Quarterly Report (10-q)

Date : 05/03/2018 @ 4:28PM
Source : Edgar (US Regulatory)
Stock : Approach Resources Inc. (AREX)
Quote : 2.88  -0.11 (-3.68%) @ 7:10PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                       

Commission File Number: 001-33801

 

APPROACH RESOURCES INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

51-0424817

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

One Ridgmar Centre

6500 West Freeway, Suite 800

Fort Worth, Texas

 

 

76116

(Address of principal executive offices)

(Zip Code)

(817) 989-9000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes       No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)       Yes       No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes       No

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of April 30, 2018, was 94,627,262.

 

 

 


PART I―FINANCI AL INFORMATION

Item 1. Financial Statements.

Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets

(In thousands, except shares and per-share amounts) 

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22

 

 

$

21

 

Accounts receivable:

 

 

 

 

 

 

 

 

Joint interest owners

 

 

193

 

 

 

117

 

Oil, NGLs and gas sales

 

 

9,521

 

 

 

9,678

 

Derivative instruments

 

 

1,250

 

 

 

1,398

 

Prepaid expenses and other current assets

 

 

1,558

 

 

 

5,486

 

Total current assets

 

 

12,544

 

 

 

16,700

 

 

 

 

 

 

 

 

 

 

PROPERTIES AND EQUIPMENT:

 

 

 

 

 

 

 

 

Oil and gas properties, at cost, using the successful efforts method of accounting

 

 

1,944,388

 

 

 

1,930,577

 

Furniture, fixtures and equipment

 

 

5,689

 

 

 

5,658

 

Total oil and gas properties and equipment

 

 

1,950,077

 

 

 

1,936,235

 

Less accumulated depletion, depreciation and amortization

 

 

(868,923

)

 

 

(853,359

)

Net oil and gas properties and equipment

 

 

1,081,154

 

 

 

1,082,876

 

Total assets

 

$

1,093,698

 

 

$

1,099,576

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,028

 

 

$

9,450

 

Oil, NGLs and gas sales payable

 

 

5,438

 

 

 

5,363

 

Derivative instruments

 

 

2,430

 

 

 

2,181

 

Accrued liabilities

 

 

8,761

 

 

 

8,073

 

Total current liabilities

 

 

26,657

 

 

 

25,067

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Senior secured credit facility, net

 

 

290,449

 

 

 

289,275

 

Senior notes, net

 

 

84,260

 

 

 

84,185

 

Deferred income taxes

 

 

80,492

 

 

 

82,102

 

Asset retirement obligations

 

 

11,042

 

 

 

11,065

 

Other non-current liabilities

 

 

604

 

 

 

466

 

Total liabilities

 

 

493,504

 

 

 

492,160

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized, none outstanding

 

 

 

 

Common stock, $0.01 par value, 180,000,000 shares authorized,

     94,605,086 and 94,533,246 issued and outstanding, respectively

 

 

946

 

 

 

945

 

Additional paid-in capital

 

 

742,614

 

 

 

742,391

 

Accumulated deficit

 

 

(143,366

)

 

 

(135,920

)

Total stockholders’ equity

 

 

600,194

 

 

 

607,416

 

Total liabilities and stockholders’ equity

 

$

1,093,698

 

 

$

1,099,576

 

 

See accompanying notes to these unaudited consolidated financial statements

1


Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations

(In thousands, except shares and per-share amounts) 

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

REVENUES:

 

 

 

 

 

 

 

 

Oil, NGLs and gas sales

 

$

28,772

 

 

$

26,355

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

Lease operating

 

 

5,268

 

 

 

4,170

 

Production and ad valorem taxes

 

 

2,500

 

 

 

2,357

 

Exploration

 

 

 

 

 

1,043

 

General and administrative (1)

 

 

6,567

 

 

 

5,928

 

Depletion, depreciation and amortization

 

 

15,680

 

 

 

17,962

 

Total expenses

 

 

30,015

 

 

 

31,460

 

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

 

(1,243

)

 

 

(5,105

)

 

 

 

 

 

 

 

 

 

OTHER:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(5,886

)

 

 

(5,463

)

Gain on debt extinguishment

 

 

 

 

 

5,053

 

Commodity derivative (loss) gain

 

 

(1,928

)

 

 

3,444

 

Other income

 

 

1

 

 

 

3

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAX (BENEFIT) PROVISION

 

 

(9,056

)

 

 

(2,068

)

INCOME TAX (BENEFIT) PROVISION

 

 

(1,610

)

 

 

138,700

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(7,446

)

 

$

(140,768

)

 

 

 

 

 

 

 

 

 

LOSS PER SHARE:

 

 

 

 

 

 

 

 

Basic

 

$

(0.08

)

 

$

(2.00

)

Diluted

 

$

(0.08

)

 

$

(2.00

)

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

Basic

 

 

94,516,280

 

 

 

70,409,303

 

Diluted

 

 

94,516,280

 

 

 

70,409,303

 

(1)  Includes non-cash share-based compensation expense as follows:

 

 

828

 

 

 

1,159

 

 

See accompanying notes to these unaudited consolidated financial statements

 

2


Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(In thousands) 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,446

)

 

$

(140,768

)

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depletion, depreciation and amortization

 

 

15,680

 

 

 

17,962

 

Amortization of debt issuance costs

 

 

262

 

 

 

219

 

Gain on debt extinguishment

 

 

 

 

 

(5,053

)

Commodity derivative loss (gain)

 

 

1,928

 

 

 

(3,444

)

Settlements of commodity derivatives

 

 

(1,531

)

 

 

(961

)

Exploration expense

 

 

 

 

 

1,033

 

Share-based compensation expense

 

 

828

 

 

 

1,159

 

Deferred income tax provision (benefit)

 

 

(1,610

)

 

 

138,700

 

Other non-cash items

 

 

 

 

 

(3

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

85

 

 

 

863

 

Prepaid expenses and other current assets

 

 

(466

)

 

 

(266

)

Accounts payable

 

 

(1,781

)

 

 

(3,973

)

Oil, NGLs and gas sales payable

 

 

72

 

 

 

318

 

Accrued liabilities

 

 

(636

)

 

 

(97

)

Cash provided by operating activities

 

 

5,385

 

 

 

5,689

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Additions to oil and gas properties

 

 

(13,685

)

 

 

(13,359

)

Additions to furniture, fixtures and equipment, net

 

 

(31

)

 

 

(6

)

Change in working capital related to investing activities

 

 

8,329

 

 

 

6,479

 

Cash used in investing activities

 

 

(5,387

)

 

 

(6,886

)

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

29,500

 

 

 

21,500

 

Repayment of amounts outstanding under credit facility

 

 

(28,500

)

 

 

(19,500

)

Equity issuance costs

 

 

 

 

 

(2,468

)

Tax withholdings related to restricted stock

 

 

(604

)

 

 

(93

)

Debt issuance costs

 

 

(14

)

 

 

 

Change in working capital related to financing activities

 

 

(379

)

 

 

1,816

 

Cash provided by financing activities

 

 

3

 

 

 

1,255

 

 

 

 

 

 

 

 

 

 

CHANGE IN CASH AND CASH EQUIVALENTS

 

 

1

 

 

 

58

 

CASH AND CASH EQUIVALENTS , beginning of period

 

$

21

 

 

$

21

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS , end of period

 

$

22

 

 

$

79

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,174

 

 

$

4,202

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:

 

 

 

 

 

 

 

 

Asset retirement obligations capitalized

 

$

 

 

$

11

 

 

See accompanying notes to these unaudited consolidated financial statements

 

 

 

3


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

 

1.  Summary of Significant Accounting Policies

Organization and Nature of Operations

Approach Resources Inc. (“Approach,” the “Company,” “we,” “us” or “our”) is an independent energy company engaged in the exploration, development, production and acquisition of oil and gas properties.  We focus on finding and developing oil and natural gas reserves in oil shale and tight gas sands.  Our properties are primarily located in the Permian Basin in West Texas. We also own interests in the East Texas Basin.

Consolidation, Basis of Presentation and Significant Estimates

The interim consolidated financial statements of the Company are unaudited and contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full year, due in part to the volatility in prices for oil, natural gas liquids (“NGLs”) and gas, future commodity prices for commodity derivative contracts, global economic and financial market conditions, interest rates, access to sources of liquidity, estimates of reserves, drilling risks, geological risks, transportation restrictions, the timing of acquisitions, product supply and demand, market competition and interruptions of production. You should read these consolidated interim financial statements in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 9, 2018.

The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated.  In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures of contingencies. Actual results may differ from those estimates. Significant assumptions are required in the valuation of proved oil and gas reserves, which affect our estimate of depletion expense as well as our impairment analyses. Significant assumptions also are required in our estimation of accrued liabilities, commodity derivatives, income tax provision, share-based compensation and asset retirement obligations. It is at least reasonably possible these estimates could be revised in the near term, and these revisions could be material.  Certain prior-year amounts have been reclassified to conform to current-year presentation.  These classifications have no impact on the net loss reported.

Recent Accounting Pronouncements

On January 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) accounting standards update for “Revenue from Contracts with Customers,” which superseded the revenue recognition requirements in “Topic 605, Revenue Recognition,” using the modified retrospective method. Adoption of this standard did not have a significant impact on our consolidated statements of operations or cash flows. We implemented processes to ensure new contracts are reviewed for the appropriate accounting treatment and generate the disclosures required under the new standard. See Note 2 for additional disclosures required under this accounting standards update related to the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers including disaggregation of revenue.

In February 2016, FASB issued an accounting standards update for “Leases,” which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This new guidance is effective for interim and annual periods beginning after December 15, 2018, and we will adopt it using a modified retrospective approach. Currently, the Company is evaluating the standard’s applicability to our various contractual arrangements. We believe that the adoption of this standard will result in recognition of assets and liabilities on the balance sheet for current operating leases. The Company is still evaluating the impact of this new guidance on its consolidated financial statements.

In January 2017, FASB issued an accounting standards update for “Clarifying the Definition of a Business,” which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard requires entities to use a screen test to determine when an integrated set of assets and activities is not a business or if the integrated set of assets and activities needs to be further evaluated against the framework. We have adopted this standard as of January 1, 2018. Adoption of this standard did not  impact our consolidated statements of operations or cash flows. 

In August 2017, FASB issued an accounting standards update for “Derivatives and Hedging,”  which amends existing guidance related to the recognition and presentation requirements of hedge accounting, including eliminating the requirement to

4


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

separately measure and report hedge ineffectiveness, and presenting all items that affect earnings in the same income statement li ne item as the hedged item. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We have elected to early adopt this standard in the first quarter of 2018. Adoption of this st andard did not  impact our consolidated statements of operations or cash flows.  Although we have not historically designated our derivative contracts as cash-flow hedges, we designated swap derivative contracts entered in April 2018 as cash-flow hedges. See Note 8 for additional information related to the derivative contracts designated as cash-flow hedges.

 

Prepaid Expenses and Other Assets

 

In April 2017, we entered into an agreement that secured pricing of a hydraulic fracturing services crew. Under this agreement, we made a prepayment of $5 million, to be used as we completed wells. We have used $1.2 million of this prepayment related to hydraulic fracturing services provided during the first year of the agreement. In March 2018, this agreement was terminated and $3.8 million of the unused prepaid balance was refunded to us.

 

2.  Revenue Recognition

 

Revenues for the sale of oil, NGLs, and gas are recognized as the product is delivered to our customers’ custody transfer points and collectability is reasonably assured. We fulfill the performance obligations under our customer contracts through daily delivery of oil, NGLs and gas to our customers’ custody transfer points and revenues are recorded on a monthly basis. The prices received for oil, NGLs and natural gas sales under our contracts are generally derived from stated market prices which are then adjusted to reflect deductions including transportation, fractionation and processing. As a result, our revenues from the sale of oil, natural gas and NGLs will decrease if market prices decline. The sales of oil, NGLs and gas as presented on the Consolidated Statements of Operations represent the Company’s share of revenues net of royalties and excluding revenue interests owned by others. When selling oil, NGLs and gas on behalf of royalty owners or working interest owners, the Company is acting as an agent and thus reports the revenue on a net basis. To the extent actual volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and recorded.

 

The following table presents our disaggregated revenue by major source for the three months ended March 31, 2018, and 2017 (in thousands).

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Revenues (in thousands):

 

 

 

 

 

 

 

 

Oil

 

$

16,343

 

 

$

13,694

 

NGLs

 

 

7,332

 

 

 

6,060

 

Gas

 

 

5,097

 

 

 

6,601

 

Total oil, NGLs and gas sales

 

$

28,772

 

 

$

26,355

 

 

 

 

5


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

3 .  Earnings Per Common Share

We report basic earnings per common share, which excludes the effect of potentially dilutive securities, and diluted earnings per common share, which includes the effect of all potentially dilutive securities unless their impact is antidilutive. The following table provides a reconciliation of the numerators and denominators of our basic and diluted earnings per share (dollars in thousands, except per-share amounts).

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Income (numerator):

 

 

 

 

 

 

 

 

Net loss – basic

 

$

(7,446

)

 

$

(140,768

)

 

 

 

 

 

 

 

 

 

Weighted average shares (denominator):

 

 

 

 

 

 

 

 

Weighted average shares – basic

 

 

94,516,280

 

 

 

70,409,303

 

Dilution effect of share-based compensation, treasury

   method (1)

 

 

 

 

 

 

Weighted average shares – diluted

 

 

94,516,280

 

 

 

70,409,303

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.08

)

 

$

(2.00

)

Diluted

 

$

(0.08

)

 

$

(2.00

)

 

(1)

Approximately 39,000 options to purchase our common stock were excluded from this calculation because they were antidilutive for the three months ended March 31, 2017. No options were outstanding as of March 31, 2018, as they had expired.

 

 

4. Equity Exchange Transactions

 

Debt exchange

 

On November 2, 2016, we entered into an exchange agreement with Wilks Brothers, LLC and SDW Investments, LLC (collectively, “Wilks”) the largest holder of our 7% Senior Notes due 2021 (the “Senior Notes”), to exchange $130,552,000 principal amount of our Senior Notes for 39,165,600 newly issued shares of common stock, par value $0.01 per share (the “Initial Exchange”). On January 26, 2017, our stockholders approved the Exchange Transactions (defined below) and an increase in our authorized common stock from 90 million shares to 180 million shares.  We closed the Initial Exchange on January 27, 2017, and paid $1.1 million of accrued interest on the Senior Notes held by Wilks. In connection with the Initial Exchange, a second supplemental indenture became effective, which removed certain covenants and events of default from the indenture governing our Senior Notes and eliminated certain restrictive covenants discussed in Note 5.

 

On March 22, 2017, we exchanged an additional $14,528,000 principal amount of outstanding Senior Notes for 4,009,728 shares of our common stock (the “Follow-On Exchange”).

 

The Initial Exchange and the Follow-On Exchange (together, the “Exchange Transactions”) reduced the principal amount of outstanding Senior Notes by $145.1 million and reduced interest payments by $44.3 million over the remaining term of the Senior Notes.  The Exchange Transactions were accounted for as a debt extinguishment. A gain of $5.1 million was recognized on the Exchange Transactions for the difference between the fair market value of the shares issued, a Level 1 fair value measurement, and the net carrying value of the Senior Notes exchanged. We incurred equity issuance costs of $2.8 million related to the Exchange Transactions, which were recorded as a reduction to additional paid-in capital.

 

The Exchange Transactions triggered a cumulative change in ownership of our common stock by more than 50% under Section 382 of the Internal Revenue Code as of March 22, 2017. This established an annual limitation on the usage of our pre-change net operating losses (“NOLs”) in the future. Accordingly, we recognized a write-off of deferred tax assets of $139.1 million.

 

Acquisition

 

6


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

On November 1, 2017, we entered into a definitive agreement (the “ Purchase Agreement”) to acquire producing properties directly adjacent to our acreage in the Permian Basin (the “Bolt-On Acquisition”). The Bolt-On Acquisition closed on November 20, 2017, and we issued 7,573,403 newly issued shares of common stock, par va lue $0.01 per share, with an effective date of September 1, 2017. The purchase price was finalized in April 2018, and we expect to receive 142,362 of the previously issued shares of our common stock, which will be retired , pursuant to adjustments under the Purchase Agreement .

 

5. Long-Term Debt

The following table provides a summary of our long-term debt at March 31, 2018, and December 31, 2017 (in thousands).

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Senior secured credit facility:

 

 

 

 

 

 

 

 

Outstanding borrowings

 

$

292,000

 

 

$

291,000

 

Debt issuance costs

 

 

(1,551

)

 

 

(1,725

)

Senior secured credit facility, net

 

 

290,449

 

 

 

289,275

 

Senior notes:

 

 

 

 

 

 

 

 

Principal

 

 

85,240

 

 

 

85,240

 

Debt issuance costs

 

 

(980

)

 

 

(1,055

)

Senior notes, net

 

 

84,260

 

 

 

84,185

 

Total long-term debt

 

$

374,709

 

 

$

373,460

 

 

Senior Secured Credit Facility

At March 31, 2018, the borrowing base and aggregate lender commitments under our amended and restated senior secured credit facility (the “Credit Facility”) were $325 million, with maximum commitments from the lenders of $1 billion. The Credit Facility has a maturity date of May 7, 2020.  The borrowing base is redetermined semi-annually based on our oil, NGLs and gas reserves.  We, or the lenders, can each request one additional borrowing base redetermination each calendar year. Our semi-annual borrowing base redetermination was completed on May 1, 2018, and our borrowing base and aggregate lender commitments were reaffirmed at $325 million.

At March 31, 2018, borrowings under the Credit Facility bore interest based on the agent bank’s prime rate plus an applicable margin ranging from 2% to 3%, or the sum of the LIBOR rate plus an applicable margin ranging from 3% to 4%.  In addition, we pay an annual commitment fee of 0.50% of unused borrowings available under the Credit Facility. Margins vary based on the borrowings outstanding compared to the borrowing base of the lenders.

We had outstanding borrowings of $292 million under the Credit Facility at March 31, 2018, compared to $291 million of outstanding borrowings at December 31, 2017. The weighted average interest rate applicable to borrowings under the Credit Facility for the three months ended March 31, 2018, was 5.5%. We had outstanding unused letters of credit under the Credit Facility totaling $0.3 million at March 31, 2018, and December 31, 2017, respectively, which reduce amounts available for borrowing under the Credit Facility.

Obligations under the Credit Facility are secured by mortgages on substantially all of the oil and gas properties of the Company and its subsidiaries. The Company is required to grant liens in favor of the lenders covering the oil and gas properties of the Company and its subsidiaries representing at least 95% of the total value of all oil and gas properties of the Company and its subsidiaries.

On December 21, 2017, we entered into a fourth amendment to the Credit Facility. The fourth amendment, among other things, (a) extended the maturity date of the Credit Facility from May 7, 2019, to May 7, 2020, (b) increased the  applicable margin rates on borrowings by  50 basis points, (c) required the Company to hedge 50% of the Company’s estimated 2018 oil and gas production from proved developed producing reserves and (d) amended our financial covenants as described below. In connection with the fourth amendment to the Credit Facility, we incurred $1 million of debt issuance costs.

7


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

Covenants

The Credit Facility contains three principal financial covenants:

 

a consolidated interest coverage ratio covenant that requires us to maintain a ratio of (i) consolidated EBITDAX for the period of four fiscal quarters then ending to (ii) Cash Interest Expense for such period as of the last day of any fiscal quarter of not less than 1.75 to 1.0 through December 31, 2018, a ratio of not less than 2.25 to 1.0 through December 31, 2019, and 2.5 to 1.0 thereafter. EBITDAX is defined as consolidated net (loss) income plus (i) interest expense, net, (ii) income tax provision (benefit), (iii) depreciation, depletion, amortization, (iv) exploration expenses and (v) other noncash loss or expense (including share-based compensation and the change in fair value of any commodity derivatives), less noncash income. Cash Interest Expense is calculated as interest expense, net less amortization of debt issuance costs. At March 31, 2018, our consolidated interest coverage ratio was 2.6 to 1.0;

 

a consolidated modified current ratio covenant that requires us to maintain a ratio of not less than 1.0 to 1.0 as of the last day of any fiscal quarter. The consolidated modified current ratio is defined as the ratio of (i) current assets plus funds available under our revolving credit facility, less the current derivative asset, to (ii) current liabilities less the current derivative liability. At March 31, 2018, our consolidated modified current ratio was 1.8 to 1.0; and

 

a consolidated total leverage ratio covenant that imposes a maximum permitted ratio of (i) Total Debt to (ii) EBITDAX for the period of four fiscal quarters then ending of not more than 5.0 to 1.0, as of the last day of any fiscal quarter from March 31, 2019, through June 30, 2019, thereafter not more than 4.75 to 1.0 as of the last day of any fiscal quarter through December 31, 2019, and (iii) not more than 4.0 to 1.0 as of the last day of any fiscal quarter thereafter. Total Debt is defined as the face or principal amount of debt. Our leverage ratio is currently above the level that will be required as of March 31, 2019. At March 31, 2018, our leverage ratio was 6.9 to 1.0.

The Credit Facility also contains covenants restricting cash distributions and other restricted payments, transactions with affiliates, incurrence of other debt, consolidations and mergers, the level of operating leases, asset sales, investment in other entities and liens on properties.

In addition, the obligations of the Company may be accelerated upon the occurrence of an Event of Default (as defined in the Credit Facility). Events of Default include customary events for a financing agreement of this type, including, without limitation, payment defaults, the inaccuracy of representations and warranties, defaults in the performance of affirmative or negative covenants, defaults on other indebtedness of the Company or its subsidiaries, bankruptcy or related defaults, defaults related to judgments and the occurrence of a Change of Control (as defined in the Credit Facility), which includes instances where a third party becomes the beneficial owner of more than 50% of the Company’s outstanding equity interests entitled to vote.

Senior Notes

At March 31, 2018, and December 31, 2017, $85.2 million of Senior Notes were outstanding. We issued the Senior Notes under a senior indenture dated June 11, 2013, among the Company, our subsidiary guarantors and Wilmington Trust, National Association, as successor trustee. The senior indenture, as supplemented by supplemental indentures dated June 11, 2013, and December 20, 2016, is referred to as the “Indenture.”

We may redeem some or all of the Senior Notes at specified redemption prices, plus accrued and unpaid interest to the redemption date. The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of our subsidiaries, subject to certain customary release provisions. A subsidiary guarantor may be released from its obligations under the guarantee:

 

in connection with any sale or other disposition of all or substantially all of the assets of that guarantor (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary guarantor, if the sale or other disposition otherwise complies with the Indenture;

 

in connection with any sale or other disposition of the capital stock of that guarantor to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary guarantor, if that guarantor no longer qualifies as a subsidiary of the Company as a result of such disposition and the sale or other disposition otherwise complies with the Indenture;

 

if the Company designates any restricted subsidiary that is a guarantor to be an unrestricted subsidiary in accordance with the Indenture;

8


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

 

upon defeasance or covenant defeasance of the notes or satisfaction and discharge of the Indenture, in each case, in accordance with the Indenture;

 

upon the liquidation or dissolution of that guarantor, provided that no default or event of default occurs under the Indenture as a result thereof or shall have occurred and is continuing; or

 

in the case of any restricted subsidiary that, after the issue date of the notes is required under the Indenture to guarantee the notes because it becomes a guarantor of indebtedness issued or an obligor under a credit facility with respect to the Company and/or its subsidiaries, upon the release or discharge in full from its (i) guarantee of such indebtedness or (ii) obligation under such credit facility, in each case, which resulted in such restricted subsidiary’s obligation to guarantee the notes.

The Indenture contains limited events of default.

Subsidiary Guarantors

The Senior Notes are guaranteed on a senior unsecured basis by each of our consolidated subsidiaries.  Approach Resources Inc. is a holding company with no independent assets or operations. The subsidiary guarantees are full and unconditional and joint and several, and any subsidiaries of the Company other than the subsidiary guarantors are minor. There are no significant restrictions on the Company’s ability, or the ability of any subsidiary guarantor, to obtain funds from its subsidiaries through dividends, loans, advances or otherwise.

At March 31, 2018, we were in compliance with all of our covenants, and there were no existing defaults or events of default, under our debt instruments.

 

 

6.  Commitments and Contingencies

Our contractual obligations include long-term debt, operating lease obligations, asset retirement obligations and employment agreements with our executive officers.  Since December 31, 2017, there have been no material changes to our contractual obligations.

We are involved in various legal and regulatory proceedings arising in the normal course of business.  While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal or regulatory proceeding, individually or in the aggregate, would be material to our consolidated financial condition or cash flows.

 

 

7.  Income Taxes

For the three months ended March 31, 2018, our income tax benefit was $1.6 million, compared to an income tax provision of $138.7 million for the three months ended March 31, 2017. The following table reconciles our income tax expense for the three months ended March 31, 2018, and 2017, to the U.S. federal statutory rates of 21% and 35%, respectively (dollars in thousands).

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

Statutory tax at 21% and 35%, respectively

 

$

(1,902

)

 

$

(724

)

State taxes, net of federal impact

 

 

162

 

 

 

41

 

Share-based compensation tax shortfall

 

 

70

 

 

 

290

 

Nondeductible compensation

 

 

57

 

 

 

 

Other differences

 

 

3

 

 

 

3

 

Write-off of deferred tax assets

 

 

 

 

$

139,090

 

Income tax (benefit) provision

 

$

(1,610

)

 

$

138,700

 

 

On December 22, 2017, the Tax Cuts and Jobs Act was enacted which, among other things, lowered the U.S. Federal income tax rate applicable to corporations from 35% to 21% and repealed the corporate alternative minimum tax. 

The Exchange Transactions triggered a cumulative change in ownership of our common stock by more than 50% under Section 382 of the Internal Revenue Code as of March 22, 2017. This established an annual limitation on the usage of our pre-change NOLs in

9


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

the future. Accordingly, we recognized a write-off of our deferred tax assets of $139.1 million in the three months ended March 31, 2017.

 

8.  Derivative Instruments and Fair Value Measurements

The following table provides our outstanding commodity derivative positions at March 31, 2018.

 

Commodity and Period

 

Contract

Type

 

Volume Transacted

 

Contract Price

Crude Oil

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

300 Bbls/day

 

$50.00/Bbl

April 2018 – June 2018

 

Collar

 

500 Bbls/day

 

$55.00/Bbl - $60.00/Bbl

April 2018 – September 2018

 

Swap

 

1,500 Bbls/day

 

$60.50/Bbl

 

 

 

 

 

 

 

Natural Gas

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

200,000 MMBtu/month

 

$3.085/MMBtu

April 2018 – December 2018

 

Swap

 

250,000 MMBtu/month

 

$3.084/MMBtu

 

 

 

 

 

 

 

NGLs (C2 - Ethane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

1,000 Bbls/day

 

$11.424/Bbl

NGLs (C3 - Propane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

600 Bbls/day

 

$32.991/Bbl

NGLs (IC4 - Isobutane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

50 Bbls/day

 

$38.262/Bbl

NGLs (NC4 - Butane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

200 Bbls/day

 

$38.22/Bbl

NGLs (C5 - Pentane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

200 Bbls/day

 

$56.364/Bbl

 

After March 31, 2018, we entered into swaps for the NYMEX Calendar Monthly Average Roll (the “CMA Roll”) covering 2,000 Bbls of oil per day for May 2018 through December 2018 at $0.66/bbl. Swaps for the CMA Roll are pricing adjustments to the trade month versus the delivery month for contract pricing. These derivative contracts were designated as cash-flow hedges. The changes in fair value of the derivative contracts designated as cash-flow hedges, to the extent the hedge is effective, will be recognized in other comprehensive income until the hedged item is recognized in revenue.

 

The following table summarizes the fair value of our open commodity derivatives as of March 31, 2018, and December 31, 2017 (in thousands).

 

 

 

Balance Sheet Location

 

Fair Value

 

 

 

 

 

March 31,

 

 

December   31,

 

 

 

 

 

2018

 

 

2017

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

Commodity derivatives

 

Derivative assets

 

$

1,250

 

 

$

1,398

 

Commodity derivatives

 

Derivative liabilities

 

 

(2,430

)

 

 

(2,181

)

 

The following table summarizes the change in the fair value of our commodity derivatives (in thousands).

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

 

2018

 

 

2017

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

Commodity derivatives

 

Net cash payment on derivative settlements

 

$

(1,531

)

 

$

(961

)

 

 

Non-cash fair value (loss) gain on derivatives

 

 

(397

)

 

 

4,405

 

 

 

Commodity derivative (loss) gain

 

$

(1,928

)

 

$

3,444

 

 

10


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

Derivative assets and liabilities , at fair value, are included on our consolidated balance sheets as current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts.  Changes in the fair value of our commodity derivative contrac ts, not designated as cash-flow hedges, are recorded in earnings as they occur and included in income (expense) on our consolidated statements of operations.  We estimate the fair values of swap contracts based on the present value of the difference in exc hange-quoted forward price curves and contractual settlement prices multiplied by notional quantities.  We internally valued the option contracts using industry-standard option pricing models and observable market inputs.  We use our internal valuations to determine the fair values of the contracts that are reflected on our consolidated balance sheets.

We are exposed to credit losses in the event of nonperformance by the counterparties on our commodity derivatives positions and have considered the exposure in our internal valuations. However, we do not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions.

To estimate the fair value of our commodity derivatives positions, we use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to use the best available information. We determine the fair value based upon the hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and lowest priority to unobservable inputs (Level 3 measurement). The three levels of fair value hierarchy are as follows:

 

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.  The shares of our common stock issued in the Exchange Transactions were valued as a Level 1 measurement. At March 31, 2018, we had no Level 1 measurements.

 

Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Our derivatives, which consist primarily of commodity swaps and collars, are valued using commodity market data, which is derived by combining raw inputs and quantitative models and processes to generate forward curves. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2.  At March 31, 2018, all of our commodity derivatives were valued using Level 2 measurements.

 

Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At March 31, 2018, we had no recurring Level 3 measurements.

Financial Instruments Not Recorded at Fair Value

The following table sets forth the fair values of financial instruments that are not recorded at fair value on our financial statements (in thousands).

 

 

 

March 31, 2018

 

 

 

Carrying

Amount

 

 

Fair Value

 

Senior Notes

 

$

84,260

 

 

$

80,978

 

 

The fair value of the Senior Notes is based on quoted market prices, but the Senior Notes are not actively traded in the public market. Accordingly, the fair value of the Senior Notes would be classified as Level 2 in the fair value hierarchy.

 

 

9.  Share-Based Compensation

In March 2018, we issued 774,590 cash-settled performance awards, subject to certain performance conditions, and 387,295 restricted shares subject to three-year total shareholder return (“TSR”) conditions, assuming maximum TSR, to our executive officers. The aggregate fair market value of the cash-settled performance awards and TSR restricted shares on the date of grant was approximately $2.4 million and $0.8 million, respectively, to be expensed over a service period of approximately three years.

11


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

Cash-settled performance awards

As of March 31, 2018, we had 1,508,286 unvested cash-settled performance awards, subject to certain performance conditions outstanding. The cash-settled performance awards represent a non-equity unit with a conversion value equal to the fair market value of a share of the Company’s common stock at the vesting date. These awards are classified as liability awards due to the cash settlement feature. Compensation costs associated with the cash-settled performance awards are re-measured at each interim reporting period and an adjustment is recorded in general and administrative expenses on our consolidated statements of operations. For the three months ended March 31, 2018, we recognized $0.3 million in expense, compared to a benefit of $0.1 million for the three months ended March 31, 2017. At March 31, 2018, we recorded a current liability of $0.8 million and a non-current liability of $0.6 million related to the cash-settled performance awards on our consolidated balance sheets.  During the three months ended March 31, 2018, we paid $1 million related to vested cash-settled performance awards.

 

10.  Related Party Transactions

 

Wilks, a related party, purchased a portion of our outstanding Senior Notes in the open market subsequent to the Exchange Transactions. The Company believes that Wilks held approximately $60 million of our outstanding Senior Notes as of March 31, 2018. The Senior Notes held by Wilks are included in Senior Notes, net on our consolidated balance sheets. Our interest expense includes interest attributable to any Senior Notes held by Wilks on our consolidated statements of operations.

 

In April 2018, we engaged ProFrac Services, LLC (“ProFrac”) to perform completion services to the Company. There is no required minimum or maximum number of wells committed, and we intend to use ProFrac on a well-by-well basis throughout 2018. Matthew D. Wilks, a member of our Board of Directors, serves as the Chief Financial Officer of ProFrac, and Wilks has an equity ownership interest in ProFrac.

 

 

12


 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion is intended to assist in understanding our results of operations and our financial condition. This section should be read in conjunction with management’s discussion and analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on March 9, 2018.  Our consolidated financial statements and the accompanying notes included elsewhere in this report contain additional information that should be referred to when reviewing this material. Certain statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, which could cause actual results to differ from those expressed in this report.  A glossary containing the meaning of the oil and gas industry terms used in this management’s discussion and analysis follows the “Results of Operations” table in this Item 2.

Cautionary Statement Regarding Forward-Looking Statements

Various statements in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements may include projections and estimates concerning the timing and success of specific projects, typical well economics and our future reserves, production, revenues, costs, income, capital spending, 3-D seismic operations, interpretation and results and obtaining permits and regulatory approvals. When used in this report, the words “will,” “believe,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” “potential” or their negatives, other similar expressions or the statements that include those words, are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.

These forward-looking statements are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate.  We caution all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur.  Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed or referred to in the “Risk Factors” section and elsewhere in this report.  All forward-looking statements speak only as of the date of this report. We disclaim any obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, unless required by law. These cautionary statements qualify all forward-looking statements attributable to us, or persons acting on our behalf. The risks, contingencies and uncertainties relate to, among other matters, the following:

 

uncertainties in drilling, exploring for and producing oil and gas;

 

oil, NGLs and natural gas prices;

 

overall United States and global economic and financial market conditions;

 

our leverage negatively affecting our semi-annual redetermination of our revolving credit facility and our ability to comply with the covenants in our revolving credit facility;

 

domestic and foreign demand and supply for oil, NGLs, natural gas and the products derived from such hydrocarbons;

 

actions of the Organization of Petroleum Exporting Countries, its members and other state-controlled oil companies relating to oil price and production controls;

 

our ability to obtain additional financing necessary to fund our operations and capital expenditures and to meet our other obligations;

 

our ability to maintain a sound financial position;

 

issuance of our common stock in connection with potential refinancing transactions that may cause substantial dilution;

 

our cash flows and liquidity;

 

the effects of government regulation and permitting and other legal requirements, including laws or regulations that could restrict or prohibit hydraulic fracturing;

 

disruption of credit and capital markets;

13


 

 

disruptions to, capacity constraints in or other limitations on the pipeline systems that deliver our oil, NGLs and natural gas and other processing and transportation considerations;

 

marketing of oil, NGLs and natural gas;

 

high costs, shortages, delivery delays or unavailability of drilling and completion equipment, materials, labor or other services;

 

competition in the oil and gas industry;

 

uncertainty regarding our future operating results;

 

profitability of drilling locations;

 

interpretation of 3-D seismic data;

 

replacing our oil, NGLs and natural gas reserves;

 

our ability to retain and attract key personnel;

 

our business strategy, including our ability to recover oil, NGLs and natural gas in place associated with our Wolfcamp shale oil resource play in the Permian Basin;

 

development of our current asset base or property acquisitions;

 

estimated quantities of oil, NGLs and natural gas reserves and present value thereof;

 

plans, objectives, expectations and intentions contained in this report that are not historical; and

 

other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 9, 2018.

Overview

Approach Resources Inc. is an independent energy company focused on the exploration, development, production and acquisition of unconventional oil and gas reserves in the Midland Basin of the greater Permian Basin in West Texas, where we leased approximately 149,000 net acres as of March 31, 2018.  We believe our concentrated acreage position and extensive, integrated field infrastructure system provides us an opportunity to achieve cost, operating and recovery efficiencies in the development of our drilling inventory.   Our long-term business strategy is to create value by growing reserves and production in a cost efficient manner and at attractive rates of return.  We intend to pursue that strategy by developing resource potential from the Wolfcamp shale oil formation and pursuing acquisitions that meet our strategic and financial objectives. Additional drilling targets could include the Clearfork, Canyon Sands, Strawn and Ellenburger zones.  We sometimes refer to our development project in the Permian Basin as “Project Pangea,” which includes “Pangea West.”  Our management and technical team have a proven track record of finding and developing reserves through advanced drilling and completion techniques. As the operator of all of our estimated proved reserves and production, we have a high degree of control over capital expenditures and other operating matters.

At December 31, 2017, our estimated proved reserves were 181.5 million barrels of oil equivalent (“MMBoe”), made up of 28% oil, 32% NGLs and 40% gas. The proved developed reserves were 37% of our total proved reserves at December 31, 2017.  Substantially all of our proved reserves are located in the Permian Basin in Crockett and Schleicher counties, Texas.  At March 31, 2018, we owned working interests in 819 producing oil and gas wells.

First Quarter 2018 Activity

 

During the three months ended March 31, 2018, we produced 1,020 MBoe, or 11.3 MBoe/d.  We completed four horizontal wells. At March 31, 2018, we had six horizontal Wolfcamp wells waiting on completion.

2018 Capital Expenditures

For the three months ended March 31, 2018, our capital expenditures totaled $13.7 million, consisting of $12.4 million for drilling and completion activities and $1.3 million for infrastructure projects and equipment.  Our 2018 capital budget is a range of $50 million to $70 million. 

Our 2018 capital budget excludes acquisitions and lease extensions and renewals and is subject to change depending upon a number of factors, including prevailing and anticipated prices for oil, NGLs and gas, results of horizontal drilling and completions,

14


 

economic and industry conditions at the time of drilling, the availability of sufficient cap ital resources for drilling prospects, our financial results and the availability of lease extensions and renewals on reasonable terms. Although the impact of changes in these collective factors in the current commodity price environment is difficult to es timate, we currently expect to execute our development plan based on current conditions. To the extent there is a significant increase or decrease in commodity prices in the future, we will assess the impact on our development plan at that time, and we may respond to such changes by altering our capital budget or our development plan.

15


 

Results of Operations

The following table sets forth summary information regarding oil, NGLs and gas revenues, production, average product prices and average production costs and expenses for the three months ended March 31, 2018 and 2017.  We determine a barrel of oil equivalent using the ratio of six Mcf of natural gas to one Boe, and one barrel of NGLs to one Boe. The ratios of six Mcf of natural gas to one Boe and one barrel of NGLs to one Boe do not assume price equivalency and, given price differentials, the price for a Boe for natural gas or NGLs may differ significantly from the price for a barrel of oil.

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Revenues (in thousands):

 

 

 

 

 

 

 

 

Oil

 

$

16,343

 

 

$

13,694

 

NGLs

 

 

7,332

 

 

 

6,060

 

Gas

 

 

5,097

 

 

 

6,601

 

Total oil, NGLs and gas sales

 

 

28,772

 

 

 

26,355

 

 

 

 

 

 

 

 

 

 

Net cash payment on derivative settlements

 

 

(1,531

)

 

 

(961

)

Total oil, NGLs and gas sales including derivative

   impact

 

$

27,241

 

 

$

25,394

 

 

 

 

 

 

 

 

 

 

Production:

 

 

 

 

 

 

 

 

Oil (MBbls)

 

 

272

 

 

 

278

 

NGLs (MBbls)

 

 

352

 

 

 

352

 

Gas (MMcf)

 

 

2,376

 

 

 

2,377

 

Total (MBoe)

 

 

1,020

 

 

 

1,027

 

Total (MBoe/d)

 

 

11.3

 

 

 

11.4

 

 

 

 

 

 

 

 

 

 

Average prices:

 

 

 

 

 

 

 

 

Oil (per Bbl)

 

$

60.04

 

 

$

49.17

 

NGLs (per Bbl)

 

 

20.84

 

 

 

17.20

 

Gas (per Mcf)

 

 

2.15

 

 

 

2.78

 

Total (per Boe)

 

 

28.21

 

 

 

25.67

 

 

 

 

 

 

 

 

 

 

Net cash payment on derivative settlements (per Boe)

 

 

(1.50

)

 

 

(0.94

)

Total including derivative impact (per Boe)

 

$

26.71

 

 

$

24.73

 

 

 

 

 

 

 

 

 

 

Costs and expenses (per Boe):

 

 

 

 

 

 

 

 

Lease operating

 

$

5.16

 

 

$

4.06

 

Production and ad valorem taxes

 

 

2.45

 

 

 

2.29

 

Exploration

 

 

 

 

 

1.02

 

General and administrative

 

 

6.44

 

 

 

5.77

 

Depletion, depreciation and amortization

 

 

15.37

 

 

 

17.49

 

 

Glossary

Bbl.   One stock tank barrel, of 42 U.S. gallons liquid volume, used herein to reference oil, condensate or NGLs.

Boe.   Barrel of oil equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil equivalent, and one Bbl of NGLs to one Bbl of oil equivalent.

MBbl.   Thousand barrels of oil, condensate or NGLs.

MBoe.   Thousand barrels of oil equivalent.

Mcf.   Thousand cubic feet of natural gas.

MMBoe.   Million barrels of oil equivalent.

16


 

MMBtu. Million British thermal units.

MMcf.   Million cubic feet of natural gas.

NGLs.   Natural gas liquids.

NYMEX. New York Mercantile Exchange.

/d.   “Per day” when used with volumetric units or dollars.

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

Oil, NGLs and gas sales .  Oil, NGLs and gas sales increased $2.4 million, or 9%, for the three months ended March 31, 2018, to $28.8 million, compared to $26.4 million for the three months ended March 31, 2017.  The increase in oil, NGLs and gas sales was due to an increase in average realized commodity prices ($2.6 million) partially offset by a decrease in production volumes ($0.2 million).  Production volumes decreased as a result of no well completions in the fourth quarter of 2017. We expect oil, NGLs and gas sales to increase in 2018 compared to 2017 due to improved commodity prices and an increase in production due to increased well completion activity.

Net loss .  Net loss for the three months ended March 31, 2018, was $7.4 million, or $0.08 per diluted share, compared to $140.8 million, or $2.00 per diluted share, for the three months ended March 31, 2017. Net loss for the three months ended March 31, 2018, included a commodity derivative loss of $1.9 million. The decrease in the net loss for the three months ended March 31, 2018, was primarily due to the debt-for-equity exchange transactions completed in the three months ended March 31, 2017. In connection with exchange transactions, we recognized a gain on debt extinguishment of $5.1 million and a write-off of deferred tax assets of $139.1 million resulting from our cumulative change in ownership.

Oil, NGLs and gas production.   Production for the three months ended March 31, 2018, totaled 1,020 MBoe (11.3 MBoe/d), compared to production of 1,027 MBoe (11.4 MBoe/d) in the prior-year period, a 1% decrease.  Production for the three months ended March 31, 2018, and March 31, 2017 was 27% oil, 34% NGLs and 39% gas.  Production volumes decreased during the three months ended March 31, 2018, as a result of no well completions in the fourth quarter of 2017. We expect production to increase from current levels due to increased well completion activity.

Commodity derivative (loss) gain.    The following table sets forth the components of our commodity derivative (loss) gain for the three months ended March 31, 2018, and 2017 (dollars in thousands).

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Net cash payment on derivative settlements

 

$

(1,531

)

 

$

(961

)

Non-cash fair value (loss) gain on derivatives

 

 

(397

)

 

 

4,405

 

Commodity derivative (loss) gain

 

$

(1,928

)

 

$

3,444

 

Historically, we have not designated our derivative instruments as cash-flow hedges. Commodity derivative settlements are derived from the relative movement of commodity prices in relation to the fixed notional pricing in our derivative contracts for the respective years. As commodity prices increase or decrease, the fair value of the open portion of those positions decreases or increases, respectively. We record our open derivative instruments at fair value on our consolidated balance sheets as either derivative assets or liabilities. For commodity derivatives not designated as a cash-flow hedge, we record changes in such fair value in earnings on our consolidated statements of operations under the caption entitled “commodity derivative (loss) gain.”

17


 

After March 31, 2018, we entered into basis swaps for the NYMEX Calendar Monthly Average Roll (the “CMA Roll ) covering 2,000 Bbls per day for May 2018 through December 2018 at $0.66/bbl. Basis swaps for the CMA Roll are pricing adjustments to the trade month versus the delivery month for contract pricing. These derivative contracts were designated as cash-flow hedges. The changes in fair value of the derivative contracts designated as cash-flow hedges, to the extent the hedge is effective, will be recognized in other comprehensive income until the hedged item is recognized in revenue.

Lease operating. Our lease operating expenses (“LOE”) increased $1.1 million, or 26%, for the three months ended March 31, 2018, to $5.3 million, or $5.16 per Boe, compared to $4.2 million, or $4.06 per Boe, for the three months ended March 31, 2017.  The increase in LOE per Boe for the three months ended March 31, 2018, was primarily due to well repairs, workovers and maintenance. We expect LOE per Boe to decrease from the current levels due to a decrease in well repairs, workovers and maintenance and an increase in production. The following table summarizes LOE per Boe.

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

 

 

 

 

$MM

 

 

Boe

 

 

$MM

 

 

Boe

 

 

$MM

 

 

Boe

 

 

% Change (Boe)

 

Compressor rental and repair