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, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 18, 2019. 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:
|
•
|
our ability to continue as a going concern;
|
|
•
|
our ability to obtain forbearance or waivers from our lenders;
|
|
•
|
our ability to regain compliance with the covenants in our revolving credit facility;
|
|
•
|
our leverage negatively affecting the semi-annual redetermination of our revolving credit facility;
|
|
•
|
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;
|
|
•
|
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 equity securities in connection with potential financing or deleveraging transactions or other strategic alternatives that may cause substantial dilution;
|
|
•
|
our cash flows and liquidity;
|
18
|
•
|
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;
|
|
•
|
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, 2018, filed with the SEC on March 18, 2019.
|
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 116,000 net acres as of June 30, 2019. 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 teams 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, 2018, our estimated proved reserves were 180.1 million barrels of oil equivalent (“MMBoe”), made up of 29% oil, 31% NGLs and 40% gas. The proved developed reserves were 37% of our total proved reserves at December 31, 2018. Substantially all of our proved reserves are located in the Permian Basin in Crockett and Schleicher counties, Texas. At June 30, 2019, we owned working interests in 810 producing oil and gas wells.
19
Going Concern
Uncertainty
Our liquidity and ability to comply with financial covenants under our revolving credit facility have been negatively impacted by the recent decrease in commodity prices, the severe natural gas price discount in the Permian Basin and restructuring expenses incurred during the six months ended June 30, 2019. Our revolving credit facility contains three principal financial covenants: (i) a consolidated interest coverage ratio, (ii) a consolidated modified current ratio and (iii) a consolidated total leverage ratio. See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility. As of June 30, 2019, we were not in compliance with the consolidated interest coverage ratio and the consolidated total leverage ratio covenants under our revolving credit facility, which represents an event of default under our revolving credit facility. As a result, we have classified the outstanding balance on our revolving credit facility as a current liability as of June 30, 2019. These factors raise substantial doubt regarding our ability to continue as a going concern.
In order to improve our leverage position, we currently are pursuing or considering a number of actions, which in certain cases may require the consent of current lenders, stockholders or bond holders. As part of our review of deleveraging transactions, we currently are engaged in discussions and negotiations with Wilks Brothers, LLC, and its affiliate SDW Investments, LLC (collectively, “Wilks”) regarding their investment in the Company, including, without limitation, a possible debt for equity exchange of approximately $62.3 million of 7% Senior Notes due 2021 (the “Senior Notes”) currently held by Wilks and an additional capital infusion into Approach (the “Exchange Transaction”). We have engaged advisors in these discussions and negotiations, but there can be no assurance that these discussions and negotiations will result in the consummation of any transaction in a timely manner, or at all.
Further, the consummation of an Exchange Transaction is contingent on the successful consummation of an extension and amendment under our credit agreement, as further discussed below. In the event the Exchange Transaction, and credit agreement extension and amendment, are not timely completed, we anticipate that we will pursue a restructuring of our balance sheet through an in-court Chapter 11 proceeding.
Pursuant to the terms of a limited forbearance agreement, our credit facility lenders have agreed to forbear from exercising their rights and remedies under the revolving credit facility (and related loan documents) and applicable law with respect to the occurrence or continuance of events of default caused by our failure to comply with certain financial covenants in the revolving credit facility. This limited forbearance agreement will terminate on August 21, 2019, unless earlier terminated due to additional Events of Default under our revolving credit facility, or a default under the forbearance agreement. In addition, we are in continuing discussions and negotiations with the lenders regarding a potential extension of and amendment to the existing credit agreement. There can be no assurance that these discussions and negotiations will result in the consummation of any extension or amendment in a timely manner, or at all.
An extension of and amendment to the existing credit agreement would be contingent on the successful and timely consummation of an Exchange Transaction.
As we have previously disclosed, our Board has formed a committee of independent directors (the “Committee”) to evaluate the Exchange Transaction as well as other financing alternatives and deleveraging transactions, including without limitation (i) amendments or waivers to the covenants or other provisions of our revolving credit facility, (ii) raising new capital in private or public markets and (iii) restructuring our balance sheet either through an in-court Chapter 11 proceeding or through an out-of-court agreement with creditors. We also are considering operational matters such as adjusting our capital budget and continuing to reduce costs in an effort to improve cash flows from operations, and intend to continue to evaluate other strategic alternatives, including without limitation: (i) acquiring assets with existing production and cash flows by issuing preferred or common equity to finance such acquisitions; (ii) selling existing producing or midstream assets; and (iii) merging with a strategic partner. There can be no assurance that we will be able to consummate any of these financing or deleveraging transactions or other strategic alternatives in a timely manner, or at all, or that such financing or deleveraging transactions or other strategic alternatives, if implemented, would result in regaining or continuing compliance under our credit facility.
Second Quarter 2019 Activity
During the three months ended June 30, 2019, we produced 875 MBoe, or 9.6 MBoe/d. At June 30, 2019, we had seven horizontal Wolfcamp wells waiting on completion.
We currently have no rigs running in Project Pangea.
2019 Capital Expenditures
We currently are evaluating our annual capital budget, and our capital expenditures for 2019 will be dependent on the successful consummation of the potential financing and deleveraging transactions and other strategic alternatives disclosed above. For the three months ended June 30, 2019, our capital expenditures totaled $1.5 million.
We initially set our 2019 capital budget at a range of $30 million to $60 million, prior to suspending our capital budget in light of our pursuit of the financing and deleveraging transactions discussed above.
Our original 2019 capital budget excluded 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, economic and industry conditions at the time of drilling,
20
the availability of sufficient capital resources for drilling prospe
cts, our financial results and the availability of lease extensions and renewals on reasonable terms.
T
he impact of changes in these collective factors in the current commodity price environment is difficult to estimate
. W
e will assess the impact
of change
s in these collective factors, as well as the results of the potential financing and deleveraging transactions
on our development plan at
the appropriate
time, and we may respond to such changes by altering our capital budget or our development plan.
21
Resu
lts 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 and six months ended June 30, 2019 and 2018. 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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
11,261
|
|
|
$
|
18,106
|
|
|
$
|
22,616
|
|
|
$
|
34,450
|
|
NGLs
|
|
|
4,030
|
|
|
|
8,852
|
|
|
|
9,199
|
|
|
|
16,184
|
|
Gas
|
|
|
(571
|
)
|
|
|
3,368
|
|
|
|
2,148
|
|
|
|
8,464
|
|
Total oil, NGLs and gas sales
|
|
|
14,720
|
|
|
|
30,326
|
|
|
|
33,963
|
|
|
|
59,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash receipt (payment) on derivative settlements
|
|
|
639
|
|
|
|
(1,982
|
)
|
|
|
2,115
|
|
|
|
(3,513
|
)
|
Total oil, NGLs and gas sales including derivative
impact
|
|
$
|
15,359
|
|
|
$
|
28,344
|
|
|
$
|
36,078
|
|
|
$
|
55,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls)
|
|
|
199
|
|
|
|
278
|
|
|
|
419
|
|
|
|
550
|
|
NGLs (MBbls)
|
|
|
323
|
|
|
|
377
|
|
|
|
647
|
|
|
|
729
|
|
Gas (MMcf)
|
|
|
2,117
|
|
|
|
2,404
|
|
|
|
4,289
|
|
|
|
4,780
|
|
Total (MBoe)
|
|
|
875
|
|
|
|
1,056
|
|
|
|
1,781
|
|
|
|
2,076
|
|
Total (MBoe/d)
|
|
|
9.6
|
|
|
|
11.6
|
|
|
|
9.8
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
|
|
$
|
56.54
|
|
|
$
|
65.09
|
|
|
$
|
53.97
|
|
|
$
|
62.59
|
|
NGLs (per Bbl)
|
|
|
12.49
|
|
|
|
23.49
|
|
|
|
14.22
|
|
|
|
22.21
|
|
Gas (per Mcf)
|
|
|
(0.27
|
)
|
|
|
1.40
|
|
|
|
0.50
|
|
|
|
1.77
|
|
Total (per Boe)
|
|
|
16.83
|
|
|
|
28.73
|
|
|
|
19.07
|
|
|
|
28.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash receipt (payment) on derivative settlements (per Boe)
|
|
|
0.73
|
|
|
|
(1.88
|
)
|
|
|
1.19
|
|
|
|
(1.69
|
)
|
Total including derivative impact (per Boe)
|
|
$
|
17.56
|
|
|
$
|
26.85
|
|
|
$
|
20.26
|
|
|
$
|
26.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses (per Boe):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating
|
|
$
|
4.78
|
|
|
$
|
4.77
|
|
|
$
|
5.08
|
|
|
$
|
4.96
|
|
Production and ad valorem taxes
|
|
|
1.76
|
|
|
|
2.43
|
|
|
|
1.95
|
|
|
|
2.44
|
|
Exploration
|
|
|
1.65
|
|
|
|
—
|
|
|
|
0.81
|
|
|
|
—
|
|
General and administrative
|
|
|
4.93
|
|
|
|
5.77
|
|
|
|
4.54
|
|
|
|
6.10
|
|
Depletion, depreciation and amortization
|
|
|
14.94
|
|
|
|
15.96
|
|
|
|
14.98
|
|
|
|
15.67
|
|
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.
22
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 June 30, 2019 Compared to Three Months Ended June 30, 2018
Oil, NGLs and gas sales
. Oil, NGLs and gas sales decreased $15.6 million, or 51%, for the three months ended June 30, 2019, to $14.7 million, compared to $30.3 million for the three months ended June 30, 2018. The decrease in oil, NGLs and gas sales was due to a decrease in average realized commodity prices ($10.4 million) and a decrease in production volumes ($5.2 million). Production volumes decreased as a result of no well completions since the third quarter of 2018.
We expect oil, NGLs and gas sales to decrease in 2019 compared to 2018 due to a decrease in commodity prices and a decrease in production due to decreased well completion activity.
Net loss
. Net loss for the three months ended June 30, 2019, was $13.6 million, or $0.15 per diluted share, compared to $9.1 million, or $0.10 per diluted share, for the three months ended June 30, 2018. Net loss for the three months ended June 30, 2019, included a commodity derivative gain of $0.4 million. The increase in the net loss for the three months ended June 30, 2019, was primarily due to a decrease in revenue ($15.6 million), partially offset by a decrease in operating expenses ($5.9 million).
Oil, NGLs and gas production.
Production for the three months ended June 30, 2019, totaled 875 MBoe (9.6 MBoe/d), compared to production of 1,056 MBoe (11.6 MBoe/d) in the prior-year period, a 17% decrease. Production for the three months ended June 30, 2019, was 23% oil, 37% NGLs and 40% gas compared to 26% oil, 36% NGLs and 38% gas for the three months ended June 30, 2018. Production volumes decreased during the three months ended June 30, 2019, as a result of no well completions since the third quarter of 2018. We expect production to decrease from current levels due to decreased well completion activity.
Commodity derivative gain (loss).
The following table sets forth the components of our commodity derivative gain (loss) for the three months ended June 30, 2019, and 2018 (dollars in thousands).
|
|
Three Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net cash receipt (payment) on derivative settlements
|
|
$
|
639
|
|
|
$
|
(1,982
|
)
|
Non-cash fair value loss on derivatives
|
|
|
(284
|
)
|
|
|
(2,902
|
)
|
Commodity derivative gain (loss)
|
|
$
|
355
|
|
|
$
|
(4,884
|
)
|
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 gain (loss).” As of June 30, 2019, we had no outstanding commodity derivative contracts designated as cash-flow hedges.
In April 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.
Oil, NGLs and gas sales includes $62,000 related to this cash flow hedge for the three months ended June 30, 2018.
23
Lease operating.
Our lease operating expenses (“LOE”)
de
creased $
0.8
million, or
17
%, for the three months ended
June 30
,
2019
, to $
4.2
million, or $
4.78
per Boe, compared to $
5
million, or $
4.77
per Boe, for the three
months ended
June 30
,
2018
. The
de
crease in LOE for the three months ended
June 30
,
2019
, was primarily due to
a decrease in well repairs, workovers and maintenance and water handling
. The following table summarizes LOE
in millions and LOE
per Boe.
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
|
|
|
$MM
|
|
|
Boe
|
|
|
$MM
|
|
|
Boe
|
|
|
$MM
|
|
|
Boe
|
|
|
% Change (Boe)
|
|
Compressor rental and repair
|
|
$
|
1.8
|
|
|
$
|
2.01
|
|
|
$
|
1.6
|
|
|
$
|
1.56
|
|
|
$
|
0.2
|
|
|
$
|
0.45
|
|
|
|
28.8
|
%
|
Well repairs, workovers and maintenance
|
|
|
0.9
|
|
|
|
1.06
|
|
|
|
1.4
|
|
|
|
1.33
|
|
|
|
(0.5
|
)
|
|
|
(0.27
|
)
|
|
|
(20.3
|
)
|
Water handling and other
|
|
|
0.7
|
|
|
|
0.85
|
|
|
|
1.2
|
|
|
|
1.16
|
|
|
|
(0.5
|
)
|
|
|
(0.31
|
)
|
|
|
(26.7
|
)
|
Pumpers and supervision
|
|
|
0.8
|
|
|
|
0.86
|
|
|
|
0.8
|
|
|
|
0.72
|
|
|
|
-
|
|
|
|
0.14
|
|
|
|
19.4
|
|
Total
|
|
$
|
4.2
|
|
|
$
|
4.78
|
|
|
$
|
5.0
|
|
|
$
|
4.77
|
|
|
$
|
(0.8
|
)
|
|
$
|
0.01
|
|
|
|
0.2
|
%
|
Production and ad valorem taxes.
Our production and ad valorem taxes decreased $1.1 million, or 40%, for the three months ended June 30, 2019, to $1.5 million compared to $2.6 million for the three months ended June 30, 2018. Production and ad valorem taxes were $1.76 per Boe and $2.43 per Boe and approximately 10.5% and 8.5% of oil, NGLs and gas sales for the three months ended June 30, 2019 and 2018, respectively. The decrease in production and ad valorem taxes was primarily a function of the decrease in oil, NGLs and gas sales between the two periods.
Exploration.
We recorded exploration expense of $1.4 million for the three months ended June 30, 2019, compared to $3,000 for the three months ended June 30, 2018. The increase in exploration expense is due to lease expirations of approximately 2,400 net acres in the three months ended June 30, 2019.
General and administrative
. Our general and administrative expenses (“G&A”) decreased $1.8 million, or 29%, to $4.3 million, or $4.93 per Boe, for the three months ended June 30, 2019, compared to $6.1 million, or $5.77 per Boe, for the three months ended June 30, 2018. The decrease in G&A and G&A per Boe was primarily due to a decrease in salaries and benefits and share-based compensation due to the departure of certain executives. We expect G&A to decrease compared to 2018 due to a decrease in salaries and benefits in connection with the departure of certain executives. The following table summarizes G&A in millions and G&A per Boe.
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
|
|
|
$MM
|
|
|
Boe
|
|
|
$MM
|
|
|
Boe
|
|
|
$MM
|
|
|
Boe
|
|
|
% Change (Boe)
|
|
Salaries and benefits
|
|
$
|
2.0
|
|
|
$
|
2.25
|
|
|
$
|
3.6
|
|
|
$
|
3.40
|
|
|
$
|
(1.6
|
)
|
|
$
|
(1.15
|
)
|
|
|
(33.8
|
)%
|
Share-based compensation
|
|
|
0.3
|
|
|
$
|
0.32
|
|
|
|
0.7
|
|
|
$
|
0.62
|
|
|
|
(0.4
|
)
|
|
|
(0.30
|
)
|
|
|
(48.4
|
)
|
Professional fees
|
|
|
0.7
|
|
|
$
|
0.77
|
|
|
|
0.5
|
|
|
$
|
0.48
|
|
|
|
0.2
|
|
|
|
0.29
|
|
|
|
60.4
|
|
Other
|
|
|
1.3
|
|
|
$
|
1.59
|
|
|
|
1.3
|
|
|
$
|
1.27
|
|
|
|
-
|
|
|
|
0.32
|
|
|
|
25.2
|
|
Total
|
|
$
|
4.3
|
|
|
$
|
4.93
|
|
|
$
|
6.1
|
|
|
$
|
5.77
|
|
|
$
|
(1.8
|
)
|
|
$
|
(0.84
|
)
|
|
|
(14.6
|
)%
|
Restructuring expenses.
During the three months ended June 30, 2019, we recorded restructuring expenses of $0.1 million in connection with the departures of certain executives and in connection with the review of the potential deleveraging transactions. We expect to continue to recognize restructuring expenses in connection with the continued review of the potential financing and deleveraging transactions.
Depletion, depreciation and amortization.
Our depletion, depreciation and amortization expense (“DD&A”) decreased $3.7 million, or 22%, to $13.1 million for the three months ended June 30, 2019, compared to $16.8 million for the three months ended June 30, 2018. Our DD&A per Boe decreased by $1.02, or 6%, to $14.94 per Boe for the three months ended June 30, 2019, compared to $15.96 per Boe for the three months ended June 30, 2018.
The decrease in DD&A over the prior-year period was primarily due to a decrease in production.
Interest expense, net.
Our interest expense, net, increased $1.2 million, or 20%, to $7.4 million for the three months ended June 30, 2019, compared to $6.2 million for the three months ended June 30, 2018. This increase was primarily due to an increase in outstanding borrowings and floating interest rates under our revolving credit facility. The weighted average interest rate applicable to borrowings under our revolving credit facility for the three months ended June 30, 2019, was 6.7% compared to 5.8% for the three months ended June 30, 2018.
24
Income taxes.
For the three months ended
June 30
,
2019
, our income tax benefit was $
3.4
million, compared to
$
2.2
million
for the three months ended
June 30
,
2018
.
The following table reconciles our income tax
benefit
for the three mont
hs ended
June 30
,
2019
, and
2018
, to the U.S. federal statutory rates of 21% (dollars in thousands).
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Statutory tax at 21%
|
|
$
|
(3,574
|
)
|
|
$
|
(2,372
|
)
|
State taxes, net of federal impact
|
|
|
64
|
|
|
|
112
|
|
Share-based compensation tax shortfall
|
|
|
12
|
|
|
|
—
|
|
Nondeductible compensation
|
|
|
74
|
|
|
|
36
|
|
Other differences
|
|
|
4
|
|
|
|
2
|
|
Income tax benefit
|
|
$
|
(3,420
|
)
|
|
$
|
(2,222
|
)
|
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
Oil, NGLs and gas sales
. Oil, NGLs and gas sales decreased $25.1 million, or 43%, for the six months ended June 30, 2019, to $34 million, compared to $59.1 million for the six months ended June 30, 2018. The decrease in oil, NGLs and gas sales was due to a decrease in average realized commodity prices ($16.7 million) and a decrease in production volumes ($8.4 million). Production volumes decreased as a result of no well completions since the third quarter of 2018.
We expect oil, NGLs and gas sales to decrease in 2019 compared to 2018 due to a decrease in commodity prices and a decrease in production due to decreased well completion activity.
Net loss
. Net loss for the six months ended June 30, 2019, was $30.4 million, or $0.32 per diluted share, compared to $16.5 million, or $0.17 per diluted share, for the six months ended June 30, 2018. Net loss for the six months ended June 30, 2019, included restructuring expenses of $6.4 million and a commodity derivative loss of $2.5 million. The increase in the net loss for the six months ended June 30, 2019, was primarily due to a decrease in revenue ($25.1 million) and the restructuring expenses of $6.4 million, partially offset by a decrease in other operating expenses ($11.6 million).
Oil, NGLs and gas production.
Production for the six months ended June 30, 2019, totaled 1,781 MBoe (9.8 MBoe/d), compared to production of 2,076 MBoe (11.5 MBoe/d) in the prior-year period, a 14% decrease. Production for the six months ended June 30, 2019, was 24% oil, 36% NGLs and 40% gas compared to 27% oil, 35% NGLs and 38% gas for the six months ended June 30, 2018. Production volumes decreased during the six months ended June 30, 2019, as a result of no well completions since the third quarter of 2018. We expect production to decrease from current levels due to decreased well completion activity.
Commodity derivative loss.
The following table sets forth the components of our commodity derivative loss for the six months ended June 30, 2019, and 2018 (dollars in thousands).
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net cash receipt (payment) on derivative settlements
|
|
$
|
2,115
|
|
|
$
|
(3,513
|
)
|
Non-cash fair value loss on derivatives
|
|
|
(4,606
|
)
|
|
|
(3,299
|
)
|
Commodity derivative loss
|
|
$
|
(2,491
|
)
|
|
$
|
(6,812
|
)
|
Lease operating.
Our LOE decreased $1.3 million, or 12%, for the six months ended June 30, 2019, to $9 million, or $5.08 per Boe, compared to $10.3 million, or $4.96 per Boe, for the six months ended June 30, 2018. The increase in LOE per Boe for the six months ended June 30, 2019, was primarily due to lower production volumes. The following table summarizes LOE in millions and LOE per Boe.
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
|
|
|
$MM
|
|
|
Boe
|
|
|
$MM
|
|
|
Boe
|
|
|
$MM
|
|
|
Boe
|
|
|
% Change (Boe)
|
|
Compressor rental and repair
|
|
$
|
3.6
|
|
|
$
|
2.02
|
|
|
$
|
3.4
|
|
|
$
|
1.65
|
|
|
$
|
0.2
|
|
|
$
|
0.37
|
|
|
|
22.4
|
%
|
Well repairs, workovers and maintenance
|
|
|
2.2
|
|
|
|
1.25
|
|
|
|
3.0
|
|
|
|
1.44
|
|
|
|
(0.8
|
)
|
|
|
(0.19
|
)
|
|
|
(13.2
|
)
|
Water handling and other
|
|
|
1.7
|
|
|
|
0.95
|
|
|
|
2.3
|
|
|
|
1.12
|
|
|
|
(0.6
|
)
|
|
|
(0.17
|
)
|
|
|
(15.2
|
)
|
Pumpers and supervision
|
|
|
1.5
|
|
|
|
0.86
|
|
|
|
1.6
|
|
|
|
0.75
|
|
|
|
(0.1
|
)
|
|
|
0.11
|
|
|
|
14.7
|
|
Total
|
|
$
|
9.0
|
|
|
$
|
5.08
|
|
|
$
|
10.3
|
|
|
$
|
4.96
|
|
|
$
|
(1.3
|
)
|
|
$
|
0.12
|
|
|
|
2.4
|
%
|
Production and ad valorem taxes.
Our production and ad valorem taxes decreased $1.6 million, or 31%, for the six months ended June 30, 2019, to $3.5 million compared to $5.1 million for the six months ended June 30, 2018. Production and ad valorem
25
taxes were $
1.95
per Boe and $2.4
4
per Boe and approximately
10.2
% and 8.
6
% of oil, NGLs and gas sales for the
six
months ended June 30, 2019 and 2018, respectively. The decrease in production and ad valorem taxes was primarily
a function of the decrease in oil, NGLs and gas sales between the two periods.
Exploration.
We recorded exploration expense of $1.4 million for the six months ended June 30, 2019, compared to $3,000 for the six months ended June 30, 2018. The increase in exploration expense is due to lease expirations of approximately 2,400 net acres in the six months ended June 30, 2019.
General and administrative
. Our general and administrative expenses (“G&A”) decreased $4.6 million, or 36%, to $8.1 million, or $4.54 per Boe, for the six months ended June 30, 2019, compared to $12.7 million, or $6.10 per Boe, for the six months ended June 30, 2018. For the six months ended June 30, 2019, G&A included a benefit of $1.1 million related to the forfeiture of 960,890 unvested shares of restricted stock and 691,509 unvested cash-settled performance awards in connection with the departures of certain executives. The decrease in G&A and G&A per Boe was primarily due a decrease in salaries and benefits and share-based compensation due to the departure of certain executives. We expect G&A to decrease compared to 2018 due to a decrease in salaries and benefits in connection with the departure of certain executives. The following table summarizes G&A in millions and G&A per Boe.
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
|
|
|
$MM
|
|
|
Boe
|
|
|
$MM
|
|
|
Boe
|
|
|
$MM
|
|
|
Boe
|
|
|
% Change (Boe)
|
|
Salaries and benefits
|
|
$
|
3.8
|
|
|
$
|
2.14
|
|
|
$
|
7.4
|
|
|
$
|
3.56
|
|
|
$
|
(3.6
|
)
|
|
$
|
(1.42
|
)
|
|
|
(39.9
|
)%
|
Share-based compensation
|
|
|
(0.1
|
)
|
|
$
|
(0.06
|
)
|
|
|
1.5
|
|
|
$
|
0.71
|
|
|
|
(1.6
|
)
|
|
|
(0.77
|
)
|
|
|
(108.5
|
)
|
Professional fees
|
|
|
1.8
|
|
|
$
|
0.98
|
|
|
|
1.2
|
|
|
$
|
0.59
|
|
|
|
0.6
|
|
|
|
0.39
|
|
|
|
66.1
|
|
Other
|
|
|
2.6
|
|
|
$
|
1.48
|
|
|
|
2.6
|
|
|
$
|
1.24
|
|
|
|
-
|
|
|
|
0.24
|
|
|
|
19.4
|
|
Total
|
|
$
|
8.1
|
|
|
$
|
4.54
|
|
|
$
|
12.7
|
|
|
$
|
6.10
|
|
|
$
|
(4.6
|
)
|
|
$
|
(1.56
|
)
|
|
|
(25.6
|
)%
|
Restructuring expenses.
During the six months ended June 30, 2019, we recorded restructuring expenses of $6.4 million in connection with the departures of certain executives and in connection with the review of the potential deleveraging transactions. We expect to continue to recognize restructuring expenses in connection with the continued review of the potential financing and deleveraging transactions.
Depletion, depreciation and amortization.
Our depletion, depreciation and amortization expense (“DD&A”) decreased $5.8 million, or 18%, to $26.7 million for the six months ended June 30, 2019, compared to $32.5 million for the six months ended June 30, 2018. Our DD&A per Boe decreased by $0.69, or 4%, to $14.98 per Boe for the six months ended June 30, 2019, compared to $15.67 per Boe for the six months ended June 30, 2018.
The decrease in DD&A over the prior-year period was primarily due to a decrease in production.
Impairment.
During the six months ended June 30, 2019, we initiated a plan to market certain corporate assets for sale. The assets are available for immediate sale and are being actively marketed. The corporate assets held for sale were recorded at their estimated fair value less costs to sell as of March 31, 2019. As a result, we recognized an impairment loss of $0.3 million for the difference between the asset’s carrying value and the estimated fair value less costs to sell during the six months ended June 30, 2019.
Interest expense, net.
Our interest expense, net, increased $2.1 million, or 18%, to $14.2 million for the six months ended June 30, 2019, compared to $12.1 million for the six months ended June 30, 2018. This increase was primarily due to an increase in outstanding borrowings and floating interest rates under our revolving credit facility. The weighted average interest rate applicable to borrowings under our revolving credit facility for the six months ended June 30, 2019, was 6.6% compared to 5.6% for the six months ended June 30, 2018.
Income taxes.
For the six months ended June 30, 2019, our income tax benefit was $7.7 million, compared to $3.8 million for the six months ended June 30, 2018.
The following table reconciles our income tax benefit for the six months ended June 30, 2019, and 2018, to the U.S. federal statutory rates of 21% (dollars in thousands).
26
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Statutory tax at 21%
|
|
$
|
(7,999
|
)
|
|
$
|
(4,274
|
)
|
State taxes, net of federal impact
|
|
|
127
|
|
|
|
274
|
|
Share-based compensation tax shortfall
|
|
|
1
|
|
|
|
70
|
|
Nondeductible compensation
|
|
|
167
|
|
|
|
93
|
|
Other differences
|
|
|
5
|
|
|
|
5
|
|
Income tax benefit
|
|
$
|
(7,699
|
)
|
|
$
|
(3,832
|
)
|
Liquidity and Capital Resources
We believe the liquidity of our business is dependent on a successful restructuring of our balance sheet in the near term.
In the event the Exchange Transaction, and credit agreement extension and amendment, as discussed above, are not completed in the near term, we anticipate that we will pursue a restructuring of our balance sheet through an in-court Chapter 11 proceeding.
Our failure to comply with financial covenants under the revolving credit facility represents an event of default. In the case of an event of default, the lenders (i) are not required to lend any additional amounts to us, (ii) could elect to declare all outstanding borrowings, together with accrued and unpaid interest and fees, to be due and payable, (iii) could require us to apply all of our available cash to repay these borrowings and (iv) could prevent us from making debt service payments under our other agreements. Pursuant to the terms of a limited forbearance agreement, our credit facility lenders have agreed to forbear from exercising their rights and remedies under the revolving credit facility (and related loan documents) and applicable law with respect to the occurrence or continuance of events of default caused by our failure to comply with certain financial covenants in the revolving credit facility. This limited forbearance agreement will terminate on August 21, 2019, unless earlier terminated due to additional Events of Default under our revolving credit facility, or a default under the forbearance agreement. In addition, we are in continuing discussions and negotiations with the lenders regarding a potential extension of and amendment to the existing credit agreement.
These factors raise substantial doubt about our ability to continue as a going concern. See Note 1 to our consolidated financial statements in this report for additional information regarding our plans to improve our leverage and liquidity.
In the event we successfully consummate the Exchange Transactions and associated credit agreement extension and amendment, we generally would rely on cash generated from operations, to the extent available, borrowings under our revolving credit facility and, to the extent that credit and capital market conditions will allow, future equity and debt offerings to satisfy our liquidity needs. Due to our non-compliance with certain financial covenants under our revolving credit facility, our current sources of liquidity include only cash generated from operations and our cash balance of $7.2 million as of June 30, 2019.
See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility.
Our cash flow from operations is driven by commodity prices, production volumes and the effect of commodity derivatives. Cash flows from operations are primarily used to fund exploration and development of our oil and gas properties.
In addition, our revolving credit facility is subject to scheduled redeterminations of its borrowing base semi-annually, based on our reserves. Continued low commodity prices may adversely impact the results of the upcoming redetermination, and have a significant negative impact on the Company’s liquidity.
Our ability to fund planned capital expenditures and to make acquisitions depends upon commodity prices, our future operating performance, availability of borrowings under our revolving credit facility, and more broadly, on the availability of equity and debt financing, which is affected by prevailing economic conditions in our industry and financial, business and other factors, some of which are beyond our control. We cannot predict whether additional liquidity from equity or debt financings, including access to our revolving credit facility, will be available on acceptable terms, or at all, in the foreseeable future.
We are continuing to minimize our capital expenditures, reduce costs and maximize cash flows from operations to improve our liquidity; however, our business and liquidity outlook has adversely changed as a result of prolonged commodity price declines. Please see “Going Concern Uncertainty” above. If we do not have sufficient resources from operations or cash on hand to fund our working capital needs, we may determine to use various financing sources, including the issuance of common stock, preferred stock, debt, convertible securities and other securities for future development of reserves, acquisitions, additional working capital or other liquidity needs, if such financing is available on acceptable terms. We cannot guarantee that such financing will be available on acceptable terms or at all. Using some of these financing sources may require approval from the lenders under our revolving credit facility. If such financing is unavailable,
we anticipate that we will pursue a restructuring of our balance sheet through an in-court Chapter 11 proceeding.
Liquidity
We have historically defined liquidity as funds available under our revolving credit facility and cash and cash equivalents. However, due to our non-compliance with financial covenants under our revolving credit facility, our liquidity as of June 30, 2019,
27
wa
s limited to our
then
available cash of $
7.2
million.
See Note 5 to our consolidated financial statements
in this report
for additional
information regarding
the
financial
covenants unde
r our revolving credit facility
, and the remedies our lenders may exercise during an event of default
.
As of
June 30
, 2019, we had $322 million in outstanding borrowings under our revolving credit facility and liquidity of $
7.2
million.
A
s of December 31, 2018,
we had $
301.5
million in outstanding borrowings under our revolving credit facility and liquidity of $
23.2
million
.
Working Capital
We had a working capital deficit of $322.5 million and $4.8 million at June 30, 2019, and December 31, 2018, respectively. The change in working capital was primarily due to the classification of the outstanding borrowings under our revolving credit facility as current as of June 30, 2019. Additionally, our working capital deficit increased $6.6 million due to the application of ASC 842,
Leases
. This was partially offset by an increase in cash and cash equivalents of $7.2 million.
Cash Flows
The following table summarizes our sources and uses of funds for the periods noted (in thousands).
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash (used in) provided by operating activities
|
|
$
|
(7,160
|
)
|
|
$
|
14,250
|
|
Cash used in investing activities
|
|
|
(2,231
|
)
|
|
|
(19,463
|
)
|
Cash provided by financing activities
|
|
|
16,567
|
|
|
|
5,214
|
|
Net increase in cash and cash equivalents
|
|
$
|
7,176
|
|
|
$
|
1
|
|
Operating Activities
Cash used in operating activities increased by $21.5 million, to $7.2 million during the six months ended June 30, 2019, compared to cash provided by operating activities of $14.3 million in the prior-year period. The decrease in our cash provided by operating activities was primarily due to a decrease in revenue ($25.1 million) and an increase in restructuring expenses ($6.4 million), partially offset by decreases in LOE ($1.3 million) and G&A ($4.6 million).
Investing Activities
Cash used in investing activities decreased by $17.3 million for the six months ended June 30, 2019, to $2.2 million, compared to the prior-year period. Cash used in investing activities for the six months ended June 30, 2019, was primarily related to capital expenditures ($1.9 million) and changes in working capital associated with investing activities ($0.4 million). At June 30, 2019, we had seven horizontal Wolfcamp wells waiting on completion.
Financing Activities
Cash provided by financing activities increased by $11.4 million for the six months ended June 30, 2019, compared to the prior-year period. During the six months ended June 30, 2019, net cash provided by financing activities included net borrowings under our revolving credit facility of $20.5 million, tax withholdings related to restricted stock of $0.2 million and changes in working capital associated with financing activities of $3.8 million.
Revolving Credit Facility
At June 30, 2019, the borrowing base and aggregate lender commitments under our revolving credit facility were $325 million, with maximum commitments from the lenders of $1 billion and a maturity date of May 7, 2020. We had outstanding borrowings of $322 million and $301.5 million under our revolving credit facility at June 30, 2019, and December 31, 2018, respectively. The weighted average interest rate applicable to borrowings under our revolving credit facility for the three months ended June 30, 2019, was 6.7%.
The borrowing base is redetermined semi-annually based upon a number of factors, including commodity prices and reserve levels. We or the lenders can each request one additional borrowing base redetermination each calendar year.
As of June 30, 2019, we were not in compliance with the interest coverage ratio and the total leverage ratio covenants under our revolving credit facility, which represents an event of default.
See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility.
As a result, we have presented the
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outstanding balance under the revolving credit facility as a current liability as of June 30, 2019. In the case of an event of default, the lend
ers (i) are not required to lend any additional amounts to us, (ii) could elect to declare all outstanding borrowings, together with accrued and unpaid interest and fees to be payable, (iii) could require us to apply all of our available cash to repay thes
e borrowings and (iv) could prevent us from making debt service payments under our other agreements. Pursuant to the terms of a limited forbearance agreement,
our credit facility lenders
have agreed to forbear from exercising their rights and
remedies
unde
r the revolving credit facility (and related loan documents) and applicable law with respect to the occurrence or continuance of
event
s
of default caused by our failure to comply with certain financial covenants in the
revolving credit facility
.
This
limi
ted forbearance
agreement will terminate on
August
2
1
, 2019, unless earlier terminated due to additional
E
vents of
D
efault under our
revolving c
redit
f
acility, or a default under the
forbearance
agreement.
In addition, we are in continuing discussions
and
negotiations
with the lenders regarding a potential extension of and amendment to the existing credit agreement.
There can be no assurance that these discussions
and negotiations
will result in the consummation of any extension or amendment in a timely ma
nner,
or
at all.
Senior Notes
At June 30, 2019, and December 31, 2018, $85.2 million of our 7% Senior Notes were outstanding.
See Note 5 to our consolidated financial statements in this report for additional information regarding the Senior Notes.
An event of default under our revolving credit facility does not result in an event of default under our Senior Notes.
Wilks, a related party, purchased a portion of our outstanding Senior Notes in the open market. The Company believes
that Wilks held approximately $62.3 million of our outstanding Senior Notes as of June 30, 2019. 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. As we previously disclosed, we are currently engaged in discussions and negotiations with Wilks regarding, among other things, a debt for equity exchange involving the Senior Notes. We have engaged advisors in these discussions and negotiations, but there can be no assurance that these discussions and negotiations will result in the consummation of any transaction in a timely manner, or at all.
Contractual Obligations
Our contractual obligations include long-term debt, operating lease obligations, asset retirement obligations and employment agreements with our executive officers. Since December 31, 2018, other than the restructuring expenses disclosed in Note 2 to our consolidated financial statements in this report, there have been no other material changes to our contractual obligations.
Off-Balance Sheet Arrangements
From time to time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of June 30, 2019, the off-balance sheet arrangements and transactions that we have entered into include undrawn letters of credit and short-term operating lease agreements. We do not believe that these arrangements have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
General Trends and Outlook
We believe the outlook for our business is dependent on a successful restructuring of our balance sheet.
In the event the Exchange Transaction, and credit agreement extension and amendment, are not timely completed, we anticipate that we will pursue a restructuring of our balance sheet through an in-court Chapter 11 proceeding.
Our financial results depend upon many factors, particularly the price of oil, NGLs and gas. Commodity prices are affected by changes in market demand, which is impacted by factors outside of our control, including domestic and foreign supply of oil, NGLs and gas, overall domestic and global economic conditions, commodity processing, gathering and transportation availability and the availability of refining capacity, price and availability of alternative fuels, price and quantity of foreign imports, domestic and foreign governmental regulations, political conditions in or affecting other oil and gas producing countries, weather and technological advances affecting oil, NGLs and gas consumption. As a result, we cannot accurately predict future oil, NGLs and gas prices, and therefore, we cannot determine what effect increases or decreases will have on our capital program, production volumes and future revenues.
If the current oil or natural gas prices
and differentials do not improve
from current levels, they
could
have a material adverse effect on our business, financial condition
and
results of operations and quantities of oil, natural gas and NGLs
reserves that may be economically produced and liquidity that may be accessed through our borrowing base under our revolving credit facility and through capital markets. Our current operations have been significantly impacted by the WAHA NYMEX-Henry Hub price differential, which we do not expect to significantly improve until the fourth quarter of 2019.
We face the challenge of financing exploration, development and future acquisitions. We may determine to use various financing sources, including the issuance of common stock, preferred stock, debt, convertible securities and other securities for future
29
d
evelopment of reserves, acquisitions, additional working capital or other liquidity needs, if such financing is available on acceptable terms. We cannot guarantee that such financing will be available on acceptable terms or at all. Using some of these fi
nancing sources may require approval from the lenders under our revolving credit facility.
In addition to production volumes and commodity prices, finding and developing sufficient amounts of oil and gas reserves at economical costs are critical to our long-term success. Future finding and development costs are subject to changes in the industry, including the costs of acquiring, drilling and completing our projects. We focus our efforts on increasing oil and gas reserves and production while controlling costs at a level that is appropriate for long-term operations. As commodity prices improve, service costs in our industry may also increase. Our future cash flow from operations will depend on our ability to manage our overall cost structure.
Like all oil and gas production companies, we face the challenge of natural production declines. Oil and gas production from a given well naturally decreases over time. Additionally, our wells have a rapid initial production decline. We attempt to overcome this natural decline by drilling to develop and identify additional reserves, farm-ins or other joint drilling ventures, and by acquisitions. However, during times of severe price declines, we may from time to time reduce current capital expenditures and curtail drilling operations in order to preserve liquidity. A material reduction in capital expenditures and drilling activities could materially reduce our production volumes and revenues.