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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 September 30, 2020

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 001-36302

Sundance Energy Inc.

(Exact name of Registrant as specified in its Charter)

Delaware

61-1949225

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

1050 17th Street, Suite 700, Denver, CO

80265

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (303) 543-5700

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of Exchange on Which Registered

Common Stock, par value $0.001 per share

SNDE

The Nasdaq Stock Market LLC

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 þ NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YES þ 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

þ

Non-accelerated filer

 

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. YES NO

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

As of November 9, 2020, the registrant has 6,875,672 shares of common stock, par value $0.001 per share, outstanding.

2

Glossary of Selected Oil and Natural Gas Terms

All defined terms under Rule 4-10(a) of Regulation S-X shall have their statutorily prescribed meanings when used in this Quarterly Report on Form 10-Q. As used in this document:

Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, of oil or other liquid hydrocarbons.

Boe. Barrels of oil equivalent, with 6,000 cubic feet of natural gas being equivalent to one barrel of oil.

Boe/d. Barrels of oil equivalent per day.

Completion. A process of treating a drilled well, including hydraulic fracturing among other stimulation processes, followed by the installation of permanent equipment for the production of oil or gas.

Mcf. Thousand cubic feet of natural gas.

Natural gas liquids or NGLs. Hydrocarbons found in natural gas which may be extracted as liquefied petroleum gas and natural gasoline.

Net acres or net wells. The sum of the fractional working interests owned in gross acres or wells, as the case may be. An owner who has 50% interest in 100 acres owns 50 net acres.

NYMEX. New York Mercantile Exchange.

Working interest. A cost-bearing interest under an oil and gas lease that gives the holder the right to develop and produce the minerals under the lease.

Workover. The repair or stimulation of an existing production well for the purpose of restoring, prolonging or enhancing the production of hydrocarbons.

WTI. means the West Texas Intermediate spot price.

3

Presentation of Information

On November 26, 2019, Sundance Energy Inc., a newly formed Delaware corporation, acquired all of the issued and outstanding ordinary shares of Sundance Energy Australia Limited, a public company incorporated under the laws of the State of South Australia (“SEAL”), and former parent company of the Sundance group of companies, pursuant to a Scheme of Arrangement under Australian law, which was approved by the Federal Court of Australia on November 14, 2019, and by SEAL shareholders at a meeting of shareholders, which approval was obtained on November 8, 2019 (the “Redomiciliation”). All of the issued and outstanding shares of SEAL were exchanged for newly issued shares of common stock of Sundance Energy Inc., on the basis of one share of common stock for every 100 ordinary shares of SEAL issued and outstanding. Holders of SEAL’s American Depository Shares (“ADSs”) (each of which represented 10 ordinary shares) received one share of common stock for every 10 ADSs held. Thereafter, SEAL distributed all of its assets to Sundance Energy Inc., and Sundance Energy Inc. assumed all of the liabilities of SEAL.

The purpose of the Redomiciliation was to reorganize the operations of SEAL into a structure whereby the ultimate parent company of the Sundance group of companies would be a Delaware corporation. In connection with the Redomiciliation, the ordinary shares of SEAL were delisted from the Australian Securities Exchange, and the common stock of Sundance Energy Inc. began trading on the Nasdaq Global Market on November 26, 2019 under the ticker symbol “SNDE”, the same symbol under which SEAL’s ADSs were traded on Nasdaq Global Market prior to the implementation of the Redomiciliation.

Sundance Energy, Inc., a Colorado corporation (“SEI”), a subsidiary of SEAL prior to the Redomiciliation, has historically been the U.S. operating company for the Sundance group of companies. Following the Redomiciliation, SEI will continue in the role of U.S. operating company as a subsidiary of Sundance Energy Inc. Prior to the Redomiciliation, SEAL reported its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). Following the Redomiciliation, the Company retroactively transitioned to accounting principles generally accepted in the United States of America (“GAAP”) and applied GAAP retrospectively for all prior periods presented.  

Unless the context otherwise requires, references to “Sundance,” “we,” “us,” “our,” and the “Company” refer to (i) SEAL and its subsidiaries prior to the Redomiciliation and (ii) Sundance Energy Inc. and its subsidiaries upon completion of the Redomiciliation, as applicable.

4

PART I – FINANCIAL INFORMATION

Item I. Financial Statements

SUNDANCE ENERGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(all amounts in thousands except share and per share data)

(Unaudited)

September 30,

December 31,

    

2020

    

2019

ASSETS

Current assets:

 

  

 

  

Cash and cash equivalents

$

2,553

$

12,382

Accounts receivable trade and other

 

15,153

 

27,020

Derivative financial instruments

 

28,498

 

1,215

Income tax receivable

 

4,729

 

3,555

Other current assets

 

3,998

 

3,616

Total current assets

 

54,931

 

47,788

Oil and gas properties, successful efforts method

 

823,642

 

1,122,908

Less: accumulated depletion, depreciation and amortization

(443,094)

(379,961)

Total oil and gas properties, net

380,548

742,947

Other long-term assets:

Other property and equipment, net of accumulated depreciation of $3,346 and $3,419

1,479

1,963

Income tax receivable

1,172

Operating lease right-of-use assets

12,168

17,331

Derivative financial instruments

 

 

878

Other long-term assets

1,220

1,835

TOTAL ASSETS

$

450,346

$

813,914

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Current liabilities:

Accounts payable trade

$

21,447

$

43,284

Current portion of long-term debt

373,034

Accrued liabilities

 

10,019

 

26,409

Derivative liabilities

 

7,234

 

4,394

Operating lease liabilities - current

 

4,653

 

7,720

Total current liabilities

 

416,387

 

81,807

Long-term liabilities:

 

  

 

  

Long-term debt, net of current portion

 

 

353,490

Asset retirement obligations

 

4,354

 

3,653

Operating lease liabilities - long term

 

7,578

 

9,611

Derivative financial instruments

 

 

3,669

Deferred tax liabilities

251

7,138

Other long-term liabilities

 

252

 

1,149

Total long-term liabilities

 

12,435

 

378,710

Total liabilities

428,822

460,517

Commitments and contingencies (Note 12)

Stockholders' Equity:

 

  

 

  

Common stock, $0.001 value, 100,000,000 shares authorized; 6,875,672 issued and outstanding at September 30, 2020 and December 31, 2019.

7

7

Additional paid-in capital

 

633,438

 

633,246

Accumulated deficit

 

(611,247)

 

(279,144)

Accumulated other comprehensive loss

 

(674)

 

(712)

Total stockholders' equity

21,524

353,397

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

450,346

$

813,914

The accompanying notes are an integral part of these consolidated financial statements

5

SUNDANCE ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(all amounts in thousands except share and per share data)

(Unaudited)

For the three months ended September 30,

For the nine months ended September 30,

Revenues:

    

2020

    

2019

    

2020

    

2019

Oil sales

$

17,638

$

45,683

$

57,830

$

132,626

Natural gas sales

1,743

2,823

5,121

9,617

Natural gas liquid sales

1,542

2,591

5,445

9,495

Total revenues

 

20,923

 

51,097

 

68,396

151,738

Operating expenses:

Lease operating and workover expense

 

5,256

 

7,606

 

18,802

 

26,122

Gathering, processing and transportation expense

3,329

3,344

9,673

9,914

Production taxes

 

2,330

 

2,842

 

4,057

 

9,079

Exploration expense

20

213

193

235

Depreciation, depletion and amortization expense

22,758

23,273

67,527

67,735

Impairment expense

331,877

907

331,877

9,990

General and administrative expense

 

3,859

 

5,073

 

13,379

 

15,790

Loss (gain) on commodity derivative financial instruments

 

7,193

 

(16,301)

 

(65,652)

 

6,755

Other expense (income), net

 

106

 

23

 

(2,522)

 

233

Total operating expenses

 

376,728

 

26,980

 

377,334

 

145,853

Income (loss) from operations:

(355,805)

24,117

(308,938)

5,885

Other expense

Interest expense

 

(9,134)

 

(9,248)

 

(30,155)

 

(29,633)

Total other expense

(9,134)

(9,248)

(30,155)

(29,633)

Income (loss) before income taxes

(364,939)

14,869

(339,093)

(23,748)

Income taxes

Current benefit

33

103

Deferred benefit (expense)

 

8,332

 

(1,573)

 

6,887

 

2,478

Total income tax benefit (expense)

 

8,365

 

(1,573)

 

6,990

 

2,478

Net income (loss)

$

(356,574)

$

13,296

$

(332,103)

$

(21,270)

Income (loss) per common share

 

 

 

 

Basic

$

(51.87)

$

1.93

$

(48.31)

$

(3.09)

Diluted

$

(51.87)

$

1.93

$

(48.31)

$

(3.09)

Weighted average shares outstanding

 

 

 

 

Basic

 

6,875,017

 

6,874,146

 

6,874,962

 

6,874,082

Diluted

 

6,875,017

 

6,874,407

 

6,874,962

 

6,874,082

Comprehensive income (loss)

Net income (loss)

$

(356,574)

$

13,296

$

(332,103)

$

(21,270)

Other comprehensive income (loss):

Foreign currency translation

19

145

38

163

Total comprehensive income (loss)

$

(356,555)

$

13,441

$

(332,065)

$

(21,107)

The accompanying notes are an integral part of these consolidated financial statements

6

SUNDANCE ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(all amounts in thousands except share and per share data)

(Unaudited)

Accumulated

other

Common stock

Additional

Accumulated

comprehensive

    

Shares

    

Amount

    

Paid-In Capital

    

Deficit

    

loss

    

Total

BALANCES - January 1, 2019

6,874,622

$

7

$

632,742

$

(239,554)

$

(706)

$

392,489

Stock-based compensation

1,050

 

135

135

Net loss

 

(37,209)

 

(37,209)

Foreign currency translation

 

(22)

 

(22)

BALANCES - March 31, 2019

6,875,672

$

7

$

632,877

$

(276,763)

$

(728)

$

355,393

Stock-based compensation

 

142

142

Net income

 

2,643

 

2,643

Foreign currency translation

 

40

 

40

BALANCES - June 30, 2019

6,875,672

$

7

$

633,019

$

(274,120)

$

(688)

$

358,218

Stock-based compensation

 

57

57

Net income

 

13,296

 

13,296

Foreign currency translation

 

145

 

145

BALANCES - September 30, 2019

6,875,672

$

7

$

633,076

$

(260,824)

$

(543)

$

371,716

BALANCES - January 1, 2020

6,875,672

$

7

$

633,246

$

(279,144)

$

(712)

$

353,397

Stock-based compensation

104

104

Net income

60,242

60,242

Foreign currency translation

428

428

BALANCES - March 31, 2020

6,875,672

$

7

$

633,350

$

(218,902)

$

(284)

$

414,171

Stock-based compensation

91

91

Net loss

(35,771)

(35,771)

Foreign currency translation

(409)

(409)

BALANCES - June 30, 2020

6,875,672

$

7

$

633,441

$

(254,673)

$

(693)

$

378,082

Stock-based compensation

(3)

(3)

Net loss

(356,574)

(356,574)

Foreign currency translation

19

19

BALANCES - September 30, 2020

6,875,672

$

7

$

633,438

$

(611,247)

$

(674)

$

21,524

The accompanying notes are an integral part of these consolidated financial statements

7

SUNDANCE ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(all amounts in thousands except for share and per share data)

(Unaudited)

Nine Months Ended September 30,

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES

 

  

 

  

Net loss

 

$

(332,103)

 

$

(21,270)

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

 

 

Depreciation, depletion and amortization expense

67,527

67,735

Impairment expense

331,877

9,990

Stock-based compensation

192

334

Payable-in-kind interest

1,711

Deferred income tax (benefit) expense

(6,887)

(2,478)

(Gain) loss on commodity derivative financial instruments

(65,652)

6,755

Net cash settlements received on commodity derivative contracts

37,410

5,713

Premiums paid on commodity derivative contracts

(152)

Unrealized loss on interest rate swaps

1,008

4,375

Amortization of deferred debt issuance costs

2,673

2,399

Write-off of deferred debt issuance costs

1,199

Gain on conveyance of oil and gas properties

(2,479)

Other

94

(68)

Changes in assets and liabilities:

Accounts receivable trade and other

7,765

2,529

Income tax receivable

(2)

Accounts payable trade

(10,751)

(2,205)

Accrued liabilities

(10,918)

2,079

Other assets and liabilities, net

510

(635)

Net cash provided by operating activities

 

23,174

 

75,101

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Capital expenditures for proved oil and gas properties

 

(46,995)

 

(123,878)

Capital expenditures for unproved oil and gas properties

 

(16)

 

(359)

Proceeds from the sale of oil and gas properties

50

Other property and equipment

 

(300)

 

(182)

Net cash used in investing activities

 

(47,311)

 

(124,369)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Proceeds from borrowings

 

17,000

 

50,000

Repayments of borrowings

 

(1,400)

 

Payments of debt issuance costs

 

(1,025)

 

(232)

Principal payments on finance lease obligations

(222)

(118)

Net cash provided by financing activities

 

14,353

 

49,650

Net change in cash and cash equivalents

 

(9,784)

 

382

CASH AND CASH EQUIVALENTS

Beginning of period

12,382

 

1,581

Effect of exchange rates on cash

 

(45)

 

(33)

End of period

 

$

2,553

 

$

1,930

SUPPLEMENTAL CASH FLOW DISCLOSURES

`

Income taxes received

$

101

$

Interest paid, net of amounts capitalized

$

29,749

$

24,543

Operating lease right-of-use assets obtained in exchange for lease liabilities

$

1,420

$

9,468

Finance lease right-of-use assets obtained in exchange for lease liabilities

$

44

$

528

NON-CASH INVESTING AND FINANCING ACTIVITIES

Accounts payable and accrued expenses for oil and gas properties

$

11,504

$

44,069

The accompanying notes are an integral part of these consolidated financial statements

8

SUNDANCE ENERGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

Description of Operations

On November 26, 2019, a new Delaware corporation named Sundance Energy Inc. (the “Company”) acquired all of the issued and outstanding ordinary shares of Sundance Energy Australia Limited (“SEAL”), an Australian Company, pursuant to a Scheme of Arrangement under Australian law (the “Scheme”) which was approved by SEAL’s shareholders on November 8, 2019 and the Federal Court of Australia on November 14, 2019. These events are collectively referred to as the “Redomiciliation”. Prior to the Redomiciliation, the Company’s ordinary shares were listed on the Australian Securities Exchange (“ASX”) and Sundance Energy Inc. had no business or operations. Following the Redomiciliation, the business and the operations of Sundance Energy Inc. consist solely of the historical business and operations of SEAL and its subsidiaries.  

In the Redomiciliation, all outstanding SEAL ordinary shares on November 26, 2019, were cancelled and shares of the Company’s common stock, par value $0.001 per share, were issued. Each of SEAL’s shareholders received one share of the Company’s common stock in exchange for 100 SEAL ordinary shares held.

The purpose of the Redomiciliation was to reorganize the operations of SEAL, a public company incorporated under the laws of the State of South Australia, into a structure whereby the ultimate parent company of the Sundance group of companies would be a Delaware corporation. In connection with the Redomiciliation, the ordinary shares of SEAL were delisted from the ASX, and the common stock of Sundance Energy Inc. began trading on the Nasdaq Global Market on November 26, 2019 under the ticker symbol “SNDE”, the same symbol under which SEAL’s American Depository Shares were traded on Nasdaq Global Market prior to the implementation of the Redomiciliation. Immediately following the effectiveness of the Redomiciliation, SEAL distributed all of its assets to Sundance Energy Inc., and Sundance Energy Inc. assumed all of the liabilities of SEAL.

Unless the context otherwise requires, references to “Sundance,” “we,” “us,” “our,” and the “Company” refer to (i) SEAL and its subsidiaries prior to the Redomiciliation and (ii) Sundance Energy Inc. and its subsidiaries upon completion of the Redomiciliation, as applicable.

Sundance Energy Inc. is an independent oil and gas company engaged in the development, production and exploration of oil, natural gas and natural gas liquids (“NGLs”) primarily targeting the Eagle Ford basin in South Texas.

Basis of Presentation

Prior to the Redomiciliation, SEAL reported its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”).  Following the Redomiciliation, the Company retroactively transitioned to accounting principles generally accepted in the United States of America (“GAAP”) and applied GAAP retrospectively for all prior periods presented.  The accompanying unaudited financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, certain disclosures required by accounting principles generally accepted in the United States and normally included in Annual Reports on Form 10-K have been omitted. Although management believes that our disclosures in these interim financial statements are adequate, they should be read in conjunction with the financial statements, summary of significant accounting policies, and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2019. Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the year. In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of our consolidated financial position as of September 30, 2020 and our consolidated results of operations for the three and nine months ended September 30, 2020 and 2019.

9

Going Concern

The accompanying condensed consolidated financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The market price for oil, natural gas, and NGLs decreased significantly beginning in the first quarter of 2020, continuing into the third quarter of 2020. As described in Note 3 in greater detail, the Company is required to meet certain financial and non-financial covenants as a condition to its credit facilities. Under the Company’s second lien term loan (the “Term Loan”), the Company is required to maintain an Asset Coverage Ratio of not less than 1.5 to 1.0, which is calculated as the present value of its Total Proved Reserves (discounted at 9%) based upon the forward month prices quoted on the NYMEX, adjusted for basis differentials or premiums and transportation costs and to reflect the Company’s commodity hedging agreements then in effect to Total Debt. Under the Company’s senior secured revolving credit facility (the “Revolving Facility”) it is required to maintain a (i) Total Debt to EBITDA Ratio of less than 3.5 to 1.0 and (ii) a minimum Current Ratio of consolidated current assets, including undrawn borrowing capacity, to consolidated current liabilities, of not less than 1.0 to 1.0 as of the last day of any fiscal quarter. Both the value of the Company’s oil and gas reserves, (including “Total Proved Reserves” as described in the Term Loan agreement) and the Company’s EBITDA are highly sensitive to commodity prices and the Company’s ongoing development of its properties. A breach of any covenant in the Company’s credit agreements will result in default or cross-default under the Company’s Term Loan and Revolving Facility, after any applicable grace period, which could result in acceleration of the repayment of amounts outstanding under the credit facilities to the Company’s lenders. 

The Company regularly enters into commodity derivative contracts to protect the cash flows associated with the Company’s proved developed producing wells and to provide supplemental liquidity to mitigate decreases in revenue due to reductions in commodity prices.  Based on the Company’s historical experience, in periods of sustained low commodity prices, the prevailing market price for oil and gas services has also decreased, including the types of costs included in the Company’s lease operating expenses, drilling costs, completion costs, and costs to equip its wells.  Beginning in the first quarter of 2020, the Company renegotiated pricing with a number of its vendors and entered into contractual arrangements with drilling and completion service providers.  As a result, the Company realized lower drilling and completion costs on 2020 development relative to the costs incurred in 2019 and the assumed costs in the Company’s 2019 reserve report.  The Company also changed its field operating procedures in response to the material drop in oil prices which further reduces its cost structure relative to those realized in 2019 and those used in the Company’s 2019 reserve report.  Additionally, in early May 2020, the Company made reductions of general and administrative costs, including implementing a reduction in workforce and certain salary reductions. Commodity hedging that the Company currently has in place, combined with cost reductions are expected to reduce the impact of recent commodity price declines.

The requirement for the Company to comply with the June 30, 2020 Asset Coverage Ratio covenant was removed from the Term Loan agreement; however it is unlikely that the Company would have been able to meet the covenant as of June 30, 2020. The Asset Coverage Ratio covenant continues to apply for periods subsequent to June 30, 2020. At September 30, 2020, the Company was in breach of the Total Debt to EBITDA Ratio, as well as the Current Ratio under the Revolving Facility, as a result of reclassifying it outstanding debt from long-term to current, which is an event of default, and allows the lenders to call the Company’s Revolving Facility and Term Loan (due to cross-default provisions) to be immediately due and payable. Additionally, given the recent decline and continued volatility of commodity prices combined with a scaled back development program, the Company believes it is probable it will not meet the Asset Coverage Ratio covenant, Total Debt to EBITDA Ratio covenant and Current Ratio covenant and potentially other covenants in its credit facilities at measurement dates during the 12 months following the date of this report.  The Company is currently working with its lenders to address the status of its compliance with the covenants under the Term Loan and the Revolving Facility. In the event that repayment of some or all of the amounts outstanding under its credit facilities are accelerated and become immediately due and payable, the Company does not have sufficient liquidity to repay such outstanding amounts.  These conditions and events raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date of the issuance of financial statements. 

10

Management is pursuing, or has pursued, several initiatives to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, which include the following:

Materially limiting development activity to reduce capital expenditures and continuing to renegotiate pricing with a number of its operating expenditure vendors;
Pursuing further changes to its cost structure in response to the material drop in oil prices;
Pursuing additional costs savings with its vendors and reductions of other general and administrative costs; and
Exploring transactions with the Company’s creditors to optimize its balance sheet, including exploring ways to obtain additional capital, which may include asset sales, public or private issuance of debt or equity, or any combination thereof.

The Company is working with its Revolving Facility lenders to obtain a waiver of these events of default, however, there is no guarantee that the Company’s Revolving Facility lenders will agree to waive these events of default or potential events of default in the future.  There can be no assurances that the Company will be successful in any restructuring of existing debt obligations or in obtaining capital sufficient to fund the refinancing of its outstanding indebtedness or to provide sufficient liquidity to meet the outstanding debt obligations of the Company, if repayment of its credit facilities is accelerated. If the Company is unsuccessful in its efforts to restructure and secure new financing, it may be necessary for the Company to seek protection from creditors under Chapter 11 of the U.S. Bankruptcy Code, or an involuntary petition for bankruptcy may be filed against it. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Items subject to such estimates and assumptions include (i) oil and natural gas reserves; (ii) impairment tests of long-lived assets; (iii) depreciation, depletion and amortization; (iv) asset retirement obligations; (v) income taxes; (vi) accrued liabilities; (vii) valuation of derivative instruments; and (ix) accrued revenue and related receivables.  Although management believes these estimates are reasonable, actual results could differ from these estimates. Further, these estimates and other factors, including those outside of the Company’s control, such as the impact of lower commodity prices, may have a significant negative impact to the Company’s business, financial condition, results of operations and cash flows.

Customer Concentration Risk

During the nine months ended September 30, 2020, the Company had two customers that each accounted for 10% or more of the Company’s total oil, NGL and natural gas sales (67% and 21%, respectively). The Company does not believe the loss of any single purchaser would materially impact the Company’s operating results because oil, natural gas, and NGLs are commodities for which there are a large number of potential buyers. Because of the adequacy of the infrastructure to transport oil and natural gas in the areas in which the Company operates, if the Company were to lose one or more customers, management believes that it could readily procure substitute or additional customers.

 

Recently Issued and Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which provides a model, known as the current expected credit loss model (“CECL model”), to estimate the expected lifetime credit loss on financial assets, including trade and other receivables. The Company adopted the ASU effective January 1, 2020, and it did not have a material impact on the Company’s consolidated financial statements as the Company does not have a history of material credit losses. The Company continues to monitor the credit risk from trade receivable counterparties to determine if expected credit losses may become material.

11

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes or modifies current fair value disclosures and adds additional disclosures to improve effectiveness The Company adopted this ASU on January 1, 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements or related disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 was issued to reduce the complexity of accounting for income taxes including requirements related to (i) the intraperiod tax allocation exception to the incremental approach; (ii) interim-period accounting for enacted changes in tax laws; and (iii) the year-to-date loss limitation in interim-period tax accounting. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not expect adoption of ASU 2019-12 to have a material impact on the Company’s consolidated financial statements or disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The provisions of ASU 2020-04 apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.  Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. The Company is evaluating the options provided by ASU 2020-04 and has not determined the full impact on its consolidated financial statements and related disclosures.

NOTE 2 — OIL AND GAS PROPERTIES

Net capitalized costs related to the Company’s oil and gas producing activities as of September 30, 2020 and December 31, 2019 are as follows (in thousands):

September 30,

December 31,

    

2020

    

2019

Oil and gas properties, successful efforts method:

 

  

 

  

Unproved

 

$

24,954

$

25,037

Proved

 

795,774

 

1,090,774

Work in progress

2,914

7,097

 

823,642

 

1,122,908

Accumulated depletion, depreciation and amortization

 

(443,094)

 

(379,961)

Oil and gas properties, net

 

$

380,548

$

742,947

Capitalized Interest

The Company capitalized interest of $0.2 million and $0.6 million for the three months ended September 30, 2020 and 2019, respectively, and $0.6 million and $2.0 million for the nine months ended September 30, 2020 and 2019, respectively.

Impairment

The Company assesses its long-lived assets, including oil and gas properties, for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable.  The impairment test compares undiscounted future net cash flows of the assets to the assets’ net book value.  When it is determined that the estimated future net cash flows of an asset will not be sufficient to recover its carrying amount, an impairment loss must be recorded to reduce the carrying amount to its estimated fair value. The Company assesses impairment at the Eagle Ford field level.

12

Fair value for oil and gas properties is generally determined based on discounted future net cash flows. These judgments and assumptions include such matters as the estimation of oil and gas reserve quantities, risks associated with the different categories of oil and gas reserves, the timing of development and production, expected future commodity prices, capital expenditures, production costs, and appropriate discount rates.

The Company identified an impairment triggering event for its oil and gas properties as of September 30, 2020 due to the adverse change to its business climate resulting from oil and gas prices declining in 2020 and the resulting changes in its future development plan. As such, the Company performed a quantitative assessment as of September 30, 2020, and the estimated undiscounted cash flows from its proved properties were less than the carrying value of its proved oil and gas properties. The impairment was the result of a significantly slower pace in its development plan in light of continued depressed commodity prices and uncertainty regarding the Company’s liquidity situation.

Fair value and resulting impairment expense recognized in the consolidated statement of operations for the three and nine months ended September 30, 2020 is as follows (in thousands):

At September 30, 2020

    

Carrying costs, net

    

Fair Value

 

Impairment

Proved oil and gas properties

 

687,397

355,594

331,803

During the three and nine months ended September 30, 2019, the Company recorded impairment expense of $0.9 million and $10.0 million related to assets held for sale. The Company’s Dimmit County, Texas, oil and gas properties, were classified as held for sale until they were divested in October 2019.

Divestitures

On June 12, 2020, the Company conveyed its interest in the petroleum exploration license 570 located in the Cooper Basin in Australia (“PEL570”) to the property’s operator. At the time of the conveyance, the Company had accrued expenses related to exploratory drilling of approximately $3.7 million. As consideration for the property, the operator settled the Company’s outstanding liability for $0.9 million. The property had previously been fully impaired, and therefore the Company recognized a gain on the conveyance of $2.8 million nine months ended September 30, 2020, which is recorded in other income (expense) on the consolidated statement of operations. As a result of the conveyance, the Company is also relieved of its commitment to fund any further exploratory drilling for PEL570.

NOTE 3 — LONG-TERM DEBT

The following is a summary of long-term debt, including the current portion, as of September 30, 2020 and December 31, 2019 (in thousands):

September 30,

December 31,

    

2020

    

2019

 

  

 

  

Revolving Facility

 

$

130,600

$

115,000

Term Loan

 

250,000

 

250,000

Total principal

380,600

365,000

Accrued paid in kind interest

1,711

Unamortized debt issuance costs on Term Loan (1)

(9,277)

(11,510)

Total long-term debt

 

373,034

 

353,490

Less: current portion of long-term debt (2)

 

(373,034)

 

Total long-term debt, net of current portion

 

$

$

353,490

(1) Although the Company’s debt was classified as current at September 30, 2020, the amortization period for the Company’s deferred debt issuance costs remains as the contractual term of the debt.
(2) The Company has reclassified its long-term debt as a current liability as of September 30, 2020 as it was not in compliance with its Leverage Ratio covenant under its Revolving Facility, which constitutes an event of default under the Revolving Facility and a cross default under the Term Loan. The reclassification of long-term debt to current debt also results in the Company breaching the required Current Ratio. See Revolving Facility below for more information.

13

Revolving Facility

On April 23, 2018, the Company entered into a syndicated Revolving Facility with Natixis, New York Branch, as administrative agent, with initial availability of $87.5 million ($250.0 million face).  The Revolving Facility is secured by certain of the Company’s oil and gas properties and will mature in October 2022.

The Revolving Facility is subject to a borrowing base, which is redetermined at least semi-annually and depends on the volumes of the Company’s proved oil and gas reserves, commodity prices, estimated cash flows from these reserves and other information deemed relevant by the Revolving Facility lenders. As discussed below, the most recent redetermination was completed in June 2020. If, upon any downward adjustment of the borrowing base, the outstanding borrowings are in excess of the revised borrowing base, the Company may have to repay its indebtedness in excess of the borrowing base immediately, or in five monthly installments.

In January 2020, the Company entered into the fourth amendment to the Revolving Facility, which increased the borrowing base to $210 million (with elected borrowing commitments of $190 million), increased the maximum credit amount from $250 million to $500 million, revised the Leverage Ratio, and Interest Coverage Ratio covenant (as reflected below) and appointed Toronto Dominion (Texas) LLC, as the administrative agent. As a result of the former administrative agent exiting the facility and terminating its commitments, the Company wrote-off previously capitalized deferred debt issuance costs of $1.1 million during the nine months ended September 30, 2020 in accordance with ASC 470 Debt, which is included in interest expense on the consolidated statement of operations. The Company capitalized new financing and legal fees of $1.0 million, which will be amortized over the remaining loan term.

In June 2020, the Company entered into the fifth amendment to the Revolving Facility, which decreased the borrowing base to $170 million from $210 million. In addition to the borrowing base reduction, the amendment increased the interest rate margin to a range of 2.50% to 3.50%, depending on the level of funds borrowed, and incorporated changes corresponding to the third amendment to the Term Loan described below.

On June 30, 2020, the Company unwound certain of its derivative positions for proceeds of $1.4 million. The Company’s credit agreements require that 90% of the proceeds from such transactions be used to repay the Revolving Facility balance with a corresponding reduction in the Company’s borrowing base. Following this event, the borrowing base was $168.6 million. At September 30, 2020, the Company had outstanding borrowings of $130.6 million, outstanding letters of credit of $16.4 million and undrawn capacity of $21.7 million.

As of September 30, 2020, interest on the Revolving Facility accrued at a rate equal to LIBOR, plus a margin ranging from 2.50% to 3.50%, depending on the level of funds borrowed. The stated weighted average interest rate on the Revolving Facility was 3.40% as of September 30, 2020.

Under the Revolving Facility, the Company is required to maintain the following financial ratios:

a minimum Current Ratio, consisting of consolidated current assets (as defined in the Revolving Facility) including undrawn borrowing capacity to consolidated current liabilities (as defined in the Revolving Facility), of not less than 1.0 to 1.0 as of the last day of any fiscal quarter;
a maximum Leverage Ratio, consisting of consolidated Total Debt to adjusted consolidated EBITDAX (as defined in the Revolving Facility), of not greater than 3.5 to 1.0 as of the last day of any fiscal quarter; and
a minimum Interest Coverage Ratio, consisting of EBITDAX to Consolidated Interest Expense (as defined in the Revolving Facility), of not less than 1.5 to 1.0 as of the last day of any fiscal quarter (for such time as there is a similar covenant under the Company’s or SEI’s subordinated indebtedness).

14

At September 30, 2020, the Company was not in compliance with the Leverage Ratio or the Current Ratio, as a result of the reclassification of its outstanding debt from long-term to current. The Company is currently in discussions with the Revolving Facility lenders to waive the defaults arising under the Company’s failure to comply with the Leverage Ratio and the Current Ratio as of September 30, 2020. There can be no assurance that the Company will receive these waivers. The failure to be in compliance constitutes an event of default under the Revolving Facility, and at any time after the occurrence of an event of default under the Revolving Facility, the lenders thereunder may, among other options, declare any amounts outstanding under the Revolving Facility immediately due and payable and the lenders thereunder may terminate any commitment to make further loans under the Revolving Facility. Any such acceleration of the Revolving Facility will also constitute an event of default under the Term Loan. An event of default under either the Revolving Facility or the Term Loan would likely cause a cross-default under the Company’s commodity derivative contracts allowing the counterparties in such contracts to terminate the contract upon notice. Because most of these derivative contracts are currently “in-the-money,” if the counterparties elect to terminate them, it will result in the value of such contracts being paid to the Company. Due to the uncertainty of obtaining a waiver from the Revolving Facility lenders, the Company has classified its derivatives as current.

Term Loan

On April 23, 2018, the Company entered into a $250.0 million syndicated Term Loan with Morgan Stanley Energy Capital, as administrative agent, which will mature in April 2023. The Term Loan is secured by certain of the Company’s oil and gas properties.  Under the Term Loan, the Company is required to maintain the following financial ratios:

a minimum Interest Coverage Ratio, consisting of EBITDAX to Consolidated Interest Expense (as defined in the Term Loan), of not less than 1.5 to 1.0 as of the last day of any fiscal quarter (for such time as there is a similar covenant under the Company’s or SEI’s subordinated indebtedness); and
An Asset Coverage Ratio, consisting of Total Proved PV9% (including the effect of the Company’s derivative positions) to Total Debt (as defined in the Term Loan agreement), of not less than 1.50 to 1.0.

In June 2020, the Company entered into a third amendment to the Term Loan. The third amendment:

Increased the applicable interest rate margin from 8% to 10%, of which 2% of the applicable margin is payable-in-kind (“PIK”), effective May 30, 2020;
Required that 50% of excess cash flow (as defined in the Term Loan agreement) (“ECF”) generated during each quarter, if any, be used to pay down the outstanding balance on its Revolving Facility, with a permanent corresponding reduction in the borrowing base. If the outstanding balance on the Revolver is zero, any Required ECF Prepayment Amounts will be applied to reduce amounts outstanding under the Term Loan;
Waived the Asset Coverage Ratio requirement for the period ended March 31, 2020;
Limited the Company’s capital expenditures (as defined in the Term Loan agreement) for the period from May 1, 2020 to September 30, 2020 to $5 million;
Limited the Company’s general and administrative expense (as defined in the Term Loan agreement) for the second and third quarters of 2020 to $3 million per quarter and
Required the Company to negotiate in good faith with the Lenders by September 30, 2020 to reduce the Company’s total debt and leverage and explore transactions to increase the Company’s capital, which may include asset sales, public or private issuance of debt or equity, or any combination thereof.

On October 16 and October 30, 2020, the Company entered into the fourth and fifth amendments to the Term Loan, respectively. Collectively, these amendments, among other things:

Extended the delivery date of the July 1, 2020 Reserve Report prepared by a petroleum engineering firm appointed by the Term Loan lenders to October 30, 2020;
Limit the Company’s capital expenditures (as defined in the Term Loan agreement) for the period from May 1, 2020 to December 31, 2020 to $11.1 million;
Limit the Company’s general and administrative expense (as defined in the Term Loan agreement) for the fourth quarter of 2020 to $3.6 million;

15

Require the Company to, (a) until December 31, 2020, negotiate with the Term Loan lenders in good faith on a potential workout, restructuring or similar negotiation with respect to the Term Loan, which is expected to include any or a combination of (i) mutually agreeing to a term sheet that reduces the Company’s total debt and leverage, (ii) exploring additional sources of equity capital for the Company, (iii) exploring potential transfers of the Company’s oil and gas properties (through asset sales or otherwise), and (iv) if necessary, hiring of restructuring advisors, and (b) enter into a restructuring support agreement with the Term Loan and the Revolving Facility lenders with respect to a workout or restructuring of the Company’s debt on or prior to November 30, 2020 or such later date as may be agreed; and
Provide that the Asset Coverage Ratio as of June 30, 2020 will not apply or be tested; if the Asset Coverage Ratio as of such date had been tested, it is unlikely that the Company would have been in compliance.

The Company has retained restructuring and legal advisors to assist it in its discussions with the lenders under the Term Loan and the Revolving Credit Facility. There can be no assurance that the Company will be able to enter into a restructuring support agreement within such time frame or that the Term Loan lenders will agree to an extension of the deadline to enter into a restructuring support agreement. If the Company is unsuccessful in such efforts, it may be necessary for the Company to seek protection from creditors under Chapter 11 of the U.S. Bankruptcy Code, or an involuntary petition for bankruptcy may be filed against it.

Interest on the Term Loan Facility accrues at a rate of (i) LIBOR (with a LIBOR floor of 1.0%) plus 8.0% plus (ii) 2% PIK. As of September 30, 2020, the stated weighted average interest rate on the Term Loan was 11.00%, including the PIK.

Pursuant to the Fifth Amendment to Amended and Restated Term Loan Agreement, the Company is required to deliver on November 30, 2020 (i) a reserve report as of September 30, 2020 and (ii) a compliance certificate with respect to the Asset Coverage Ratio as of September 30, 2020. While the Company has not yet finalized its reserve report as of such date and, as such, has not yet determined whether it was in compliance with the Asset Coverage Ratio as of the same date, there is substantial risk that the Company will not be in compliance with the Asset Coverage Ratio as of such date. The failure to be in compliance with the Asset Coverage Ratio as of any date would constitute an event of default under the Term Loan, and at any time after the occurrence of an event of default under the Term Loan, the lenders thereunder may, among other options, declare any amounts outstanding thereunder immediately due and payable. Such an event of default would also constitute an event of default under the Revolving Facility. To the extent that the Company believes it would not be in compliance with the Asset Coverage Ratio, it would endeavor to work with the lenders under the Term Loan to provide for whatever waivers or amendments necessary to avoid an event of default thereunder, although there can be no assurances that the Company would be able to obtain such a waiver or amendment.

NOTE 4 — ASSET RETIREMENT OBLIGATIONS

The Company’s asset retirement obligations represent the present value of estimated future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage, and land restoration in accordance with applicable lease terms, local, state and federal laws. The following table summarizes the changes in the Company’s asset retirement obligations for the nine months ended September 30, 2020 (in thousands):

For the nine months ended

    

September 30, 2020

Balance, beginning of period

$

3,653

Additional liability incurred

 

54

Obligations on assets sold

(14)

Revisions in estimated cash flows

362

Accretion expense

 

299

Balance, end of period

$

4,354

16

NOTE 5 — INCOME TAXES

For the three and nine months ended September 30, 2020, income tax expense was calculated on a discrete quarterly basis, as the Company does not believe it can reliably estimate the annual effective tax rate for 2020.  For the three and nine months ended September 30, 2019, income tax expense during interim periods was based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period.  The provision for income taxes for the three and nine months ended September 30, 2020 and 2019 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income primarily due to changes in the valuation allowance (which totaled $66.1 million for the nine months ended September 30, 2020).

On March 27, 2020, President Trump signed into U.S. federal law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit (“AMT”) refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, the CARES Act, (i) eliminates the 80% of taxable income limitation by allowing corporate entities to fully utilize NOLs to offset taxable income in 2018, 2019 or 2020, (ii) allows for NOLs generated in 2018, 2019, or 2020 to be carried back 5 years, (iii) increases the net interest expense deduction limit to 50% of adjusted taxable income from 30% for tax years beginning January 1, 2019 and 2020, and (iv) allows taxpayers with AMT credits to claim a refund in 2019 for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as originally enacted by the Tax Cuts and Jobs Act in 2017.  As a result of the CARES Act, we reclassified $1.2 million of expected AMT refunds from long-term to current during the nine months ended September 30, 2020. Subsequent to September 30, 2020, the Company collected $2.3 million of AMT refunds related to 2018.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment, including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year.  The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.  For the nine months ended September 30, 2020, the Company has concluded that a discrete quarterly calculation of income taxes is appropriate due to sensitivity of the annual effective tax rate to estimates of future income and uncertainty in future estimates due to the impacts of COVID-19.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Management considers all available evidence (both positive and negative) in determining whether a valuation allowance is required.  Such evidence includes the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, projected future taxable income, and tax planning strategies in making this assessment.  Judgment is required in considering the relative weight of negative and positive evidence.  The Company continues to monitor facts and circumstances in the reassessment of the likelihood that operating loss carryforwards, credits, and other deferred tax assets will be utilized prior to their expiration.  As a result, it may be determined that a deferred tax asset valuation allowance should be established or released.  The Company increased its valuation allowance during the nine months ended September 30, 2020 as a result of current period taxable loss.  Future increases or decreases in a deferred tax asset valuation allowance will impact net income through offsetting changes in income tax expense.

17

NOTE 6 — DERIVATIVE FINANCIAL INSTRUMENTS

Commodity Derivatives

The Company uses derivative instruments to mitigate volatility in commodity prices.  While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future cash flow from favorable price changes.  The Company’s policy is to hedge, at the time the contract is entered into, at least 50% of its reasonably projected oil & gas production from the Proved Reserves classified as “Developed Producing Reserves” for a rolling 36 month period, but not more than 80% of the reasonably projected production from the Proved Reserves for a rolling 24 months and not more than 75% of the reasonably projected production from the Proved reserves for months 25-60, as required by its Revolving Facility agreement. 

As of September 30, 2020, the Company had primarily entered into oil and gas swaps and collars and oil basis swaps. For collars, the Company receives the difference between the published index price and a floor price if the index price is below the floor price, or pays the difference between the ceiling price and the index price if the index price is above the ceiling price.  No amounts are paid or received if the index price is between the floor and the ceiling prices. By using a collar, the minimum and maximum prices on the underlying production are fixed. The oil basis swaps are settled based on the difference between a published index price minus a fixed differential and the applicable local index price under which the underlying production is sold. By using a basis swap, the Company has fixed the differential between the published index price and certain of our physical pricing points. The basis swaps fix the price differential between the WTI NYMEX (Cushing Oklahoma) price and the WTI Houston Argus price.

18

A summary of the Company’s commodity derivative positions as of September 30, 2020 follows:

Oil Swaps - WTI (1)

Year

Volumes (Bbl)

Weighted Average Price per Bbl

2020 - remaining

468,000

$

52.97

2021

1,926,000

$

49.36

Oil Collars - WTI

Year

Volumes (Bbl)

Weighted Average Price per Bbl - Floor

Weighted Average Price per Bbl - Ceiling

2020 - remaining

135,000

$

55.00

$

62.00

2021

216,000

$

45.00

$

65.00

2022

228,000

$

40.00

$

66.00

2023

160,000

$

40.00

$

63.10

Oil Three-Way Collars - WTI

Year

Volumes (Bbl)

Weighted Average Price per Bbl - Floor Sold

Weighted Average Price per Bbl - Floor Purchased

Weighted Average Price per Bbl - Ceiling

2020 - remaining

75,000

$

35.00

$

50.00

$

59.60

2021

300,000

$

35.00

$

50.00

$

57.50

2022

300,000

$

35.00

$

50.00

$

56.90

Propane Calls Sold - OPIS Propane Mont Belvieu - TET(2)

Year

Volumes (Bbl)

Weighted Average Price per Bbl

2020 - remaining

54,000

$

0.70

Oil Basis Swaps - WTI-HOU (3)

Year

Volumes (Bbl)

Weighted Average Differential per Bbl

2020 - remaining

180,000

$

2.98

2021

120,000

$

2.53

Natural Gas Swaps

Price Swaps - HH(4)

Price Swaps - HSC(5)

Year

Volumes (MMBtu)

Weighted Average Price per MMBtu

Volumes (MMBtu)

Weighted Average Price per MMBtu

2020 - remaining

300,000

$

2.68

30,000

$

2.53

2021

1,950,000

$

2.70

240,000

$

2.50

2022

840,000

$

2.80

360,000

$

2.54

2023

240,000

$

2.64

The following is a list of index prices:

(1) WTI crude oil as quoted on NYMEX.

(2) Mont Belvieu – Texas Eastern Transmission (“TET”) propane as quoted by Oil Price Information Service (“OPIS”).

(3) WTI Houston Argus (“WTI-HOU”) crude oil as quoted by Argus US Pipeline.

(4) Henry Hub (“HH”) natural gas as quoted on the NYMEX.

(5) Houston Ship Channel (“HSC”) natural gas as quoted in Platt’s Inside FERC.

19

Interest Rate Derivatives

The Company utilizes interest rate swaps to mitigate exposure to changes in market interest rates on the Company’s variable-rate indebtedness. A summary of the Company’s interest rate swaps as of September 30, 2020 follows (notional amount in thousands):

Interest Rate Swaps

Portion of

Term

Term Loan

Effective Date

   

Termination Date

   

Notional Amount

   

Fixed LIBOR Rate (1)

   

Face Amount

June 11, 2020

June 11, 2021

$

125,000

3.072

%

50

%

June 11, 2021

June 11, 2022

$

125,000

3.061

%

50

%

June 13, 2022

April 23, 2023

$

125,000

3.042

%

50

%

(1)Each contract has a 1% LIBOR floor, consistent with the structure of the Term Loan.

Offsetting of Derivative Assets and Liabilities. 

The Company nets its financial derivative instrument fair value amounts executed with the same counterparty pursuant to ISDA master agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract.  The following tables summarize the location and fair value amounts of all the Company’s derivative instruments in the consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset in the consolidated balance sheets (in thousands):

 

September 30, 2020

Gross

Gross

Net Recognized

Balance Sheet

Recognized

Amounts

Fair Value

Not Designated as ASC 815 Hedges

 

Classification

Assets/Liabilities

Offset

Assets/Liabilities

DERIVATIVE ASSETS:

 

 

  

 

  

Current:

 

 

  

 

  

Commodity contracts

 

Derivative assets

$

32,365

(3,867)

$

28,498

Interest rate swaps