WPX ENERGY, INC. General and Proposed Merger OnSeptember 28 , WPX and Devon Energy ("Devon") announced the signing of an agreement (the "Merger Agreement") to combine in an all-stock merger of equals transaction. Under the terms of the agreement (the "Merger"), WPX shareholders will receive a fixed exchange ratio of 0.5165 shares of Devon common stock for each share of WPX common stock owned. Upon completion of the transaction, Devon shareholders will own approximately 57 percent of the combined company and WPX shareholders will own approximately 43 percent of the combined company on a fully diluted basis. The transaction, which is expected to close in the first quarter of 2021, has been unanimously approved by the boards of directors of both companies. Funds managed byEnCap Investments L.P. own approximately 27 percent of the outstanding shares of WPX and they have entered into a support agreement to vote in favor of the transaction. The closing of the transaction is subject to customary closing conditions, including approvals by Devon and WPX shareholders. The Merger Agreement includes certain restrictions on WPX until close, such as limitations on dividends, stock repurchases and debt repurchases. If the Merger does not occur, and under certain circumstances, WPX or Devon may be required to pay the other party a termination fee of$75 million . Until the approval by shareholders and subsequent closing, we must continue to operate WPX as a stand-alone company. The following discussion should be read in conjunction with the selected historical consolidated financial data and the consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our 2019 Annual Report on Form 10-K. The matters discussed below may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Form 10-Q and our 2019 Annual Report on Form 10-K. Unless indicated otherwise, the following discussion relates to continuing operations. See Note 3 of Notes to Consolidated Financial Statements for a discussion of discontinued operations. Overview Composition of production (based on MBoe) and product revenue Three and nine months endedSeptember 30 , Production Product Revenue [[Image Removed: wpx-20200930_g2.jpg]] 24
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The following table presents our production volumes and financial highlights for
the three and nine months ended
Three months Nine months
ended September 30, ended September 30,
2020 2019 2020 2019
Production Sales Volume Data: Per day Per day Per day Per day
Oil (MBbls) 11,251 122.3 9,991 108.6 33,631 122.7 27,543 100.9
Natural gas (MMcf) 24,881 270.4 20,874 226.9 73,209 267.2 57,821 211.8
NGLs (MBbls) 3,715 40.4 2,486 27.0 10,034 36.6 7,267 26.6
Combined equivalent volumes
(MBoe)(a) 19,112 207.7 15,955 173.4 55,867 203.9 44,446 162.8
Financial Data (millions):
Total product revenues $ 491 $ 581 $ 1,267 $ 1,646
Total revenues(b) $ 473 $ 795 $ 1,904 $ 1,849
Operating income (loss) $ (114) $ 242 $ (811) $ 274
Capital expenditure activity $ 256 $ 264 $ 757 $ 1,030
__________(a)MBoe are calculated using the ratio of six Mcf to one barrel of oil. (b)Includes net gain (loss) on derivatives.
Our third-quarter 2020 operating results were$356 million unfavorable compared to third-quarter 2019. The primary items impacting the three months endedSeptember 30, 2020 compared to the same period in 2019 include: •$174 million decrease in product revenues due to lower commodity prices; and •$285 million unfavorable change in net gain (loss) on derivatives. Offset by: •$84 million increase in product revenues due to higher overall production volumes primarily due to the Felix Acquisition. Our year-to-date 2020 operating results were$1,085 million unfavorable compared to 2019. The primary items impacting the nine months endedSeptember 30, 2020 compared to the same period in 2019 include: •$1 billion of impairments in 2020 on ourWilliston Basin net book values;$967 million of which related to proved properties reported in impairment expense and$49 million of which related to unproved leasehold impairment reported in exploration expenses; •$760 million decrease in product revenues due to lower commodity prices; •$88 million higher operating costs including depreciation, depletion and amortization, lease and facility, gathering, processing and transportation, and taxes other than income; and •$30 million of acquisition costs for the Felix Acquisition in 2020. Offset by: •$438 million favorable change in net gain (loss) on derivatives; and •$381 million increase in product revenues related to higher overall production volumes due to the Felix Acquisition. Outlook During the first quarter of 2020, oil prices deteriorated due to a softening of global demand caused by the COVID-19 (Coronavirus) pandemic and were highly volatile following actions of OPEC+ countries to relax or eliminate their production quotas and then agree to production quotas. With a modest increase in worldwide demand and production cuts across the globe, oil prices have improved since the lows seen in April and May. They remain volatile as the COVID-19 pandemic continues. Though the Company has hedges in place that will largely protect its revenues in 2020, the duration and full impacts of the COVID-19 pandemic and any further actions by OPEC+ countries are unknown at this time. As a company, we continue to manage the business to preserve the value of our reserves and conserve our assets in light of the demand impacts of the COVID-19 pandemic. We have developed and implemented safety measures in an effort to keep our workforce healthy and safe. Along with others in the energy industry, we are impacted by fundamentals driven by the duration of the pandemic and the impact on the economy. We have managed the business effectively through the market's downturns over the last several years and believe we are positioned to continue to do so, by leveraging our assets. Like most companies, uncertainty is our greatest obstacle right now. Our executive management team and our Board of Directors are continually monitoring, communicating, collaborating, and carefully considering the appropriate course of action. 25 --------------------------------------------------------------------------------
Our planned capital spending estimate for all of 2020 is approximately$1.0 billion to$1.1 billion . Depending on current and future commodity prices, we may adjust our capital spending. We currently plan to exit 2020 with eight rigs comprised of seven in theDelaware Basin and one in theWilliston Basin . As a result of market conditions, specifically in first-quarter 2020, the book values of our proved properties were evaluated for impairment. This evaluation excluded the impact of derivatives and is based on management estimates of several inputs including estimated reserves, future commodity prices, development and operating costs and drilling plans. Following this review in the first quarter of 2020, we recorded$1 billion of impairment charges related to our Williston properties (see Note 5 of Notes to Consolidated Financial Statements). We do not believe there are new indicators of impairment in the third quarter of 2020 that would impact our impairment analysis from a hold and use perspective. In the midst of these challenges, we closed on our acquisition ofFelix Energy Holdings II, LLC , or Felix (collectively, the "Felix Acquisition") onMarch 6, 2020 , which included cash consideration of$939 million and approximately 153 million shares of our common stock. The funding of the cash portion primarily came from proceeds from a very successfulJanuary 2020 offering of$900 million of 4.50% Senior Notes due in 2030. See Note 2 of Notes to Consolidated Financial Statements for further discussion of the Felix Acquisition. InJune 2020 , we issued$500 million 5.875% Senior Notes due in 2028 (the "2028 Notes") and concurrently launched a tender offer for up to$450 million of Senior Notes primarily targeting Senior Notes due in 2022 and 2023. OnJuly 2, 2020 , we closed and settled the tender offer retiring approximately$369 million of Senior Notes. Our liquidity atSeptember 30, 2020 totaled approximately$1.7 billion , reflecting amounts available under the Credit Facility Agreement and cash on hand. Our next Senior Note maturity of$43 million is not due until 2022. As of this filing, our Credit Facility Agreement is subject to a$2.1 billion borrowing base with aggregate elected commitments of$1.5 billion and a maturity date ofApril 17, 2023 (see Note 8 of Notes to Consolidated Financial Statements for further discussion). In October, we completed the bank redetermination of our borrowing base that was affirmed at$2.1 billion . Several peers had reductions in borrowing base and commitments during spring 2020 redeterminations. Overall, we believe we are well positioned for this near-term disruption caused by the pandemic and related actions by OPEC+. However, the challenging and dynamic environment of the oil and gas industry, along with future market conditions, may alter these expectations or plans. If we foresee further changes in market conditions, including prolonged depressed commodity prices, we will evaluate the appropriateness of adjustments to our plans. Through the closing of proposed Merger, we will continue to operate with a focus on increasing shareholder value and investing in our businesses in a way that enhances our competitive position by: •sustainable, value driven and environmentally responsible development of our positions in theDelaware and Williston Basins; •successful integration of Felix; •continuing to pursue cost improvements and efficiency gains; •employing new technology and operating methods; •continuing to invest in projects to assess resources and add new development opportunities or opportunistic acquisitions to our portfolio; •retaining the flexibility to make adjustments to our planned levels and allocation of capital investment expenditures in response to changes in economic conditions or business opportunities; and •continuing to maintain an active economic hedging program around our commodity price risks. Potential risks or obstacles that could impact the execution of our plan include: •distractions due to the proposed merger with Devon; •lower than anticipated recovery in demand for energy worldwide; •lower than anticipated energy commodity prices, including recovery from current levels; •disruptions to general economic conditions as a consequence of global pandemics, including the COVID-19 pandemic; •inability to successfully integrate Felix's operations or to realize cost savings, revenues or other anticipated benefits of the Felix Acquisition; •increase in the cost of, or shortages or delays in the availability of, drilling rigs and equipment supplies, skilled labor or transportation; •higher capital costs of developing our properties, including the impact of inflation; •lower than expected levels of cash flow from operations; 26 --------------------------------------------------------------------------------
•counterparty credit and performance risk; •general economic, financial markets or industry downturn including changes attributable to competition for market share among major oil-exporting countries; •unavailability of capital either under our revolver or access to capital markets; •changes in the political and regulatory environments; and •decreased drilling success. We continue to address certain of these risks through utilization of commodity hedging strategies, disciplined investment strategies and maintaining adequate liquidity. In addition, we use master netting agreements and collateral requirements with our counterparties to reduce credit risk and liquidity requirements. Further, we continue to monitor the long-term market outlooks and forecasts for potential indicators of further needed changes to our forecasted oil and natural gas prices. As noted above, the commodity prices are volatile and prices for a barrel of oil ranged from over$100 per barrel to less than$20 per barrel since 2014. Our forecasted price assumptions reflect a long-term view of pricing and also consider current prices consistent with pricing assumptions generally used in evaluating our drilling decisions and acquisition plans. In the first quarter of 2020, we adjusted our forecasted commodity prices especially those in the next two years and evaluated our producing properties for impairment. This resulted in an impairment of our Williston properties in first quarter 2020. If the forecasted oil and natural gas prices were to further decline, we would need to perform additional reviews of proved properties for possible impairment. Because of the uncertainty inherent in these factors, we cannot predict when or if future impairment charges will be recorded. If further impairments were required, the charges could be significant. The net book value of our proved properties is approximately$6.3 billion and is primarily associated with ourDelaware Basin Properties . In addition, the net book value associated with unproved leasehold is approximately$2 billion and is also primarily associated with our Delaware Basin properties. See Note 5 of Notes to Consolidated Financial Statements herein and the Critical Accounting Estimates section of Item 7 in our Annual Report on Form 10-K for the year endedDecember 31, 2019 for further discussion. 27 --------------------------------------------------------------------------------
Results of Operations
Three Month-Over-Three Month Results of Operations
Revenue analysis
Three months Favorable
ended September 30, (Unfavorable) Favorable (Unfavorable)
2020 2019 $ Change % Change
(Millions)
Revenues:
Oil sales $ 436 $ 539 $ (103) (19) %
Natural gas sales 14 16 (2) (13) %
Natural gas liquid sales 41 26 15 58 %
Total product revenues 491 581 (90) (15) %
Net gain (loss) on derivatives (110) 175 (285) NM
Commodity management 88 38 50 132 %
Other 4 1 3 NM
Total revenues $ 473 $ 795 $ (322) (41) %
__________
NM: A percentage calculation is not meaningful due to change in signs, a
zero-value denominator or a percentage change greater than 200.
Significant variances in the respective line items of revenues are comprised of
the following:
•$103 million decrease in oil sales reflects $171 million related to lower sales
prices partially offset by $68 million related to higher production sales
volumes for the three months ended September 30, 2020 compared to 2019. The
Delaware Basin volumes increased to 71.1 MBbls per day from 47.2 MBbls per day
for the three months ended September 30, 2020 and 2019, respectively. The
increase in production sales volumes relates to the Felix properties acquired
March 6, 2020 (see Note 2 of Notes to Consolidated Financial Statements). The
Williston Basin volumes decreased due in part to production curtailment in 2020
and were 51.2 MBbls per day as compared to 61.4 MBbls per day for the three
months ended September 30, 2020 and 2019, respectively. The following table
reflects oil production prices, the price impact of our derivative settlements
and volumes for the three months ended September 30, 2020 and 2019:
Three months
ended September 30,
2020 2019
Oil sales (per barrel) $ 38.72 $ 53.92 Impact of net cash received (paid) related to settlement of derivatives (per barrel)(a)
11.46 (1.25)
Oil net price including derivative settlements (per barrel) $ 50.18 $ 52.67
Oil production sales volumes (MBbls) 11,251 9,991
Per day oil production sales volumes (MBbls/d) 122.3 108.6
__________
(a) Included in net gain (loss) on derivatives on the Consolidated Statements of Operations.
28
--------------------------------------------------------------------------------•$2 million decrease in natural gas sales reflects$5 million related to lower sales prices partially offset by$3 million related to higher production sales volumes for the three months endedSeptember 30, 2020 compared to 2019.The Delaware Basin volumes were 219.0 MMcf per day compared to 180.9 MMcf per day for the three months endedSeptember 30, 2020 and 2019, respectively. The increase in production sales volumes relates to the Felix properties acquiredMarch 6, 2020 (see Note 2 of Notes to Consolidated Financial Statements).The Williston Basin volumes were 51.4 MMcf per day compared to 46.0 MMcf per day for the three months endedSeptember 30, 2020 and 2019, respectively. The following table reflects natural gas production prices, the price impact of our derivative settlements and volumes for the three months endedSeptember 30, 2020 and 2019: Three months endedSeptember 30, 2020 2019 Natural gas sales (per Mcf)
(0.20) 0.80
Natural gas net price including derivative settlements (per Mcf)
Natural gas production sales volumes (MMcf) 24,881 20,874 Per day natural gas production sales volumes (MMcf/d) 270.4 226.9
__________
(a) Included in net gain (loss) on derivatives on the Consolidated Statements of Operations. •$15 million increase in natural gas liquids sales primarily reflects$13 million related to higher production sales volumes and$2 million related to higher sales price for the three months endedSeptember 30, 2020 compared to 2019.The Delaware Basin volumes were 31.5 MBbls per day compared to 19.3 MBbls per day for the three months endedSeptember 30, 2020 and 2019, respectively. The increase in production sales volumes relates to the Felix properties acquiredMarch 6, 2020 (see Note 2 of Notes to Consolidated Financial Statements). The following table reflects NGL production prices and volumes for the three months endedSeptember 30, 2020 and 2019: Three months endedSeptember 30, 2020 2019
NGL net price (per barrel) $ 11.22
NGL production sales volumes (MBbls) 3,715 2,486
Per day NGL production sales volumes (MBbls/d) 40.4 27.0
•$285 million unfavorable change in net gain (loss) on derivatives primarily
reflects unfavorable change in crude oil derivatives which was a result of
losses in 2020 due to increase in 2020 of forward commodity prices relative to
our hedge positions as opposed to gains in 2019 due to decreases in 2019 of
forward commodity prices relative to our hedge position at that time.
Settlements received on derivatives totaled $124 million for the three months
ended September 30, 2020 and settlements received totaled $4 million for three
months ended September 30, 2019 .
•$50 million increase in commodity management revenues is primarily due to
higher crude sales volumes partially offset by lower prices on crude sales.
Crude sales volumes include purchases to fulfill certain sales commitments.
Related commodity management costs and expenses decreased $59 million and are
discussed below.
29
--------------------------------------------------------------------------------Cost and operating expense and operating income analysis
Three months Favorable Favorable
ended September 30, (Unfavorable) (Unfavorable) % Per Boe Expense
2020 2019 $ Change Change 2020 2019
(Millions)
Costs and expenses:
Depreciation, depletion and amortization $ 238 $ 241 $ 3 1 % $12.46 $15.11
Lease and facility operating 92 96 4 4 % $4.81 $6.02
Gathering, processing and transportation 65 49 (16) (33) % $3.41 $3.10
Taxes other than income 30 46 16 35 % $1.55 $2.90
Exploration 15 22 7 32 %
General and administrative:
General and administrative expenses 41 42 1 2 % $2.16 $2.69
Equity-based compensation 10 9 (1) (11) % $0.48 $0.54
Total general and administrative 51 51 - - % $2.64 $3.23
Commodity management 95 36 (59) (164) %
Other-net 1 12 11 92 %
Total costs and expenses $ 587 $ 553 $ (34) (6) %
Operating income (loss) $ (114) $ 242 $ (356) NM
__________
NM: A percentage calculation is not meaningful due to change in signs, a
zero-value denominator or a percentage change greater than 200.
Significant variances in our costs and expenses are comprised of the following:
•$3 million decrease in depreciation, depletion and amortization primarily
reflects $51 million related to a $2.65 per Boe decrease in rate, substantially
offset by $48 million related to higher production volumes. The decrease in rate
was primarily the result of a decrease to the depletable base following the
impairment of proved properties in the Williston Basin in the first quarter of
2020 (see Note 5 of Notes to Consolidated Financial Statements), partially
offset by the impact of lower estimated proved reserves as compared to September
30, 2019 primarily due to a lower trailing 12-month average price. The increase
in production is primarily due to the Felix acquired properties.
•$4 million decrease in lease and facility operating expenses primarily related
to a $1.21 per Boe decrease in the overall rate per Boe for the three months
ended September 30, 2020 compared to the same time in 2019 substantially offset
by an increase in production volumes related to the acquired Felix properties.
•$16 million increase in gathering, processing and transportation primarily due
to the Felix acquired properties.
•$16 million decrease in taxes other than income relate to decreased product
revenues as previously discussed and changes in estimated ad valorem taxes for
2020 due to lower expected valuations and tax rates on wells in Delaware Basin
counties.
•$59 million increase in commodity management expenses is primarily due to
higher crude purchase volumes and $5 million of unutilized pipeline capacity
expense in 2020, partially offset by depressed pricing resulting in lower crude
oil cost of sales.
•Other expense for 2019 primarily relates to expense associated with an offer
made by us to settle certain contract disputes (see Note 5 of Notes to
Consolidated Financial Statements).
30
--------------------------------------------------------------------------------Results below operating income
Three months Favorable
ended September 30, (Unfavorable) Favorable (Unfavorable)
2020 2019 $ Change % Change
(Millions)
Operating income (loss) $ (114) $ 242 $ (356) NM
Interest expense (48) (38) (10) (26) %
Loss on extinguishment of debt (24) (47) 23 49 %
Equity earnings 6 3 3 (100) %
Investment income (loss) and other - 1 (1) (100) %
Income (loss) from continuing operations before
income
taxes (180) 161 (341) NM
Provision (benefit) for income taxes (32) 39 71 NM
Income (loss) from continuing operations (148) 122 (270) NM
Loss from discontinued operations (7) (1) (6) NM
Net income (loss) $ (155) $ 121 (276) NM
__________
NM: A percentage calculation is not meaningful due to change in signs, a
zero-value denominator or a percentage change greater than 200.
The increase in interest expense primarily relates to higher level of debt
outstanding in 2020 compared to 2019 as a result of the debt issued for the
Felix Acquisition. See Note 7 of Notes to Consolidated Financial Statements.
In the second quarter of 2020, we issued $500 million Senior Notes due in 2028.
The net proceeds from this offering were used in the third quarter to fund the
purchase of $369 million aggregate principal amount of our 2022 Notes, 2023
Notes and 2024 Notes. As a result of the early retirement of these Senior Notes,
we recorded a loss on extinguishment of debt of $24 million in third-quarter
2020. See Note 7 of Notes to Consolidated Financial Statements for detail of
this transaction.
In the third quarter of 2019, we issued $600 million Senior Notes due in 2027.
The net proceeds from this offering were used to fund the purchase of $550
million aggregate principal amount of our 2022 Notes and 2023 Notes. As a result
of the early retirement of these Senior Notes, we recorded a loss on
extinguishment of debt of $47 million in third-quarter 2019. See Note 7 of Notes
to Consolidated Financial Statements for detail of this transaction.
For the three months ended September 30, 2020 , we had a benefit for income taxes
compared to a provision for the same period of 2019 due to a loss from
continuing operations for 2020 compared to income from continuing operations for
2019. See Note 8 of Notes to Consolidated Financial Statements for a discussion
of the effective tax rates compared to the federal statutory rate for 2020 and
2019.
31--------------------------------------------------------------------------------
Nine Month-Over-Nine Month Results of Operations
Revenue analysis
Nine months Favorable
ended September 30, (Unfavorable) Favorable (Unfavorable)
2020 2019 $ Change % Change
(Millions)
Revenues:
Oil sales $ 1,142 $ 1,499 $ (357) (24) %
Natural gas sales 38 57 (19) (33) %
Natural gas liquid sales 87 90 (3) (3) %
Total product revenues 1,267 1,646 (379) (23) %
Net gain on derivatives 484 46 438 NM
Commodity management 144 155 (11) (7) %
Other 9 2 7 NM
Total revenues $ 1,904 $ 1,849 $ 55 3 %
__________
NM: A percentage calculation is not meaningful due to change in signs, a
zero-value denominator or a percentage change greater than 200.
Significant variances in the respective line items of revenues are comprised of
the following:
•$357 million decrease in oil sales reflects $688 million related to lower sales
prices partially offset by $331 million related to higher production sales
volumes for the nine months ended September 30, 2020 compared to 2019. The
Delaware Basin production volumes were 69.3 MBbls per day compared to 46.0 MBbls
per day for the nine months ended September 30, 2020 and 2019, respectively. The
increase in production volumes primarily relates to the Felix properties
acquired March 6, 2020 , see Note 2 of Notes to Consolidated Financial
Statements. The Williston Basin volumes decreased due in part to production
curtailment in 2020 and were 53.4 MBbls per day compared to 54.9 MBbls per day
for the nine months ended September 30, 2020 and 2019, respectively. The
following table reflects oil sales prices, the price impact of our derivative
settlements and production volumes for the nine months ended September 30, 2020
and 2019:
Nine months
ended September 30,
2020 2019
Oil sales (per barrel) $ 33.96 $ 54.42
Impact of net cash received (paid) related to settlement of derivatives (per barrel)(a)
17.27 (1.40)
Oil net price including derivative settlements (per barrel) $ 51.23 $ 53.02
Oil production sales volumes (MBbls) 33,631 27,543
Per day oil production sales volumes (MBbls/d) 122.7 100.9
_________
(a) Included in net gain (loss) on derivatives on the Consolidated Statements of Operations.
32
--------------------------------------------------------------------------------•$19 million decrease in natural gas sales reflects$34 million related to lower sales prices partially offset by$15 million related to higher production sales volumes for the nine months endedSeptember 30, 2020 compared to 2019. The increase in our production sales volumes primarily relates to our Delaware Basin which had production volumes of 217.6 MMcf per day compared to 172.8 MMcf per day for the nine months endedSeptember 30, 2020 compared to 2019, respectively. This increase in sales primarily relates to the Felix properties acquiredMarch 6, 2020 , see Note 2 of Notes to Consolidated Financial Statements. The following table reflects natural gas sales prices, the price impact of our derivative settlements and production volumes for the nine months endedSeptember 30, 2020 and 2019: Nine months endedSeptember 30, 2020 2019 Natural gas sales (per Mcf)
(0.05) 0.71
Natural gas net price including derivative settlements (per Mcf)
Natural gas production sales volumes (MMcf) 73,209 57,821 Per day natural gas production sales volumes (MMcf/d) 267.2 211.8
__________
(a) Included in net gain (loss) on derivatives on the Consolidated Statements of Operations. •$3 million decrease in natural gas liquids sales reflects$37 million related to lower sales prices partially offset by$34 million related to higher production sales volumes for the nine months endedSeptember 30, 2020 compared to 2019. Delaware Basin production volumes were 27.9 MBbls per day compared to 20.3 MBbls per day for the nine months endedSeptember 30, 2020 and 2019, respectively. The increase in production sales volumes relates to the Felix properties acquiredMarch 6, 2020 (see Note 2 of Notes to Consolidated Financial Statements). The following table reflects NGL production prices and volumes for the nine months endedSeptember 30, 2020 and 2019: Nine months endedSeptember 30, 2020 2019
NGL net price (per barrel) $ 8.71
NGL production sales volumes (MBbls) 10,034 7,267
Per day NGL production sales volumes (MBbls/d) 36.6 26.6
•$438 million favorable change in net gain (loss) on derivatives primarily
reflects favorable change in crude oil derivatives which was a result of gains
in 2020 due to decreases in 2020 of forward commodity prices relative to our
hedge positions as opposed to losses in 2019 due to increases in 2019 of forward
commodity prices relative to our hedge position at that time. Settlements
received on derivatives totaled $578 million for the nine months ended September
30, 2020 and settlements received totaled $3 million for the nine months ended
September 30, 2019 .
•$11 million decrease in commodity management revenues primarily due to lower
prices on crude sales and lower natural gas volumes, substantially offset by
higher crude sales volumes. Higher natural gas sales volumes in 2019 were a
result of excess pipeline capacity in the Delaware Basin which we utilized to
purchase natural gas at depressed Delaware Basin pricing and transport to sales
points outside the Basin. Crude sales volumes include purchases to fulfill
certain sales commitments. Related commodity management costs and expenses
increased $35 million and are discussed below.
33
--------------------------------------------------------------------------------Cost and operating expense and operating income analysis
Nine months Favorable Favorable
ended September 30, (Unfavorable) (Unfavorable) % Per Boe Expense
2020 2019 $ Change Change 2020 2019
(Millions)
Costs and expenses:
Depreciation, depletion and amortization $ 726 $ 681 $ (45) (7) % $13.00 $15.33
Lease and facility operating 287 276 (11) (4) % $5.13 $6.21
Gathering, processing and transportation 194 131 (63) (48) % $3.47 $2.96
Taxes other than income 97 128 31 24 % $1.74 $2.88
Exploration 101 70 (31) (44) %
General and administrative:
General and administrative expenses 116 121 5 4 % $2.08 $2.74
Equity-based compensation 28 25 (3) (12) % $0.49 $0.55
Total general and administrative 144 146 2 1 % $2.57 $3.29
Commodity management 161 126 (35) (28) %
Impairment of proved properties 967 - (967) NM
Acquisition costs 30 - (30) NM
Other-net 8 17 9 53 %
Total costs and expenses $ 2,715 $ 1,575 $ (1,140) (72) %
Operating income (loss) $ (811) $ 274 $ (1,085) NM
__________
NM: A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change greater than 200. Significant variances in our costs and expenses are comprised of the following: •$45 million increase in depreciation, depletion and amortization, primarily reflects$175 million related to higher production volumes partially offset by$130 million related to a$2.33 per Boe decrease in rate. The increase in production volumes was primarily due to the Felix acquired properties. The decrease in rate was primarily the result of a decrease to the depletable base following the impairment of proved properties in theWilliston Basin in the first quarter of 2020 (see Note 5 of Notes to Consolidated Financial Statements), partially offset by the impact of lower estimated proved reserves as compared toSeptember 30, 2019 primarily due to a lower trailing 12-month average price. •$11 million increase in lease and facility operating expenses primarily due to higher production volumes, partially offset by a$1.08 per Boe decrease in rate for the nine months endedSeptember 30, 2020 compared to the same time in 2019. •$63 million increase in gathering, processing and transportation primarily due to the Felix acquired properties. •$31 million decrease in taxes other than income relate to decreased product revenues, as previously discussed. •$31 million increase in exploration expense primarily relates to an impairment of unproved leasehold in theWilliston Basin in 2020 (see Note 5 of Notes to Consolidated Financial Statements). •$35 million increase in commodity management expenses is primarily due to increased crude purchase volumes for 2020, lower-of-cost or market adjustments on long-term line fill of approximately$8 million , recorded in first-quarter 2020 and$8 million of unutilized pipeline capacity expense in 2020. These increases were substantially offset by depressed pricing resulting in lower crude cost of sales, lower natural gas purchase volumes and depressed Delaware Basin pricing on physical natural gas cost of sales. •$967 million impairment on Williston proved properties recorded in 2020 (see Note 5 of Notes to Consolidated Financial Statements). •$30 million of acquisition costs in 2020 for the Felix Acquisition (see Note 2 of Notes to Consolidated Financial Statements). •Other expense in 2020 includes a$13 million lower-of-cost or market adjustment on materials and supplies inventory made in 2020 which was partially offset by a$5 million gain related to an exchange of leasehold in second-quarter 2020 (see Note 12 of Notes to Consolidated Financial Statements). Other expense for 2019 primarily relates to expense 34 --------------------------------------------------------------------------------
associated with an offer made by us to settle certain contract disputes (see Note 5 of Notes to Consolidated Financial Statements). Results below operating income
Nine months Favorable
ended September 30, (Unfavorable) Favorable (Unfavorable)
2020 2019 $ Change % Change
(Millions)
Operating income (loss) $ (811) $ 274 $ (1,085) NM
Interest expense (145) (119) (26) (22) %
Gain on extinguishment of debt (23) (47) 24 51 %
Gains on equity method investment transactions 2 373 (371) (99) %
Equity earnings 14 6 8 133 %
Other income 2 1 1 100 %
Income (loss) from continuing operations before
income taxes (961) 488 (1,449) NM
Provision (benefit) for income taxes (194) 109 (303) NM
Income (loss) from continuing operations (767) 379 (1,146) NM
Loss from discontinued operations (182) (1) (181) NM
Net income (loss) $ (949) $ 378 (1,327) NM
__________
NM: A percentage calculation is not meaningful due to change in signs, a
zero-value denominator or a percentage change greater than 200.
The increase in interest expense primarily relates to higher level of debt
outstanding in 2020 compared to 2019 as a result of the debt issued for the
Felix Acquisition (see Note 7 of Notes to Consolidated Financial Statements).
In the second quarter of 2020, we issued $500 million Senior Notes due in 2028.
The net proceeds from this offering were used in the third quarter to fund the
purchase of $369 million aggregate principal amount of our 2022 Notes, 2023
Notes and 2024 Notes. As a result of the early retirement of these Senior Notes,
we recorded a loss on extinguishment of debt of $24 million in third-quarter
2020. See Note 7 of Notes to Consolidated Financial Statements for detail of
this transaction.
In the third quarter of 2019, we issued $600 million Senior Notes due in 2027.
The net proceeds from this offering were used to fund the purchase of $550
million aggregate principal amount of our 2022 Notes and 2023 Notes. As a result
of the early retirement of these Senior Notes, we recorded a loss on
extinguishment of debt of $47 million in third-quarter 2019. See Note 7 of Notes
to Consolidated Financial Statements for detail of this transaction.
Gains on equity method investment transactions related to the 2019 sale of our
equity interest in the Whitewater natural gas pipeline and a 2019 distribution
received related to our 25 percent equity interest in the Oryx pipeline. See
Note 5 of Notes to Consolidated Financial Statements for details of this sale.
For the nine months ended September 30, 2020 , we had a benefit for income taxes
compared to a provision for the same period of 2019 due to a loss from
continuing operations for 2020 compared to income from continuing operations for
2019. See Note 8 of Notes to Consolidated Financial Statements for a discussion
of the effective tax rates compared to the federal statutory rate for 2020 and
2019.
Loss from discontinued operations in 2020 included a $184 million accrual for a
performance guarantee related to gathering and processing contracts assumed by
the buyer of the properties in the San Juan Gallup. See Note 3 of Notes to
Consolidated Financial Statements for additional details.
Management's Discussion and Analysis of Financial Condition and Liquidity
Overview and Liquidity
As previously noted, we entered into a merger agreement with Devon, however,
until the approval by shareholders and subsequent closing, we must continue to
operate WPX as a stand-alone company. Whether or not the Merger is completed, we
expect our capital structure provides us financial flexibility to meet our
requirements for working capital and capital expenditures while maintaining a
sufficient level of liquidity. Our primary sources of liquidity in 2020 are cash
on hand, expected cash flows from operations, including derivatives,
contributions from noncontrolling interests, and, if necessary, borrowings on
our credit facility. We anticipate that the combination of these sources should
be sufficient to allow us to continue our operations through at least 2020. We
previously communicated our 2020 goals of implementing a meaningful
35
--------------------------------------------------------------------------------dividend, targeting a 7 percent to 10 percent free cash flow yield, driving down our leverage metrics from current levels and continuing to opportunistically repurchase our shares. As a standalone company, these goals remain our focus but are subject to restrictions under the proposed merger agreement. Additionally, these goals would be subject to changes as we navigate through the current world economic environment caused by the COVID-19 pandemic and the world oil market disruptions. Additional sources of liquidity, if needed and if available, include proceeds from asset sales, bank financings and proceeds from the issuance of long-term debt and equity securities. We note the following assumptions for 2020: •our estimated planned capital expenditures for full-year 2020, excluding acquisitions, could range from approximately$1 billion to$1.1 billion . However, we will be reactive to current market conditions and may further reduce our capital spending. As ofSeptember 30, 2020 , we have incurred$707 million of drilling and completion capital expenditures including facilities; and •we have hedged a significant portion of our anticipated 2020 oil and gas production as disclosed in Commodity Price Risk Management following this section. Potential risks associated with our planned levels of liquidity and the planned capital expenditures discussed above include: •lower than expected levels of cash flow from operations, primarily resulting from lower energy commodity prices or inflation of operating costs; •our ability to successfully integrate Felix's operation or to realize costs savings, revenues or other anticipated benefits of the Felix Acquisition; •long-term disruptions to general economic conditions as a consequence of global pandemics, including the COVID-19 pandemic; •unexpected consequences of a failed merger with Devon; •significantly lower than expected capital expenditures could result in the loss of undeveloped leasehold; •reduced access to our credit facility pursuant to our financial covenants or banking environment including the April and October borrowing base redeterminations; and •higher than expected development costs, including the impact of inflation. Credit Facility Our Credit Facility, as amended, includes total commitments of$1.5 billion on a$2.1 billion Borrowing Base with a maturity date ofApril 17, 2023 , subject to a springing maturity onOctober 15, 2021 if available liquidity minus outstanding 2022 notes is less than$500 million (see Note 7 of Notes to Consolidated Financial Statements). Based on our current credit ratings, a Collateral Trigger Period applies which makes the Credit Facility subject to certain financial covenants and a Borrowing Base. The Credit Facility may be used for working capital, acquisitions, capital expenditures and other general corporate purposes. The financial covenants in the Credit Facility may limit our ability to borrow money, depending on the applicable financial metrics at any given time. For additional information regarding the terms of our Credit Facility, see Note 8 of Notes to Consolidated Financial Statements on our Annual Report on Form 10-K for the year endedDecember 31, 2019 . As ofSeptember 30, 2020 , WPX had no borrowings outstanding and$13 million of letters of credit issued under the Credit Facility and we were in compliance with our covenants under the credit agreement. Our unused borrowing availability was$1,487 million as ofSeptember 30, 2020 . InOctober 2020 , our annual redetermination confirmed our Borrowing Base of$2.1 billion and total commitments of$1.5 billion that will remain in effect until the next Redetermination Date, which is expected to be inApril 2021 , absent the closing of the Merger. Several peers had reductions in borrowing base and commitments during spring 2020 redeterminations. As of the date of this filing, we are in compliance with all terms, conditions and financial covenants of the Credit Facility, as amended. Senior Notes During second-quarter 2020, we completed a debt offering of$500 million of 5.875% Senior Notes due 2028 ("2028 Notes"). OnJuly 2, 2020 , we closed and settled the tender offer retiring approximately$369 million of a portion of our 2022 Notes, 2023 Notes and 2024 Notes with a loss on extinguishment of debt of$24 million recorded in third-quarter 2020. We may use the remaining net proceeds from the 2028 Notes offering to opportunistically repurchase long-term debt through open-market purchases or privately negotiated transactions or otherwise. Such repurchases, if any, will depend on market conditions, our liquidity requirements, contractual restrictions and other factors. See Note 7 of Notes to Consolidated Financial Statements for further discussion of our senior notes. 36 --------------------------------------------------------------------------------
Commodity Price Risk Management
To manage the commodity price risk and volatility of owning producing oil and
gas properties, we enter into derivative contracts for a portion of our future
production (see Note 13 of Notes to Consolidated Financial Statements). We chose
not to designate our derivative contracts associated with our future production
as cash flow hedges for accounting purposes. The following table sets forth, as
of the date of this filing, the derivative notional volumes of the net (long)
short positions for the remainder of 2020 and 2021 that are economic hedges of
our production volumes:
Crude Oil Oct - Dec 2020 2021
Volume Weighted Average Volume Weighted Average
(Bbls/d) Price ($/Bbl) (Bbls/d) Price ($/Bbl)
Fixed Price Swaps-WTI 91,800 $ 53.06 64,878 $ 41.35
Fixed Price Swaptions-WTI - $ - 20,000 $ 57.02
Fixed Price Swaptions-WTI - $ - 5,041 $ 40.12
Fixed Price Calls-WTI - $ - 5,000 $ 39.50
Fixed Price Costless Collars-WTI 20,000 $53.33 - $63.48 - $ -
Basis Swaps-Midland/Cushing 35,000 $ 0.63 15,000 $ 0.64
Basis Swaps-Nymex Calendar Monthly Avg Roll 50,000 $ (0.43) - $ -
Basis Swaps-Brent/WTI Spread 5,000 $ 8.36 1,000 $ 8.00
Natural Gas Oct - Dec 2020 2021
Volume Weighted Average Volume Weighted Average
(BBtu/d) Price ($/MMBtu) (BBtu/d) Price ($/MMBtu)
Fixed Price Swaps-Henry Hub - $ - 240 $ 2.62
Fixed Price Swaptions-Henry Hub - $ - 50 $ 2.68
Basis Swaps-Waha 100 $ (1.14) 80 $ (0.65)
Sources (Uses) of Cash
Nine months
ended September 30,
2020 2019
(Millions)
Net cash provided by (used in):
Operating activities $ 922 $ 906
Investing activities (1,735) (507)
Financing activities 951 (385)Net increase in cash and cash equivalents and restricted cash $
138
Operating activities Net cash provided by operating activities increased for the nine months endedSeptember 30, 2020 compared to the same period in 2019 primarily due to higher realizations on our derivatives and higher production volumes offset by lower commodity prices, higher operating costs, and acquisition costs in 2020. Net cash provided by operating activities for the nine months endedSeptember 30, 2019 includes the receipt of approximately$38 million related to an alternative minimum tax credit refund. 37 --------------------------------------------------------------------------------
Investing activities
The table below reflects capital expenditures, exclusive of partnerships, for
the periods presented.
Nine months
ended September 30,
2020 2019
(Millions)
Incurred capital expenditures:
Drilling, completions and facilities $ 707 $ 821
Land acquisitions 2 107
Infrastructure 22 87
Other 26 15
Total incurred capital expenditures 757 1,030
Changes in related accounts payable and accounts receivable 54 60
Cash capital expenditures reported on the Consolidated
Statements of
Cash Flows $ 811 $ 1,090
Net cash used in investing activities for the nine months ended September 30,
2020 includes $915 million , net of cash acquired, paid for the successful
completion of the Felix Acquisition. Net cash used in investing activities for
the nine months ended September 30, 2019 includes the proceeds from the sale of
certain non-core properties and proceeds related to transactions involving our
equity method investments including our 20 percent equity interest in Whitewater
natural gas pipeline and our 25 percent equity interest in the Oryx pipeline
(see Note 5 of Notes to Consolidated Financial Statements).
Financing activities
Net cash provided by financing activities for the nine months ended September
30, 2020 includes approximately $1,377 million of net proceeds from the debt
issuances in the first and second quarters of 2020 partially offset by $390
million of payments for retirement of long-term debt, including $22 million of
premium, in the third quarter of 2020 (see Note 7 of Notes to Consolidated
Financial Statements), $44 million of payments for repurchases of common stock
under our share repurchase program (see Note 11 of Notes to Consolidated
Financial Statements) and $26 million of contributions from noncontrolling
interests in consolidated partnerships.
Net cash used in financing activities for the nine months ended September 30,
2019 includes $594 million of payments for retirement of long-term debt,
including approximately $44 million of premium, partially offset by $593 million
net proceeds from a debt issuance in the third quarter of 2019. Net cash used in
financing activities for the nine months ended September 30, 2019 also includes
approximately $43 million of payments for repurchases of common stock under our
share repurchase program (see Note 11 of Notes to Consolidated Financial
Statements).
Net cash used in financing activities for the nine months ended September 30,
2020 and 2019 also includes payment for shares withheld for taxes of $8 million
and $16 million , respectively.
Contractual Obligations
As disclosed in our 2019 Annual Report on Form 10-K, our contractual obligations
table excluded $875 million of additional commitments associated with projects
for which the counterparty had not completed construction. Significant changes
in this $875 million include the following:
•$200 million reduction related to natural gas transportation capacity
associated with a project still under construction in the Delaware Basin.
•$287 million reduction after a counterparty cancelled plans to construct
certain crude transportation assets.
•$102 million that is now a commitment as the counterparty completed
construction on a project in the Delaware Basin with a total commitment of
approximately $102 million over a 7-year term (see Note 9 of Notes to
Consolidated Financial Statements).
Critical Accounting Estimates
Our accounting policies and estimates that are critical or the most important to
understand our financial condition and results of operations, and that require
management to make the most difficult judgments, are described in our 2019
Annual Report on Form 10-K. There have been no material changes in these
critical accounting policies and estimates, with the
38
--------------------------------------------------------------------------------exception of Purchase Accounting as described below and as applied to the Felix Acquisition. See Note 2 of Notes to Consolidated Financial Statements for further discussion of the Felix Acquisition. Purchase Accounting We periodically acquire assets and assume liabilities in transactions accounted for as business combinations, such as the Felix Acquisition. In connection with a business combination, we must allocate the fair value of consideration given to the assets acquired and liabilities assumed based on estimated fair values as of the acquisition date. Deferred taxes must be recorded for any differences between the assigned values and tax bases of the acquired assets and assumed liabilities. Any excess or shortage of amounts assigned to assets and liabilities over or under the purchase price is recorded as a gain on bargain purchase or goodwill. The amount of goodwill or gain on bargain purchase recorded in any particular business combination can vary significantly depending upon the values attributed to assets acquired and liabilities assumed. In addition, estimates of fair value may not be completed as of the filing date and therefore, adjustments to the purchase price allocation would be finalized in future periods, not to exceed one year from the acquisition date. In estimating the fair values of assets acquired and liabilities assumed in a business combination, we must make various assumptions. The most significant assumptions relate to the estimated fair values assigned to proved and unproved oil and gas properties. If sufficient market data is not available regarding the fair values of proved and unproved properties, we must prepare estimates and/or engage the assistance of valuation experts. Significant judgments and assumptions are inherent in these estimates and include estimates of reserves quantities, estimates of future commodity prices (developed in consideration of market information, internal forecasts and published forward prices adjusted for locational basis differentials), drilling plans, expected capital and lease operating costs and our estimate of an applicable discount rate commensurate with the risk of the underlying cash flow estimates. Estimated fair values assigned to assets acquired can have a significant effect on results of operations in the future. A higher fair value assigned to a property results in higher depreciation, depletion and amortization expense, which results in lower net earnings or a higher net loss. A lower fair value assigned to property and related deferred taxes may result in the recording of goodwill. Fair values are based on estimates of future commodity prices, reserves quantities, operating expenses and development costs. This increases the likelihood of impairment if future commodity prices or reserves quantities are lower than those originally used to determine fair value, or if future operating expenses or development costs are higher than those originally used to determine fair value. Impairment would have no effect on cash flows but would result in a decrease in net income or increase in net loss for the period in which the impairment is recorded. See Note 2 of Notes to Consolidated Financial Statements for additional information regarding our purchase price allocations. Off-Balance Sheet Financing Arrangements We had no guarantees of off-balance sheet debt to third parties or any other off-balance sheet arrangements atSeptember 30, 2020 or atDecember 31, 2019 . Although not a financing arrangement, we have provided a guarantee for certain obligations transferred as part of a divestment (see Note 3 of Notes to Consolidated Financial Statements). Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk Our current interest rate risk exposure is primarily related to our debt portfolio and has not materially changed during the first nine months of 2020. Commodity Price Risk We are exposed to the impact of fluctuations in the market price of oil, natural gas and natural gas liquids as well as other market factors, such as market volatility and energy commodity price correlations. We are exposed to these risks in connection with our owned energy-related assets, our long-term energy-related contracts and our marketing trading activities. We manage the risks associated with these market fluctuations using various derivatives and nonderivative energy-related contracts. The fair value of derivative contracts is subject to many factors, including changes in energy commodity market prices, the liquidity and volatility of the markets in which the contracts are transacted and changes in interest rates. See Notes 12 and 13 of Notes to Consolidated Financial Statements. 39 --------------------------------------------------------------------------------
An assumed increase in the forward prices used in the valuation of our crude oil and natural gas fixed price swap and option derivatives of$5.00 per Bbl and$0.25 per MMBtu would decrease our derivative valuation by approximately$288 million and$165 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. Conversely, an assumed decrease in forward prices of$5.00 per Bbl and$0.25 per MMBtu would increase our derivative valuation by$278 million and$151 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. However, any cash derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production economically hedged by the derivative instruments. Contracts designated as normal purchases or sales and nonderivative energy contracts have been excluded from this sensitivity analysis. Our portfolio consists of derivative contracts that hedge or could potentially hedge the price risk exposure from our energy commodity purchases and sales. The fair value of our derivatives not designated as hedging instruments was a net asset of$5 million and net liability$24 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. Item 4. Controls and Procedures Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act) ("Disclosure Controls") or our internal control over financial reporting ("Internal Controls") will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls and Internal Controls will be modified as systems change and conditions warrant. Evaluation of Disclosure Controls and Procedures An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these Disclosure Controls are effective at a reasonable assurance level. Changes in Internal Control over Financial Reporting Our assessment of our system of internal controls included the consideration that many of our control owners and control performers have been working remotely due to Federal and State social distancing guidelines. We concluded that, as of the end of the period covered in this report, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 40
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