UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2020 |
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OR |
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☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ___________ to _________
Commission File Number 001-36302
Sundance Energy Inc.
(Exact name of Registrant as specified in its Charter)
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Delaware |
61-1949225 |
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(State or other jurisdiction of
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(I.R.S. Employer
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1050 17th Street, Suite 700, Denver, CO |
80265 |
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(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:
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Title of each class |
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Trading Symbol(s) |
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Name of Exchange on Which Registered |
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Common Stock, par value $0.001 per share |
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SNDE |
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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.
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Large accelerated filer |
☐ |
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Accelerated filer |
þ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
☑ |
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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 August 10, 2020, the registrant has 6,875,672 shares of common stock, par value $0.001 per share, outstanding.
Table of Contents
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3 |
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5 |
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5 |
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9 |
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25 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 |
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38 |
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38 |
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38 |
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38 |
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38 |
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39 |
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39 |
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40 |
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42 |
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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)
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June 30, |
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December 31, |
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2020 |
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2019 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
347 |
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$ |
12,382 |
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Accounts receivable trade and other |
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20,048 |
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27,020 |
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Derivative financial instruments |
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33,651 |
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1,215 |
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Income tax receivable |
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4,697 |
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3,555 |
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Other current assets |
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4,116 |
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3,616 |
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Total current assets |
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62,859 |
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47,788 |
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Oil and gas properties, successful efforts method |
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1,154,726 |
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1,122,908 |
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Less: accumulated depletion, depreciation and amortization |
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(420,722) |
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(379,961) |
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Total oil and gas properties, net |
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734,004 |
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742,947 |
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Other long-term assets: |
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Other property and equipment, net of accumulated depreciation of $3,160 and $3,419 |
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1,636 |
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1,963 |
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Income tax receivable |
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— |
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1,172 |
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Operating lease right-of-use assets |
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12,610 |
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17,331 |
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Derivative financial instruments |
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12,001 |
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878 |
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Other long-term assets |
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1,350 |
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1,835 |
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TOTAL ASSETS |
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$ |
824,460 |
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$ |
813,914 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable trade |
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$ |
43,910 |
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$ |
43,284 |
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Current maturities of long-term debt |
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1,285 |
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— |
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Accrued liabilities |
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12,761 |
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26,409 |
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Derivative liabilities |
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2,651 |
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4,394 |
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Operating lease liabilities - current |
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4,838 |
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7,720 |
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Other current liabilities |
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1,076 |
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— |
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Total current liabilities |
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66,521 |
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81,807 |
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Long-term liabilities: |
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Long-term debt |
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354,097 |
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353,490 |
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Asset retirement obligations |
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4,252 |
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3,653 |
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Operating lease liabilities - long term |
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7,773 |
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9,611 |
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Derivative financial instruments |
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4,729 |
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3,669 |
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Deferred tax liabilities |
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8,583 |
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7,138 |
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Other long-term liabilities |
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423 |
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1,149 |
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Total long-term liabilities |
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379,857 |
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378,710 |
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Total liabilities |
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446,378 |
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460,517 |
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Commitments and contingencies (Note 12) |
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Stockholders’ Equity: |
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Common stock, $0.001 value, 100,000,000 shares authorized; 6,875,672 issued and outstanding at June 30, 2020 and December 31, 2019. |
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7 |
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7 |
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Additional paid-in capital |
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633,441 |
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633,246 |
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Accumulated deficit |
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(254,673) |
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(279,144) |
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Accumulated other comprehensive loss |
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(693) |
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(712) |
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Total stockholders’ equity |
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378,082 |
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353,397 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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$ |
824,460 |
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$ |
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)
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For the three months ended June 30, |
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For the six months ended June 30, |
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Revenues: |
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2020 |
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2019 |
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2020 |
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2019 |
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Oil sales |
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$ |
11,733 |
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$ |
46,147 |
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$ |
40,089 |
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$ |
86,943 |
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Natural gas sales |
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1,191 |
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3,516 |
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3,378 |
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6,794 |
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Natural gas liquid sales |
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2,103 |
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3,238 |
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3,903 |
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6,904 |
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Other revenue |
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103 |
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— |
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103 |
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— |
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Total revenues |
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15,130 |
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52,901 |
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47,473 |
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100,641 |
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Operating expenses: |
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Lease operating and workover expense |
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5,386 |
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8,388 |
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13,546 |
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18,516 |
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Gathering, processing and transportation expense |
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2,730 |
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3,745 |
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6,344 |
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6,570 |
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Production taxes |
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(285) |
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3,108 |
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1,727 |
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6,237 |
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Exploration expense |
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24 |
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7 |
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173 |
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22 |
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Depreciation, depletion and amortization expense |
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20,415 |
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22,958 |
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44,769 |
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44,462 |
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Impairment expense |
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— |
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5,753 |
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— |
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9,083 |
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General and administrative expense |
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3,970 |
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5,428 |
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9,520 |
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10,717 |
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Loss (gain) on commodity derivative financial instruments |
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23,018 |
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(10,287) |
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(72,845) |
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23,056 |
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Other expense (income), net |
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(2,809) |
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|
229 |
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|
(2,628) |
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|
210 |
|
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Total operating expenses |
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52,449 |
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39,329 |
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|
606 |
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|
118,873 |
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Income (loss) from operations: |
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(37,319) |
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|
13,572 |
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46,867 |
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(18,232) |
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Other expense |
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Interest expense |
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(8,644) |
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(10,606) |
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(21,021) |
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(20,385) |
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Total other expense |
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(8,644) |
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(10,606) |
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(21,021) |
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(20,385) |
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Income (loss) before income taxes |
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(45,963) |
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2,966 |
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25,846 |
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(38,617) |
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Income taxes |
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Current benefit (expense) |
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(13) |
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— |
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70 |
|
|
— |
|
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Deferred benefit (expense) |
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10,205 |
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(323) |
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(1,445) |
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4,051 |
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Total income tax benefit (expense) |
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10,192 |
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(323) |
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(1,375) |
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|
4,051 |
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Net income (loss) |
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$ |
(35,771) |
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$ |
2,643 |
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$ |
24,471 |
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$ |
(34,566) |
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Income (loss) per common share |
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Basic |
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$ |
(5.20) |
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$ |
0.38 |
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$ |
3.56 |
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$ |
(5.03) |
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Diluted |
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$ |
(5.20) |
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$ |
0.38 |
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$ |
3.56 |
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$ |
(5.03) |
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Weighted average shares outstanding |
|
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Basic |
|
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6,875,017 |
|
|
6,874,146 |
|
|
6,874,934 |
|
|
6,874,050 |
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Diluted |
|
|
6,875,017 |
|
|
6,874,619 |
|
|
6,874,936 |
|
|
6,874,050 |
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
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Net income (loss) |
|
$ |
(35,771) |
|
$ |
2,643 |
|
$ |
24,471 |
|
$ |
(34,566) |
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Foreign currency translation |
|
|
(409) |
|
|
40 |
|
|
19 |
|
|
18 |
|
Total comprehensive income (loss) |
|
$ |
(36,180) |
|
$ |
2,683 |
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$ |
24,490 |
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$ |
(34,548) |
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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)
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|
|
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|
|
|
|
|
|
|
|
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Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other |
|
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|
Common stock |
|
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Additional |
|
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Accumulated |
|
|
comprehensive |
|
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|||
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|
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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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
||||
|
|
|
|
|
|
|
2020 |
|
|
2019 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|||
|
|
Net income (loss) |
|
$ |
24,471 |
|
$ |
(34,566) |
||
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
||
|
|
|
Depreciation, depletion and amortization expense |
|
|
44,769 |
|
|
44,462 |
|
|
|
|
Impairment expense |
|
|
— |
|
|
9,083 |
|
|
|
|
Stock-based compensation |
|
|
195 |
|
|
277 |
|
|
|
|
Payable-in-kind interest |
|
|
431 |
|
|
— |
|
|
|
|
Deferred income tax (benefit) expense |
|
|
1,445 |
|
|
(4,051) |
|
|
|
|
(Gain) loss on commodity derivative financial instruments |
|
|
(72,845) |
|
|
23,056 |
|
|
|
|
Net cash settlements received on commodity derivative contracts |
|
|
27,021 |
|
|
3,681 |
|
|
|
|
Premiums (paid) received on commodity derivative contracts |
|
|
— |
|
|
(152) |
|
|
|
|
Unrealized loss on interest rate swaps |
|
|
1,584 |
|
|
4,068 |
|
|
|
|
Amortization of deferred financing fees |
|
|
1,772 |
|
|
1,564 |
|
|
|
|
Write-off of deferred financing fees |
|
|
1,199 |
|
|
— |
|
|
|
|
Gain (loss) on conveyance of oil and gas properties |
|
|
(2,479) |
|
|
— |
|
|
|
|
Other |
|
|
12 |
|
|
(83) |
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
||
|
|
|
Accounts receivable trade and other |
|
|
2,870 |
|
|
7,365 |
|
|
|
|
Income tax receivable |
|
|
30 |
|
|
— |
|
|
|
|
Accounts payable trade |
|
|
(6,248) |
|
|
(5,308) |
|
|
|
|
Accrued liabilities |
|
|
(9,957) |
|
|
1,882 |
|
|
|
|
Other assets and liabilities, net |
|
|
656 |
|
|
(506) |
|
|
|
|
|
Net cash provided by operating activities |
|
|
14,926 |
|
|
50,772 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|||
|
|
Capital expenditures for proved oil and gas properties |
|
|
(25,386) |
|
|
(90,677) |
||
|
|
Capital expenditures for unproved oil and gas properties |
|
|
(13) |
|
|
(326) |
||
|
|
Proceeds from the sale of oil and gas properties |
|
|
— |
|
|
50 |
||
|
|
Other property and equipment |
|
|
(271) |
|
|
(120) |
||
|
|
|
|
Net cash used in investing activities |
|
|
(25,670) |
|
|
(91,073) |
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|||
|
|
Proceeds from borrowings |
|
|
— |
|
|
40,000 |
||
|
|
Payments of debt issuance costs |
|
|
(1,025) |
|
|
(232) |
||
|
|
Principal payments on finance lease obligations |
|
|
(147) |
|
|
(66) |
||
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(1,172) |
|
|
39,702 |
|
|
|
|
Net change in cash and cash equivalents |
|
|
(11,916) |
|
|
(599) |
|
CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
|||
|
|
|
|
Beginning of period |
|
|
12,382 |
|
|
1,581 |
|
|
|
|
Effect of exchange rates on cash |
|
|
(119) |
|
|
(5) |
|
|
|
|
End of period |
|
$ |
347 |
|
$ |
977 |
|
SUPPLEMENTAL CASH FLOW DISCLOSURES |
|
|
` |
|
|
|
|||
|
|
Interest paid, net of amounts capitalized |
|
$ |
21,481 |
|
$ |
16,136 |
||
|
|
Operating lease right-of-use assets obtain in exchange for lease liabilities |
|
$ |
524 |
|
$ |
2,838 |
||
|
|
Finance lease right-of-use assets obtain in exchange for lease liabilities |
|
$ |
44 |
|
$ |
179 |
||
|
NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|||
|
|
Accounts payable and accrued expenses for oil and gas properties |
|
$ |
32,376 |
|
$ |
35,150 |
||
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 June 30, 2020 and our consolidated results of operations for the three and six months ended June 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 second quarter of 2020. As described in Note 3, 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 value of its Total Proved Reserves (PV 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. The value of the Company’s oil and gas reserves, (including “Total Proved Reserves” as described in the Term Loan agreement) is highly sensitive to future commodity prices. 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. In the first and second 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 has realized lower drilling and completion costs on recent development relative to the costs incurred in 2019 and the assumed costs in the Company’s year-end 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 year-end 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. However, given the recent decline and continued volatility of commodity prices combined with a scaled back development program, the Company cannot assert that it is probable that it will comply with the Asset Coverage Ratio and other covenants within the next 12 months following the date of this report. 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 senior secured revolving credit facility (the “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.
There is no guarantee that the Company’s lenders will agree to waive events of default or potential events of default in the future. 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 that the financial statements are issued.
Management is implementing 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:
| ● | 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 to increase the Company’s capital, which may include asset sales, public or private issuance of debt or equity, or any combination thereof. |
10
There can be no assurance that sufficient liquidity can be obtained to meet the outstanding obligations of the Company, if repayment of its credit facilities is accelerated. As a result, and given the continued volatility in commodity prices, 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 six months ended June 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 (64% and 22%, 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.
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.
11
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 June 30, 2020 and December 31, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
|
|
2020 |
|
2019 |
||
|
Oil and gas properties, successful efforts method: |
|
|
|
|
|
|
|
Unproved |
|
$ |
24,974 |
|
$ |
25,037 |
|
Proved |
|
|
1,121,838 |
|
|
1,090,774 |
|
Work in progress |
|
|
7,914 |
|
|
7,097 |
|
|
|
|
1,154,726 |
|
|
1,122,908 |
|
Accumulated depletion, depreciation and amortization |
|
|
(420,722) |
|
|
(379,961) |
|
Oil and gas properties, net |
|
$ |
734,004 |
|
$ |
742,947 |
Capitalized Interest
The Company capitalized interest of $0.2 million and $0.8 million for the three months ended June 30, 2020 and 2019, respectively, and $0.5 million and $1.4 million for the six months ended June 30, 2020 and 2019, respectively.
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 during the three and six months ended June 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.
Impairment
The Company identified an impairment triggering event for its proved oil and gas properties as of June 30, 2020 due to the adverse change to its business climate resulting from the oil and gas prices during the period. As such, the Company performed a quantitative assessment as of June 30, 2020, and the estimated undiscounted cash flows from its proved properties exceeded the carrying value of its proved oil and gas properties and therefore no impairment expense was recorded.
During the three and six months ended June 30, 2019, the Company recorded impairment expense of $5.8 million and $9.1 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.
12
NOTE 3 — LONG-TERM DEBT
The following is a summary of long-term debt as of June 30, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020 |
||||||||||
|
|
|
|
Principal |
|
Unamortized deferred financing fees |
|
Accrued Paid In Kind Interest |
|
Carrying Value |
|||
|
Revolving Facility (1) |
|
$ |
113,715 |
|
$ |
— |
|
$ |
— |
|
$ |
113,715 |
|
Term Loan |
|
|
250,000 |
|
|
(10,048) |
|
|
430 |
|
|
240,382 |
|
Total long-term debt, net |
|
$ |
363,715 |
|
$ |
(10,048) |
|
$ |
430 |
|
$ |
354,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
||||||||||
|
|
|
|
Principal |
|
Unamortized deferred financing fees |
|
Accrued Paid In Kind Interest |
|
Carrying Value |
|||
|
Revolving Facility |
|
$ |
115,000 |
|
$ |
— |
|
$ |
— |
|
$ |
115,000 |
|
Term Loan |
|
|
250,000 |
|
|
(11,510) |
|
|
— |
|
|
238,490 |
|
Total long-term debt, net |
|
$ |
365,000 |
|
$ |
(11,510) |
|
$ |
— |
|
$ |
353,490 |
| (1) | The Company also had $1.3 million of Revolving Facility principal balance classified as a current liability, which is excluded from the table above. |
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 financing fees of $1.1 million during the six months ended June 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 $190 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.
13
As of June 30, 2020, the Company had letters of credit of $16.4 million outstanding on the Revolving Facility, and $38.6 million of undrawn borrowing capacity. 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; therefore at June 30, 2020, the Company classified $1.3 million of the outstanding Revolving Facility balance as a current liability. In July, the Company repaid $1.4 million, and then drew down an additional $5 million on the Revolving Facility to meet its working capital needs. Following these events, the borrowing base was $168.6 million with outstanding borrowings of $118.6 million and undrawn capacity of $33.6 million.
As of June 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 3.43% as of June 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). |
As of June 30, 2020, the Company was in compliance with all restrictive and financial covenants under the Revolving Facility.
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.
In June 2020, the Company entered into the third amendment to the Term Loan which amended the Term Loan agreement as follows:
| ● | Increases 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; |
| ● | Requires 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; |
| ● | Limits 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; |
| ● | Limits 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 |
| ● | Requires 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. |
As of June 30, 2020, the stated weighted average interest rate on the Term Loan was 11.46% as of June 30, 2020, of which is 2% PIK.
14
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. |
The third amendment to the Term Loan requires the Company to have a reserve report prepared as of June 30, 2020 by a petroleum engineering firm selected by the Term Loan lenders. Preparation of the reserve report is in process as of the date of this report, and is expected to be completed no later than September 30, 2020. Except for the Asset Coverage Ratio which has not been calculated as of the date of this report, the Company was in compliance with the other restrictive and financial covenants in the Term Loan as of June 30, 2020.
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 six months ended June 30, 2020 (in thousands):
NOTE 5 — INCOME TAXES
For the three and six months ended June 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 six months ended June 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 six months ended June 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 $3.8 million for the six months ended June 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 six months ended June 30, 2020.
15
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 six months ended June 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 released a portion of its valuation allowance during the six months ended June 30, 2020 as a result of current period taxable income. Future increases or decreases in a deferred tax asset valuation allowance will impact net income through offsetting changes in income tax expense.
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 June 30, 2020, the Company has 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.
16
A summary of the Company’s commodity derivative positions as of June 30, 2020 follows:
|
|
|
|
|
|
|
|
Oil Swaps - WTI (1) |
|
|
|||
|
Year |
|
Volumes (Bbl) |
|
Weighted Average Price per Bbl |
|
|
2020 - remaining |
|
1,035,000 |
|
$ |
52.75 |
|
2021 |
|
1,926,000 |
|
$ |
49.36 |
|
|
|
|
|
|
|
|
Propane Calls Sold - OPIS Propane Mont Belvieu - TET(2) |
|||||
|
Year |
|
Volumes (Bbl) |
|
|
Weighted Average Price per Bbl |
|
2020 - remaining |
|
141,000 |
|
$ |
0.70 |
|
|
|
|
|
|
|
|
Oil Basis Swaps - WTI-HOU (3) |
|
|
|||
|
Year |
|
Volumes (Bbl) |
|
|
Weighted Average Differential per Bbl |
|
2020 - remaining |
|
360,000 |
|
$ |
2.98 |
|
2021 |
|
120,000 |
|
$ |
2.53 |
Subsequent to June 30, 2020, the Company entered into the following commodity derivative positions:
|
|
|
|
|
|
|
Natural Gas Swaps |
|
Price Swaps -HH |
||
|
Year |
|
Volumes (MMBtu) |
|
Weighted Average Price per MMBtu |
|
2021 |
|
300,000 |
$ |
2.82 |
|
|
|
|
|
|
|
|
|
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.
17
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 June 30, 2020 follows (notional amount in thousands):
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):
18
Contingent Features in Financial Derivative Instruments. None of the Company’s derivative instruments contain credit-risk related contingent features. To minimize credit risk, most of the counterparties to the Company’s financial derivative contracts are lenders under the Company’s credit facilities and are high credit-quality financial institutions. These institutions are secured equally with the holders of Sundance’s bank debt, which eliminates the need to post collateral when Sundance is in a derivative liability position. The Company is not required to post letters of credit or corporate guarantees for its derivative counterparties in order to secure contract performance obligations. Refer to Note 7 for additional information regarding the valuation of derivative instruments.
19
NOTE 7 — FAIR VALUE MEASUREMENT
The Company follows FASB ASC Topic 820 – Fair Value Measurement and Disclosure which establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived from observable market data by correlation or other means.
Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The Level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. The financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets are grouped into the fair value hierarchy as follows (in thousands):
During the three and six months ended June 30, 2020, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfer into or out of Level 3 fair value measurements.
Measurement of Fair Value
| a) | Derivatives |
The Company’s derivative instruments consist of commodity contracts (primarily swaps and collars) and interest rate swaps. The Company utilizes present value techniques and option-pricing models for valuing its derivatives. Inputs to these valuation techniques include published forward prices, volatilities, and credit risk considerations, including the incorporation of published interest rates and credit spreads. All of the significant inputs are observable, either directly or indirectly; therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy.
20
b) Credit Facilities
As of June 30, 2020 and December 31, 2019, the Company had $250 million and $115 million of principal debt outstanding on its Term Loan and Revolving Facility, respectively. Both credit facilities were amended in June 2020, and their carrying value approximates fair value as of June 30, 2020.
c) Other Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short-term nature.
NOTE 8 — STOCK-BASED COMPENSATION
For the three and six months ended June 30, 2020, the Company recognized stock-based compensation expense of $0.1 million and $0.2 million, respectively, as compared to $0.1 million and $0.3 million, respectively, for the three and six months ended June 30, 2019.
Prior to the Company’s Redomiciliation, SEAL issued restricted share units (“RSUs”) pursuant to its Long Term Incentive Plan (the “SEAL Plan”) to motivate management and employees to make decisions benefiting long-term value creation, retain management and employees and reward the achievement of the Company’s long-term goals. The RSUs are generally settled based on the achievement of certain goals established by the Company’s Compensation Committee and approved by the Company’s Board of Directors. In connection with the Redomiciliation in November 2019, Sundance Energy Inc. assumed SEAL’s obligations with respect to the settlement of the RSUs that were granted pursuant to the SEAL Plan prior to the effective date of the Redomiciliation. Accordingly, the RSUs will be settled in shares of common stock of Sundance Energy Inc. rather than ordinary shares of SEAL. Following the effective date of the Redomiciliation, no new awards or grants have been or will be made pursuant to the SEAL Plan.
On July 28, 2020, the Company’s stockholders approved the Sundance Energy Inc. 2020 Equity Incentive Plan (the “2020 Equity Plan”). The 2020 Equity Plan allows the Company’s Board of Director’s to grant stock options, stock appreciation rights, restricted stock, dividend equivalents, RSUs, and other stock or cash-based awards to Company employees, consultants, and directors. An initial pool of 750,000 shares of the Company’s common stock was authorized for issuance under the 2020 Equity Plan.
The following table summarizes the RSU activity from January 1, 2020 through June 30, 2020 and provides information for RSUs outstanding at the dates indicated.
| (1) | Vested shares are expected to be issued later during 2020. |
| (2) | Includes 1,562 shares that were forfeited as the market-based vesting conditions were not satisfied. |
21
NOTE 9 — PAYROLL PROTECTION PROGRAM
In connection with the Payroll Protection Program (“PPP”) established by the CARES Act, the Company borrowed approximately $1.9 million on May 12, 2020. Under the PPP, the Company will be eligible for loan forgiveness up to the full amount of the PPP note. The forgiveness amount will be equal to the amount that the Company spends during the 24-week period beginning May 12, 2020 on payroll costs, plus payment of rent on any leases in force prior to February 15, 2020 and payment on any utility for which service began before February 15, 2020, up to certain limitations set forth in the regulations. The Company intends to apply for forgiveness of this indebtedness and believes it is probable it will comply with the loan forgiveness conditions.
The Company has accounted for the PPP note as an in-substance government grant and has recorded $0.8 million as a reduction to general and administrative expenses (“G&A”) during the three months ended June 30, 2020. The remainder of the PPP note has been deferred and the balance is included in other current liabilities on the consolidated balance sheet as of June 30, 2020. The Company expects to be able to recognize the deferred balance of $1.1 million as reduction to G&A in the third quarter 2020. The receipt of the PPP Note is included in operating cash flows on the consolidated statement of cash flows for the six months ended June 30, 2020.
NOTE 10 — EARNINGS PER SHARE
The reconciliations between basic and diluted earnings (loss) per share are as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||||
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Net income (loss) |
$ |
(35,771) |
|
$ |
2,643 |
|
$ |
24,471 |
|
$ |
(34,566) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic |
|
6,875,017 |
|
|
6,874,146 |
|
|
6,874,934 |
|
|
6,874,050 |
|
Diluted effect of incremental shares related to RSUs (1) |
|
— |
|
|
473 |
|
|
2 |
|
|
— |
|
Weighted average common shares outstanding, diluted |
|
6,875,017 |
|
|
6,874,619 |
|
|
6,874,936 |
|
|
6,874,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
(5.20) |
|
$ |
0.38 |
|
$ |
3.56 |
|
$ |
(5.03) |
|
Diluted |
$ |
(5.20) |
|
$ |
0.38 |
|
$ |
3.56 |
|
$ |
(5.03) |
| (1) | For the three months ended June 30, 2020, the Company had a net loss and therefore the diluted earnings per share calculation for that period excludes anti-dilutive shares of nil shares of service-based awards. For the six months ended June 30, 2019, the Company had a net loss and therefore the diluted earnings per share calculation for that period excludes anti-dilutive shares of 376 shares of service-based awards. |
22
NOTE 11 — OTHER BALANCE SHEET DETAIL
The following table summarizes components of selected balance sheet accounts as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
|
|
2020 |
|
2019 |
||
|
Accounts receivable trade and other |
|
|
|
|
|
|
|
Oil, natural gas and NGL sales (1) |
|
$ |
9,770 |
|
$ |
18,211 |
|
Joint interest owners |
|
|
110 |
|
|
260 |
|
Commodity hedge contract receivables and other |
|
|
5,961 |
|
|
4,342 |
|
Receivable due from buyer (Dimmit County oil and gas properties) |
|
|
4,207 |
|
|
4,207 |
|
|
|
$ |
20,048 |
|
$ |
27,020 |
|
|
|
|
|
|
|
|
|
Other property and equipment, net |
|
|
|
|
|
|
|
Owned property and equipment |
|
$ |
3,821 |
|
$ |
4,449 |
|
Finance lease right-of-use assets |
|
|
975 |
|
|
933 |
|
Accumulated depreciation |
|
|
(3,160) |
|
|
(3,419) |
|
|
|
$ |
1,636 |
|
$ |
1,963 |
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
|
|
|
|
|
Oil and natural gas properties: |
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
3,962 |
|
$ |
4,168 |
|
Re-fracture liability |
|
|
297 |
|
|
764 |
|
Lease operating and workover expenses and other |
|
|
3,287 |
|
|
7,393 |
|
Accrued interest payable |
|
|
332 |
|
|
6,885 |
|
General and administrative expense |
|
|
4,564 |
|
|
6,894 |
|
Finance lease liabilities |
|
|
319 |
|
|
305 |
|
|
|
$ |
12,761 |
|
$ |
26,409 |
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
|
Finance lease liabilities - non-current |
|
$ |
312 |
|
$ |
429 |
|
Re-fracture liability |
|
|
89 |
|
|
688 |
|
Other |
|
|
22 |
|
|
32 |
|
|
|
$ |
423 |
|
$ |
1,149 |
| (1) | Receivables are from contracts with customers. |
| (2) | The Company sold its Dimmit County assets in October 2019 and has as a receivable due from the Buyer for post-closing adjustments. The Buyer has disputed certain items in the purchase and sale agreement and the receivable is past due. The Company does not believe the dispute has any merit, and is pursuing collection through legal channels. |
23
NOTE 12 — COMMITMENTS AND CONTINGENCIES
Leases
The Company enters into leases as lessee to conduct its normal operations. At June 30, 2020, the Company had operating leases in place primarily for its use of compression equipment, land right of way and surface use arrangements, office facilities, and other production equipment and finance leases in place for its use of field vehicles and office equipment. Most of the Company’s leasing arrangements include extension and termination options, including evergreen provisions, all of which provide the Company flexibility in retaining the underlying facilities and equipment, as well as some protection from future price variability. The Company recognizes options to extend or terminate its leases as part of its assessment of the lease term, when it is reasonably certain to exercise the option.
Some of the Company’s contracts have pricing that is variable within a range based on throughput, others have a set rate increase at predetermined intervals, and others are silent as to future increases or have a rate that is undefined for the variable components. The Company’s leases do not have future variable payments related to indices. For contracts with throughput provisions subject to a range, future payments have been included in the calculation of the lease liabilities at the contract minimum rate. Future payment increases for leases with set rate increases have been incorporated into the calculation of the lease liabilities, including the escalations. Future variable payments such as for movement or demobilization of the underlying leased asset have typically been excluded from the calculation of the lease liabilities unless they are determinable, and are expensed as incurred.
The Company has applied judgment to determine the lease term for some of its lease contracts which include renewal or termination options. Certain of the Company’s leases include an “evergreen” provision that allows the contract term to continue on a month-to-month or year-to-year basis following expiration of the initial term included in the contract. The term of the lease is determined to be the non-cancelable period in the contract, plus the period beyond that cancellation period that the Company believes it is reasonably certain it will need the equipment for operational purposes.
The Company’s lease obligations as of June 30, 2020 will mature as follows (in thousands):
Marketing, Gathering, Processing and Transportation Commitments
In 2018, the Company entered into contracts with a large midstream company to gather, process, transport and market oil, NGL and natural gas production for certain acquired properties. The contracts contain a Minimum Revenue Commitment (“MRC”) that requires payment of minimum annual fees for those services. Fixed fees are expensed as incurred and settled with the purchaser on a monthly basis. If, at the end of each calendar year, the Company fails to satisfy the MRC, the Company is required to pay a shortfall. The total remaining MRC by fiscal year are as follows (in thousands):
24
Current production from the producing wells dedicated under these agreements is not sufficient to meet the MRC for the hydrocarbon gathering and handling agreement and crude oil and condensate purchase agreements. Based on the Company’s current 2020 development plan, it expects to have a shortfall under those agreements for the year ending December 31, 2020. The Company expects that any shortfall incurred specifically under the crude oil and condensate purchase agreements will be offset by overages from the prior year. The ability to meet this commitment in future periods will depend on the pace of development through the term of the contract.
Litigation
The Company is involved in various legal proceedings and claims in the ordinary course of business, including mechanic’s liens and contract disputes, and recognizes a contingent liability when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. While the outcome of these lawsuits and claims cannot be predicted with certainty, it is the opinion of management that, as of the date of this report, it is not probable that these claims and litigation will have a material adverse impact on the Company. Accordingly, no material amounts for loss contingencies associated with litigation, claims or assessments have been accrued as of June 30, 2020.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q (“Quarterly Report”) may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are identified by the use of the words “project,” “believe,” “estimate,” “expect,” “anticipate,” “intend,” “contemplate,” “foresee,” “would,” “could,” “plan,” and similar expressions that are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that are anticipated. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
| ● | our assumptions about energy markets; |
| ● | our ability to execute our business strategies; |
| ● | the volatility of realized oil, natural gas and NGL prices; |
| ● | general economic, business and industry conditions; |
| ● | the overall supply and demand for oil and natural gas, and regional supply and demand factors, delays, or interruptions of production; |
| ● | our ability to replace our oil, natural gas and NGL reserves; |
| ● | our ability to identify, complete and integrate acquisitions; |
| ● | competition in the oil and natural gas industry; |
| ● | the ability to obtain capital or financing needed for development and exploration operations on favorable terms, or at all; |
| ● | title defects in our properties; |
| ● | uncertainties inherent in estimating oil, gas and NGL reserves; |
25
| ● | the extent to which we are successful in acquiring and discovering additional reserves; |
| ● | our ability to obtain permits and licenses; |
| ● | the availability or cost of rigs, equipment, raw materials, supplies, oilfield services or personnel; |
| ● | the potential impact of government regulations, including current and proposed legislation and regulations related to hydraulic fracturing, oil and natural gas drilling, air emissions and climate change, conservation measures, regulatory determinations, litigation and competition; |
| ● | the availability of pipeline capacity and transportation facilities; |
| ● | operating hazards and other risks associated with oil and gas operations; |
| ● | the cost of inflation; |
| ● | impairments of proved or unproved properties or other long-lived assets; |
| ● | the impact of derivative instruments; |
| ● | our ability to realize the benefits of our Redomiciliation from Australia to the United States; |
| ● | our dependence on our key personnel; |
| ● | the outbreak of communicable diseases, such as coronavirus (“COVID-19”); |
| ● | the effectiveness of our internal control over financial reporting; |
| ● | our ability to continue as a going concern; |
| ● | physical, digital, internal, and external security breaches; |
| ● | technological advances; and |
| ● | other factors discussed below and elsewhere in this annual report. |
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this annual report as anticipated, believed, estimated or expected. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this Quarterly Report and will not be revised or updated to reflect events after the date of this Quarterly Report.
In addition to the other information and risk factors set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2019 (our “Annual Report”) and in our other filings with the Securities Exchange Commission, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are an onshore independent oil and natural gas company focused on the development, production and exploration of large, repeatable resource plays in North America. Our operations are located in the Eagle Ford formation in south Texas. Our strategy is to acquire and/or develop assets where we are operator and have high working interests, positioning us to efficiently control the pace and scope of our development and the allocation of our capital resources. We also believe that serving as operator allows us to control the drilling, completion, operations, and marketing of sold volumes.
26
Business and Industry Outlook
During the first six months of 2020, WTI oil spot prices ranged from an average of $57.52 in January and to an average of $16.55 in April, primarily due to drastic price cutting and increased production by Saudi Arabia coupled with a demand reduction caused by the global COVID-19 pandemic. More recently, WTI oil spot prices have slowly rebounded to the low $40 range. While market prices for crude oil, natural gas and NGLs are inherently volatile, the increase in supply and decrease in demand to historic extremes has impacted our entire industry. Given the dynamic nature of these macroeconomic conditions, we are unable to reasonably estimate the period of time that these market conditions will exist and the extent of the impact they will have on our business, liquidity, results of operations, financial condition, or the timing of any subsequent recovery.
Specifically, due to the sharp decline in commodity prices and expectations for commodity prices in 2020, there is uncertainty as to our ability to remain in compliance with certain of the financial covenants and ratios throughout 2020 and the first half of 2021 (described further under Credit Facilities and in Note 1 under Going Concern). To mitigate our exposure to commodity price volatility and ensure our financial stability, we continue to execute a hedging program, and added contracts in late February prior to the sharp price decline. We have oil derivatives in place covering an average of 7,908 Bbls per day for July through December 2020 at a weighted average floor price of $53.62.
As described below under Recent Developments, our capital expenditures for the period May 1, 2020 through September 30, 2020 are limited to $5 million. We expect total capital expenditures to be in the range of $40 - $45 million for 2020. We intend to continue to flexibly manage our operations, including capital expenditure levels, based on existing and expected market conditions to protect our balance sheet and retain liquidity. We expect to be able to fund our planned capital program for 2020 with cash flow generated from operating activities (which includes proceeds from settlements of hedging contracts) and cash on hand. At times, we may supplement our working capital through borrowings on our Revolving Facility. As of the date of this Quarterly Report, we had $33.6 million of borrowing capacity undrawn under our Revolving Facility.
Recent Developments
The audit opinion included in our annual report for the year ended December 31, 2019 contained a going concern explanatory paragraph, which constitutes a default under our senior secured revolving credit facility (the “Revolving Facility”) and second lien term loan facility (the “Term Loan”). We obtained waivers from our Revolving Facility and Term Loan lenders to waive the events of default arising from the inclusion of the going concern explanatory paragraph included in the audit report for the year ended December 31, 2019 and with respect to the defaults arising from a failure to deliver audited consolidated financial statements for the year ended December 31, 2019 and related reports and certificates by the applicable deadline. As a condition to the waivers, we agreed to amend our credit facilities.
On June 24, 2020, we entered into the third amendment to the Term Loan, which modified our Term Loan agreement as follows:
| ● | Increased the applicable interest rate margin from 8% to 10%, of which 2% of the applicable margin is payable-in-kind, effective May 30, 2020; |
| ● | Requires 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 our Revolving Facility, with a permanent corresponding reduction in the borrowing base. If the outstanding balance on the Revolver is zero, any required ECF amounts will be applied to reduce amounts outstanding under the Term Loan; |
| ● | Limits our capital expenditures (as defined in the Term Loan agreement) for the period from May 1, 2020 to September 30, 2020 to $5 million; |
| ● | Limits our 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 |
| ● | Requires that we negotiate in good faith with the Lenders by September 30, 2020 to reduce our total debt and leverage and explore transactions to increase our capital, which may include asset sales, public or private issuance of debt or equity, or any combination thereof. |
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In addition, on June 24, 2020, we entered into the fifth amendment to the Revolving Facility. The fifth amendment included corresponding changes to those made in the Term Loan, as described above. In addition, it reduced our borrowing base from $190 million to $170 million (as a result of our semi-annual borrowing base redetermination), and increased the margin on our interest rate by 25 basis points.
During the three months ended June 30, 2020, we completed 4.0 net operated wells, which had initial production in late June 2020.
Results of Operations
Revenues and Sales Volume. The following table provides the components of our revenues for the three and six months ended June 30, 2020 and 2019, as well as each period’s respective sales volumes:
Sales volumes decreased by 491,082 Boe (5,397 Boe/d) to 773,602 Boe (8,501 Boe/d) for the three months ended June 30, 2020 compared to 1,264,684 Boe (13,898 Boe/d) for the same prior year period. Sales volumes decreased by 607,820 Boe (3,411 Boe/d) to 1,764,087 Boe (9,693 Boe/d) for the six months ended June 30, 2020 compared to 2,371,907 Boe (13,104 Boe/d) for the same prior year period. The lower volumes in both 2020 periods are primarily due to more wells coming onto production in late 2018 and early 2019 (11.0 new wells coming online in the fourth quarter of 2018 and 8.0 new operated wells in the first half of 2019) compared to late 2019 and the first half of 2020 (2.0 wells coming online in each of the fourth quarter of 2019 and first quarter of 2020 and insignificant production from the 4.0 net wells that came online in late second quarter 2020). This scaled back 2020 development plan is in a large part due to the decrease in oil prices beginning in early March 2020 and reflects capital limitations included in our recent credit agreement amendments. The three months and six months ended June 30, 2019 also include approximately 1,400 Boe/d and 1,200 Boe/d of production from the Dimmit County asset, which were sold in October 2019.
Our sales volume is oil‐weighted, with oil representing 66% and 65% of total sales volume for the three and six months ended June 30, 2020, respectively, and liquids (oil and NGLs) representing 82% and 81% of total sales volumes for the three and six months ended June 30, 2020, respectively. In 2019, the three and six months ended June 30, 2019 had 59% and 62% and 78% and 79% of oil and liquids as a percentage of total sales volumes, respectively.
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Oil sales. Oil sales decreased by $34.4 million (75%) to $11.7 million for the three months ended June 30, 2020 from $46.1 million for the same prior year period. The decrease in oil revenue was driven by the significant decrease in market prices beginning in March 2020 ($19.7 million) and lower sales volumes ($14.7 million). The average realized price on the sale of our oil decreased by 63% to $23.13 per Bbl for the three months ended June 30, 2020. Oil sales volumes decreased 32% to 507,224 Bbls for the three months ended June 30, 2020 compared to 745,129 Bbls for the prior year period.
Oil sales decreased by $46.9 million (54%) to $40.1 million for the six months ended June 30, 2020 from $86.9 million for the same prior year period, of which $28.1 million was the result of lower realized oil prices and $18.7 million was the result of lower sales volumes. The average realized price on the sale of our oil decreased by 41% to $34.81 per Bbl for the six months ended June 30, 2020. Oil sales volumes decreased 22% to 1,151,752 Bbls for the six months ended June 30, 2020 compared to 1,467,525 Bbls for the prior year period.
Natural gas sales. Natural gas sales decreased by $2.3 million (66%) to $1.2 million for the three months ended June 30, 2020 from $3.5 million for the prior year period. The decrease in natural gas revenues was the result of lower product pricing ($0.6 million) and lower sales volumes ($1.8 million). Natural gas sales volumes decreased 50% to 836,040 Mcf for the three months ended June 30, 2020 compared to 1,688,005 Mcf for the prior year period. As noted above, we sold our Dimmit County assets in October 2019, which accounted for approximately 20% of our gas production for the six months ended June 30, 2019 (but only 5% of our oil production). The average realized price on the sale of our natural gas decreased by 32% to $1.42 per Mcf (net of certain transportation and marketing costs) for the three months ended June 30, 2020 from $2.08 per Mcf for the prior year period.
Natural gas sales decreased by $3.4 million (50%) to $3.4 million for the six months ended June 30, 2020 from $6.8 million for the prior year period, of which $2.1 million was the result of lower production volume and $1.3 million was the result of lower product pricing. Natural gas sales volumes decreased 31% to 2,038,493 Mcf for the six months ended June 30, 2020 compared to 2,960,551 Mcf for the prior year period. The average realized price on the sale of our natural gas decreased by 28% to $1.66 per Mcf for the six months ended June 30, 2020 from $2.29 per Mcf for the prior year period.
NGL sales. NGL sales decreased by $1.1 million (35%) to $2.1 million for the three months ended June 30, 2020 from $3.2 million for the prior year period. The decrease in NGL revenues was the result of lower sales volumes ($1.5 million) offset by slightly higher product pricing ($0.4 million). NGL sales volumes decreased 111,183 Bbls (47%) to 127,038 Bbls for the three months ended June 30, 2020 compared to 238,221 Bbls for the prior year period. The average realized price on the sale of our NGLs increased by 22% to $16.55 per Bbl for the three months ended June 30, 2020 from $13.59 per Bbl for the prior year period.
NGL sales decreased by $3.0 million (43%) to $3.9 million for the six months ended June 30, 2020 from $6.9 million for the prior year period, of which $2.3 million was due to lower sales volumes and $0.7 million was the result of lower product pricing. NGL sales volumes decreased 138,371 Bbls (34%) to 272,586 Bbls for the six months ended June 30, 2020 compared to 410,957 Bbls for the prior year period. The average realized price on the sale of our NGLs decreased by 15% to $14.32 per Bbl for the six months ended June 30, 2020 from $16.80 per Bbl for the prior year period.
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The following table provides a summary of our operating expenses on a per Boe basis:
| (1) | Lease operating expense and workover expense are included together in lease operating and workover expenses on the consolidated statement of operations. |
| (2) | Excludes depreciation related to corporate assets. |
Lease operating expense. Our LOE decreased by $1.6 million (23%) to $5.4 million for the three months ended June 30, 2020 from $6.9 million in the prior year period, but increased $1.45 per Boe to $6.94 per Boe from $5.49 per Boe. In March 2020, we made field operating changes and renegotiated pricing with a number of our vendors due to the material drop in market oil prices, which reduced our costs on an absolute basis. We began realizing most of these new costs savings in the second quarter 2020. However, a portion of our costs are fixed, and the per Boe rate was negatively impacted by our lower production volumes. The three months ended June 30, 2020 also includes a one-time fee to demobilize an amine facility of approximately $0.3 million. We are trying to recover a portion of that charge.
LOE decreased by $3.6 million (23%) to $12.1 million for the six months ended June 30, 2020 from $15.6 million in the prior period, but increased $0.25 per Boe to $6.84 per Boe from $6.59 per Boe for the reasons described above.
Workover expense. Workover expense was immaterial for the three months ended June 30, 2020. As a result of the material drop in oil prices, we deferred workovers for low producing wells until it is economic to service the wells, which drove down absolute and per Boe workover expense for the three and six months ended June 30, 2020. In addition, we have reduced workover expense through conversion of rod pumps to gas lift and redesign of certain rod pump wells to reduce our well failure rates and the associated workover expense going forward.
Gathering, processing and transportation expense (“GP&T”). GP&T decreased by $1.0 million (27%) to $2.7 million ($3.53 per Boe) for the three months ended June 30, 2020 as compared to $3.7 million ($2.96 per Boe) for the three months ended June 30, 2019. In 2020, GP&T fees were primarily incurred on production from the properties we acquired in April 2018. Sales volumes from these assets decreased 15% during the three months ended June 30, 2020 as compared to the prior year period. In addition, in 2019, we incurred $0.3 million of GP&T associated with the Dimmit County assets, which were sold in October 2019. The volume driven decrease in 2020 was partially offset by additional compression expense associated with our midstream partner’s plant expansion in the three months ended June 30, 2020.
GP&T decreased by $0.2 million (3%) to $6.3 million ($3.60 per Boe) for the six months ended June 30, 2020 as compared to $6.6 million ($2.77 per Boe) for the six months ended June 30, 2019. Sales volumes from the assets that generate GP&T were relatively flat during the six months ended June 30, 2020 as compared to the prior year period.
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Production taxes. Our production taxes decreased by $3.4 million (109%) to a credit (income) of $0.3 million for the three months ended June 30, 2020 from $3.1 million for the prior year period, which was driven by our overall decrease in revenue and a severance tax refund from prior periods of at least $1.1 million that the Company expects to receive. Exclusive of the expected severance tax refund, production taxes decreased to 5.7% of total revenue for the three months ended June 30, 2020, as compared to 5.9% of total revenue for the three months ended June 30, 2019.
Our production taxes decreased by $4.5 million (72%) to $1.7 million for the six months ended June 30, 2020 from $6.2 million for the prior year period, which was also driven by our overall decrease in revenue and the aforementioned severance tax refund. Exclusive of the expected severance tax refund, production taxes decreased to 6.1% of total revenue for the six months ended June 30, 2020, as compared to 6.2% of total revenue for the six months ended June 30, 2019.
Depletion, depreciation and amortization expense (“DD&A”). Our DD&A expense related to proved oil and natural gas properties decreased by $2.6 million (11%) to $20.2 million for the three months ended June 30, 2020 from $22.8 million for the prior year period. On a per Boe basis, DD&A increased to $26.15 per Boe for the three months ended June 30, 2020 compared to $18.05 per Boe for the prior year period. DD&A per Boe for the three months ended June 30, 2019, was diluted by production from the Dimmit County assets, which were classified as held for sale and not subject to depletion. The assets were sold in October 2019.
For the six months ended June 30, 2020, DD&A expense related to proved oil and natural gas properties of $44.4 million was relatively flat as compared to the same prior year period. On a per Boe basis, DD&A increased to $25.13 per Boe for the six months ended June 30, 2020 compared to $18.63 per Boe for the prior year period for the reason noted above.
Impairment expense. We did not record any impairment expense during the three months or six months ended June 30, 2020. During the three and six months ended June 30, 2019, we recorded impairment expense of $5.8 million and $9.1 million related to our Dimmit County oil and gas properties, which were classified as held for sale as of June 30, 2019 and subsequently divested in October 2019.
Reserve estimates and related impairments of proved and unproved properties are difficult to predict in a volatile price environment. Due to the supply impacts associated with the competition between Russia and Saudi Arabia for crude oil market share and demand impacts associated with the global COVID-19 pandemic, we may experience proved or unproved property impairments in the future if commodity prices for the products we produce continue to decline, if we experience changes to our longer term development plans or if there are downward adjustments to our reserves.
General and administrative expense (“G&A”). G&A decreased by $1.5 million (27%) to $4.0 million for the three months ended June 30, 2020 as compared to $5.4 million for the prior year. During the three months ended June 30, 2020 we incurred legal and advisory fees of $0.6 million ($0.83 per Boe) to amend our credit agreements and comply with certain covenants, including negotiations with the lenders under our credit agreements to reduce the our total debt and leverage and explore transactions to increase the our capital. During the three months ended June 30, 2019 we incurred legal and accounting fees to complete our Redomiciliation to the U.S of $0.5 million ($0.38 per Boe). G&A, excluding the costs associated with these discrete transactions, decreased on an absolute basis as compared to prior year primarily due to lower salaries and wages as a result of the expected PPP loan forgiveness of $0.8 million attributable to the three months ended June 30, 2020 and our workforce reduction of approximately 18% and also reduced salaries for certain positions, which occurred in early May 2020.
For the six months ended June 30, 2020, G&A decreased by $1.2 million (11%) to $9.5 million as compared to $10.7 million for the same prior year period. During the six months ended June 30, 2020 we incurred legal and advisory fees of $0.6 million ($0.36 per Boe) related to the credit facility amendments as described above and $0.2 million ($0.12 per Boe) for legal and accounting fees to complete our Redomiciliation to the U.S. During the six months ended June 30, 2019 we incurred legal and accounting fees related to the Redomiciliation of $1.0 million ($0.43 per Boe). G&A, excluding the costs associated with these discrete transactions, decreased on an absolute basis as compared to prior year primarily due to lower salaries and wages as a result of the expected PPP loan forgiveness of $0.8 million attributable to the six months ended June 30, 2020 and our workforce and salary reductions.
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As described under Credit Facilities, our G&A for the second and third quarter of 2020, is limited to $3 million per quarter (as defined in the agreements). After the adjustments provided for in the agreements, we were in compliance with the covenant.
Gain/loss on commodity derivative financial instruments. Our commodity derivative contracts are marked to market at the end of each reporting period with the changes in fair value being recognized as gain (loss) on commodity derivative financial instruments, net. Cash flow, however, is only impacted by the monthly settlements paid to or received by the counterparty, which are also recorded as gain(loss) on commodity derivative financial instruments, net. The components of gain (loss) on commodity derivative financial instruments was as follows (in thousands):
Interest expenses, net of amounts capitalized. The components of interest expense, net of amounts capitalized was as follows (in thousands):
The decrease in interest expense on our Term Loan, Revolving Facility and other for the three and six months ended June 30, 2020 as compared to the same prior year period was driven by the decrease in the average market interest rates, partially offset by an increase in the amount of outstanding debt and additional 2% of paid-in-kind (“PIK”) interest, which is added to the principal of the Term Loan. The PIK interest, effective May 30, 2020, was added as part of the Term Loan amendment in June 2020, and totaled $0.4 million for the three and six months ended June 30, 2020. Our weighted average debt outstanding during the three and six months ended June 30, 2020 was $365.0 million versus $350.3 million and $337.9 million, respectively, during the three and six months ended June 30, 2019. At June 30, 2020, the stated weighted average interest rates on the Revolving Facility and the Term Loan were 3.43% and 11.46% (including 2% PIK interest added to the principal at each reporting period), respectively, as compared to 5.18% and 10.32%, respectively, at June 30, 2019.
As described in Note 2, we entered into the fourth amendment to our Revolving Facility in January 2020, which among other things, appointed Toronto Dominion (Texas) LLC, as the administrative agent (replacing Natixis). As a result of the former administrative agent exiting the facility and terminating its commitments, we wrote-off previously capitalized deferred financing fees of $1.1 million during the six months ended June 30, 2020 in accordance with Accounting Standards Codification 470- Debt. We capitalized new financing and legal fees of $1.0 million, which will be amortized over the remaining loan term. In June 2020, we entered into the fifth amendment to our Revolving Facility, which among other things, reduced our borrowing base from $190 million and $170 million. As a result, we wrote-off deferred financing fees in proportion to the decrease in borrowing base of $0.1 million during the three months ended June 30, 2020.
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We recognized a loss on our interest rate swap of $0.2 million and $2.4 million for the three months ended June 30, 2020 and 2019, respectively, and $3.1 million and $4.0 million for the six months ended June 30, 2020 and 2019, respectively. Our interest rate swaps are marked to market at the end of each reporting period, with the changes in fair value being recognized as interest expense. Cash settlements paid to or received by our counterparty are also recorded as interest expense. In the three months ended June 30, 2020, the loss on the interest rate swap consisted of $0.7 million of unrealized gains and $1.0 million of realized cash settlements. In the three months ended June 30, 2019, the loss on the interest rate swap consisted of $2.4 million of unrealized losses and immaterial realized cash settlements. In the six months ended June 30, 2020, the loss on the interest rate swap consisted of $1.6 million of unrealized losses and $1.5 million of realized cash settlements. In the six months ended June 30, 2019, the loss on the interest rate swap consisted of $4.1 million of unrealized losses and immaterial realized cash settlements.
Other income (expense). In the second quarter 2020, we conveyed our non-core 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, we had accrued expenses related to exploratory drilling of approximately $3.7 million. As consideration for the property, the operator settled our outstanding liability for $0.9 million. The property had previously been fully impaired, and therefore the we recognized a gain on the conveyance of $2.8 million during the three and six months ended June 30, 2020, which is recorded in other income (expense) on the consolidated statement of operations. As a result of the conveyance, we were also relieved of our commitment to fund any further exploratory drilling for PEL570.
Income tax expense (benefit). The components of our provision for income tax expense (benefit) and our effective income tax rates were as follows (in thousands):
Our effective income tax rate, as shown above, differs from the statutory rate (21%) primarily due to changes in our valuation allowance.
Adjusted EBITDAX. Management has historically used both GAAP and certain non-GAAP measures to assess our performance. Adjusted EBITDAX is a supplemental non-GAAP financial measure that is used by our management team for various purposes including as a measure of operating performance and as a basis for strategic planning and forecasting, and certain external users of our consolidated financial statements, such as investors and industry analysts.
We define “Adjusted EBITDAX” as earnings before interest expense, income taxes, DD&A, property impairments, gain/(loss) on sale of non-current assets, exploration expense, stock-based compensation, gains and losses on commodity hedging, net of settlements of commodity hedging and certain other non-cash or non-recurring income/expense items. Our computation of Adjusted EBITDAX may not be comparable to other similarly titled measures of other companies.
Management believes Adjusted EBITDAX is useful because it allows us to more effectively evaluate our operating performance, identify operating trends (which may otherwise be masked by the excluded items) and compare the results of our operations from period to period without regard to our financing policies and capital structure. Adjusted EBITDAX should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with GAAP, or as an indicator of our operating performance or liquidity.
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| (1) | In 2019 and early 2020, we incurred one-time costs, primarily legal and accounting fees, to complete our Redomiciliation to the U.S. Additionally, in 2020, we incurred costs to amend our credit facilities and explore transactions to reduce our leverage (as required by the third amendment to the Term Loan). |
| (2) | Other income for the three and six months ended June 30, 2020 includes a $2.8 million gain on the conveyance of PEL570 to the operator. |
Liquidity and Capital Resources
At June 30, 2020, our cash balance totaled $0.3 million and we had negative working capital of $3.7 million, which included the fair value of derivative assets of $33.7 million. We intend to fund our 2020 development plan primarily using our cash flow generated from operating activities (which includes proceeds from settlements of hedging contracts) and cash on hand. At times, we may supplement our working capital through borrowings on our Revolving Facility, as we did in July 2020 ($5 million draw). We expect the July draw to be repaid before year-end. We currently expect our 2020 capital program to be in the range of $40 - $45 million, of which, we had incurred $35.2 million through June 30,2020 (excluding the impact of asset retirement obligations). As described below in Credit Facilities, our capital expenditures for the period May 1, 2020 through September 30, 2020 are limited to $5 million. We plan to continue to respond flexibly to market conditions to protect our balance sheet and retain liquidity.
We and our wholly owned subsidiary, SEI, are parties to a syndicated $250.0 million Term Loan with Morgan Stanley Capital Administrators Inc., as administrative agent, and the Revolving Facility, which is a syndicated reserve-based revolver with Toronto Dominion (Texas) LLC, as administrative agent. We refer to our Revolving Facility and Term Loan collectively as our “credit facilities”. At June 30, 2020, the Revolving Facility had a borrowing base of $170.0 million, of which $115.0 million was outstanding as of June 30, 2020, and $38.6 million undrawn (net of $16.4 million of outstanding letters of credit). On June 30, 2020, we unwound certain of our derivative positions for proceeds of $1.4 million. Our 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 borrowing base. In July, the Company repaid $1.4 million, and then drew down an additional $5 million on the Revolving Facility to meet our working capital needs. Following these events, the borrowing base was $168.6 million with outstanding borrowings of $118.6 million and undrawn capacity of $33.6 million.
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The Revolving Facility matures October 23, 2022, and the Term Loan matures on April 23, 2023. Our Term Loan and Revolving Facility require us to maintain a variety of financial ratios (described below under “Credit Facilities”). As a result of the recent sharp decrease in oil prices and the resulting scaled down development plan, our business is sensitive to the Asset Coverage ratio, particularly in the near term. If the economic downturn continues long-term, it could also impact our ability to meet our other financial covenants. The third amendment to the Term Loan requires that we have a reserve report prepared as of June 30, 2020 by a petroleum engineering firm selected by the lenders. Preparation of the reserve report is in process as of the date of this report, and is expected to be completed no later than September 30, 2020. Except for the Asset Coverage Ratio which has not been calculated as of the date of this report, we were in compliance with the other restrictive and financial covenants in our credit facilities as of June 30, 2020.
Our liquidity is highly dependent on prices we receive for the sale of oil, gas, and NGLs we produce. Prices we receive are determined by prevailing market conditions and greatly influence our revenue, cash flow, profitability, ability to comply with financial and other covenants in our credit facilities, access to capital and future rate of growth. We expect that our commodity derivative positions will help us stabilize a portion of our expected cash flows from operations despite the recent decline in the price of oil and natural gas. At times, we may choose to liquidate derivative positions before the contract ends in order realize the current value of our existing positions, to the extent permitted by our credit facilities Please see Note 6 to our Consolidated Financial Statements for a summary of our outstanding derivative positions as of June 30, 2020.
After the sharp decline in oil pricing in March 2020, we renegotiated pricing with a number of our vendors and we entered into contractual arrangements with drilling and completion service providers at reduced costs. Additionally, we have changed our field operating procedures in response to the material drop in oil prices which further serves to reduce our cost structure. We have also focused on reducing G&A expense, including reducing our workforce in May 2020 to right-size our employee structure for our expected development and operating plans. We are actively working to secure additional cost savings and if commodity prices remain low for a sustained period of time, we expect further reductions to our costs.
If commodity prices remain depressed for an extended period of time or the capital/credit markets become constrained, the borrowing capacity under our Revolving Facility could be reduced further and we may be required to repay some or all of our indebtedness prior to maturity.
The amount, timing and allocation of these and other future expenditures is largely discretionary. As a result, the amount of funds devoted to any particular activity may increase or decrease significantly, depending on available opportunities, timing of projects and market conditions.
Cash Flows
Our cash flows for the six months ended June 30, 2020 and 2019 are as follows:
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|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
||||
|
(In $ ’000s) |
|
2020 |
|
2019 |
||
|
Net cash provided by operating activities |
|
$ |
14,926 |
|
$ |
50,772 |
|
Net cash used in investing activities |
|
$ |
(25,670) |
|
$ |
(91,073) |
|
Net cash provided by financing activities |
|
$ |
(1,172) |
|
$ |
39,702 |
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Cash flows provided by operating activities. Cash provided by operating activities for the six months ended June 30, 2020 was $14.9 million, a decrease of $35.8 million compared to $50.8 million in the prior year period. This decrease was driven by lower revenues resulting from a decrease in production volumes. Including the effect of derivative settlements, including unwound positions, (as shown on page 30), our realized price per Boe increased 5% to $42.41 per Boe as compared to $43.94 per Boe. During the six months ended June 30, 2020, we had cash settlements from our derivative contracts of $27.0 million. In addition, we received $1.9 million of PPP proceeds, which we expect to be forgiven. Due to payment timing, our cash flows from operations for the six months ended June 30, 2020 included three quarterly interest payments on our Term Loan, whereas, the six months ended June 30, 2019 included two quarterly interest payments, which resulted in lower cash flows in 2020 of $6.5 million.
Cash flows used in investing activities. Cash used in investing activities for the six months ended June 30, 2020 decreased to $25.7 million as compared to $91.1 million in prior year period. Cash flows for both periods were primarily related to payment of drilling and completion costs. We slowed our pace of development in 2020 in order to fund our capital expenditures with operating cash flow and cash on hand. In 2019 the cash flows used in investing activities also included a $3.4 million reduction of the amount of capital expenditures in accounts payable and accrued expenditures, where as in 2020, the amount of capital expenditures included in accounts payable and accrued expenditures increased by $11.5 million.
Cash flows provided by financing activities. We used $1.2 million for financing activities during the six months ended June 30, 2020, as compared to cash provided by financing activities of $39.7 million for the six months ended June 30, 2019. We have scaled our 2020 drilling program, so that it may be funded from cash on hand and cash flow from operations; as a result, we did not have any debt draws during period. In January 2020, we paid lender and legal fees totaling $1.0 million to amend our Revolving Facility to increase the borrowing base to $210 million (which was subsequently reduced to $170 million following the industry downturn). During 2019, we borrowed $40.0 million on our Revolving Facility to fund a portion of our 2019 drilling program.
Capital Expenditures
During the six months ended June 30, 2020, we incurred approximately $32.2 million in drilling, completions and facility costs, primarily to complete and equip 6.0 net wells, which were turned to sales in February (2.0) and in late June 2020. We completed our 2020 drilling program in early April 2020 and released the rig shortly thereafter. A decision regarding timing for completing the 2.0 net drilled and uncompleted locations has not been made as of the date of this report.
We expect total capital expenditures to be in the range of $40 - $45 million for the year ending December 31, 2020. However, we intend to continue to flexibly manage our operations, including capital expenditure levels, based on existing and expected market conditions to protect our balance sheet and retain liquidity. We expect to be able to fund our planned capital program for 2020 with cash flow generated from operating activities (which includes settlements from derivatives) and cash on hand.
Credit Facilities
Interest on the Revolving Facility accrues at LIBOR plus a margin that ranges from 2.50% to 3.50% based upon the amount drawn. Interest on the Term Loan accrues at LIBOR (with a LIBOR floor of 1.0%) plus 10.0%., of which 2% of the applicable margin is payable-in-kind, (effective May 30, 2020).
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Under the Revolving Facility, we are 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 ours or SEI’s subordinated indebtedness). |
Under the Term Loan, we are 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 ours or SEI’s subordinated indebtedness); and |
| ● | an Asset Coverage Ratio, consisting of Total Proved PV9% to Total Debt (as defined in the Term Loan agreement), of not less than 1.50 to 1.0. |
In addition, the third amendment to the Term Loan and fifth amendment to the Revolving Facility established maximum capital expenditure ($5 million, as defined in the agreements) from May 1, 2020 through September 30, 2020 and general and administrative amounts ($3 million per quarter, as defined in the agreements) through September 30, 2020.
A breach of any covenants in our credit agreements will result in default under both our Term Loan and cross default on our Revolving Credit Facility, after any applicable grace period. A default, if not waived, could result in acceleration of the amounts outstanding under the Credit Facilities. In the event that some or all of the amounts outstanding under our Credit Facilities are accelerated and become immediately due and payable, we may not have the funds to repay, or the ability to refinance, such outstanding amounts and our lenders could foreclose upon our assets. If we are unable to remain in compliance with our financial and non-financial covenants, we intend to seek a waiver or covenant relief. However, no assurances can be given that we will be able to obtain such relief.
As of June 30, 2020, we were in compliance with all of the financial covenants in our Revolving Facility and Term Loan that had been evaluated at the date of this report. As described above, we are required to maintain an Asset Coverage Ratio of not less than 1.5 to 1.0, which is calculated as the value of our Total Proved Reserves (PV 9%) using Nymex pricing and giving consideration to the value of our commodity derivative instruments, to Total Debt. The third amendment to the Term Loan requires that we have a reserve report prepared as of June 30, 2020 by a petroleum engineering firm selected by our lenders. Preparation of the reserve report was in process as of the date of this report, and is expected to be completed no later than September 30, 2020. The Asset Coverage Ratio as of June 30, 2020 is due no later than September 30, 2020.
The value of our oil and gas reserves, (including “Total Proved Reserves” as described in the Term Loan agreement) is highly sensitive to future commodity prices. We regularly enter into commodity derivative contracts to protect the cash flows associated with our proved developed producing wells and to provide supplemental liquidity to mitigate decreases in revenue due to reductions in commodity prices. In addition, we have renegotiated pricing with a number of our vendors and have already realized cost savings on drilling and completion activities as compared to the rates in effect in 2019. We believe we have, or likely will, be able to implement plans to substantially mitigate any potential breach of covenant related to this pricing downturn. However, we are not able to assert that it is probable that we will remain in compliance with all of our covenants for the 12 months following the date of this Quarterly Report and cannot guarantee that we will be able to obtain waivers if a covenant is breached. This raises uncertainty about our ability to continue as a going concern.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial statements, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
There were no changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), we have evaluated, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended June 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of business. Like other oil and natural gas producers and marketers, our operations are subject to extensive and rapidly changing federal and state environmental, health and safety, and other laws and regulations governing air emissions, wastewater discharges, and solid and hazardous waste management activities. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on our financial position, cash flows or results of operations.
Item 1A. Risk Factors.
Risk factors relating to us are disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, except for the following:
The COVID-19 pandemic and recent developments in the global oil market have had a material adverse impact on our business, financial condition and results of operations, and are likely to have a continuing adverse impact for a significant period of time.
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The COVID-19 pandemic and the responses of governmental authorities and companies across the world has caused a rapid and precipitous drop in the demand for oil, which in turn has caused oil prices to plummet since the first week of March 2020. While certain containment measures have been relaxed, the remaining risks and uncertainty surrounding resurgence and reinstitution of more severe containment measures continue to reduce demand for oil and natural gas. The duration and severity of the impact of COVID-19 on the oil and gas industry, including the reduced demand for oil and natural gas and its resulting impact on commodity prices, may continue until a vaccine or alternative treatment is made widely available across the globe. We are unable to predict when, and if, an effective vaccine or alternative treatment for COVID-19 will become available.
Additionally, in March 2020, OPEC and non-OPEC producers failed to agree to production cuts, resulting in a significant drop in crude oil prices. Saudi Arabia also reduced its export prices to certain markets, while increasing its prices in others. In April 2020, members of OPEC and certain non-OPEC producers agreed to production cuts through first quarter 2022. While these production cuts are expected to reduce excess global crude oil inventories in 2021, they are unlikely to be sufficient to offset the sharp demand decreases caused by COVID-19 in the near-term.
Substantially all of our oil production is sold to purchasers under contracts at market-based prices. Accordingly, low oil prices have and will continue to adversely affecting our operating cash flow and liquidity. While we continue to flexibly manage our operations, including capital expenditure levels, based on existing and expected market conditions, our lower levels of cash flow could affect our borrowing capacity and may require us to voluntarily shut-in production that has become uneconomic, the impact of which is uncertain, but could potentially adversely impact future well performance. Additionally, these conditions may also increase the difficulty in repaying, refinancing or restructuring our long-term debt.
The COVID-19 pandemic is rapidly evolving, and the ultimate impact of this pandemic is highly uncertain and subject to change. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, its severity, the actions to contain the disease or mitigate its impact, related restrictions on travel, and the duration, timing and severity of the impact on domestic and global oil demand, all of which are beyond our control. These factors have had a material adverse impact on our business, financial condition and results of operations, and are likely to have a continuing adverse impact for a significant period of time.
Item 2. Unregistered sales of equity securities and use of proceeds.
None.
Item 6. Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference as part of this report, and such Exhibit Index is incorporated herein by reference.
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EXHIBIT INDEX
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Exhibit
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Description of Exhibit |
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3.1 |
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3.2 |
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10.1 |
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10.2 |
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10.3 |
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10.4 |
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10.5 |
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10.6 |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
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32.1 |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** |
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32.2 |
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** |
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101.INS |
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XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase |
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* |
Filed herewith. |
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** |
Furnished herewith. |
† Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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SUNDANCE ENERGY INC. |
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Date: August 10, 2020 |
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By: |
/s/Eric P. McCrady |
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Name: |
Eric P. McCrady |
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Title: |
Chief Executive Officer and Director |
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By: |
/s/Cathy L. Anderson |
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Name: |
Cathy L. Anderson |
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Title: |
Chief Financial Officer |
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Exhibit 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement (“Agreement”) is made and entered into as of July 8, 2020 by and among Sundance Energy, Inc., a Colorado corporation, and its successors or assigns (“Employer”), Sundance Energy Inc., a Delaware corporation and ultimate parent company of the Sundance group of companies (“Sundance”) and Christopher I. Humber (“Employee”). The parties hereto agree as follows:
| 1. | Employment Terms |
Employer hereby employs Employee, and Employee shall serve as the Executive Vice President, General Counsel and Secretary of both Employer and Sundance (“General Counsel”), upon the terms and conditions hereinafter set forth. The term of Employee’s employment (“Services Term”) will commence on July 20, 2020, and shall continue until the first of the following to occur:
| a) | July 20, 2023, or |
| b) | upon the sooner termination as hereinafter provided in paragraph 7 hereof. |
Any extensions of Employee’s employment relationship with Employer beyond the Services Term shall be “at will,” meaning that either Employee or Employer may terminate Employee’s employment at any time and for any reason or no reason, and with or without Good Cause. Without limiting the foregoing, any provisions of this Agreement which are intended by their terms to continue following the termination of Employee’s employment, including, but not limited to, Employee’s obligations under paragraph 6, shall continue in effect following the termination of this Agreement, for any reason.
| 2. | Duties: Reporting |
| a) | During the Services Term, except as is otherwise expressly set forth herein, Employee shall devote his full business time and attention to Employer and Sundance, and the diligent performance of his duties hereunder. Employee, in his role as General Counsel, shall have such duties, authorities and responsibilities as are commensurate with the position of General Counsel, and such other duties and responsibilities as the Chief Executive Officer of Sundance shall designate that are consistent with the Executive’s position as General Counsel, all in furtherance of the operations of Employer and Sundance relating to the acquisition, exploration and development of oil and gas assets in the Market Area (as defined in paragraph 6(f)) (the “Business”). |
| b) | Employee shall report directly to the Chief Executive Officer of Sundance. Employee hereby accepts such employment and agrees to perform his services hereunder faithfully, diligently and to the best of his ability. Employee shall observe all reasonable rules and regulations adopted by Employer and Sundance in connection with the operation of the Business, including, but not limited to, with respect to confidential information, and carry out to the best of Employee’s ability all lawful instructions of Employer and Sundance. |
| c) | As long as such activities do not materially interfere with Employee’s services to Employer or Sundance hereunder, or compete with the Business, Employee may serve on boards of directors of or provide consulting services to other entities or on boards of charitable or similar organizations. |
| 3. | Duties: Scope |
During the Services Term, Employee shall perform the following duties:
| a) | managing Sundance’s and Employer’s legal and land departments; |
| b) | managing Sundance’s and Employer’s legal, compliance and governance matters; |
| c) | overseeing Sundance’s and Employer’s compliance with and adherence to all Securities and Exchange Commission reporting obligations and applicable rules and regulations; |
| d) | overseeing and managing enterprise risk management and compliance; |
| e) | making reports from time to time to Sundance’s Board of Directors (the “Board”) concerning matters within Employee’s areas of job responsibility; and |
| f) | all ancillary activities to the duties set forth in this Agreement. |
| 4. | Compensation and Benefits |
In full consideration for all rights granted and services rendered by Employee hereunder, during the Service Term, Employer shall pay Employee the Base Salary (as defined below), as adjusted from time to time, and shall cover Employee under the compensation and benefits arrangements as specified below.
| a) | Base Salary. Employee shall receive an annual base salary at the rate of $385,000 per annum, plus any increases to that base salary as determined by the Compensation Committee (“Base Salary”). Such Base Salary shall be adjusted on a pro rata basis for any partial year and shall be paid in equal installments in accordance with Employer’s then prevailing payroll policy. |
| b) | Annual Performance Bonus. Employee shall be eligible to participate in any annual incentive plans adopted by the Board from time to time and applicable to senior executives of Sundance. During each calendar year of the Services Term, Employee will be eligible to earn an annual bonus having a target of seventy-five percent (75%) of Employee’s Base Salary (the “Annual Bonus”), based on the achievement of such Sundance, individual or other performance criteria established and determined by the Compensation Committee of the Board of Directors (“Compensation Committee”). Such Annual Bonus for the 2020 calendar year shall be prorated based on the commencement of the Services Term. Unless otherwise determined by the Compensation Committee, Employee will be eligible to receive an Annual Bonus only if Employee is actively employed in good standing on the date of payment of such Annual Bonus. |
| c) | Equity and Long-term Incentive Compensation. Employee shall be eligible to participate in any long-term incentive plans or equity incentive plans adopted by the Board from time to time and applicable to senior executives of Sundance (each such plan, an “LTI Plan”), including, without limitation, any such LTI Plan adopted for 2020, with a target value of two hundred percent (200%) of the Base Salary. Any awards granted under an LTI Plan (“LTI Awards”) are discretionary and will be subject to the Compensation Committee’s assessment of factors, including, but not limited to, Employee’s performance, as well as business conditions and the performance of Sundance. The type and size of any LTI Awards will be subject to approval by and adjustment at the discretion of the Board or Compensation Committee, as well the terms of any applicable LTI Plan. |
| d) | Benefits. Employee will receive vacation, health insurance and other benefits in accordance with Exhibit A hereto. |
| 5. | Expenses |
To the extent that Employee incurs necessary and reasonable business expenses, including, without limitation, air travel, accommodations and entertainment expenses during the course of his employment hereunder, Employee shall be reimbursed for such expenses upon receipt by Employer of satisfactory evidence thereof. Employee’s travel and accommodation expenses shall include domestic US and international travel (including, but not limited to, Australia, Asia, Europe) for business meetings and conferences related to the Business as well as other activities customarily undertaken by executives in the oil and gas business.
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| 6. | Restrictive Covenants |
| b) | Non-Competition. Employee acknowledges that, in the course of his responsibilities hereunder, Employee will form relationships and become acquainted with certain confidential and proprietary information as further described in paragraph 6(k). Employee further acknowledges that such relationships and information are and will remain valuable to Employer and Sundance and that the restrictions on future employment, if any, are reasonably necessary in order for Employer to remain competitive. In recognition of their heightened need for protection from abuse of relationships formed or information garnered before and during the Services Term of Employee’s employment hereunder, Employee covenants and agrees for the twelve (12) month period immediately following termination of employment (x) by Employer for Good Cause or (y) by Employer without Good Cause or by Employee for Good Reason and the Severance Amount is paid (the “Restrictive Period”), Employee will not be involved in any way (whether directly or indirectly, or solely or jointly with or as a partner, joint venturer, associate, advisor, consultant, manager, employee, independent contractor, agent, principal, director or officer, shareholder, unit holder, trustee, beneficiary or in any other capacity) in: |
| c) | Each of the separate obligations referred to in paragraph 6(b) is severable and has an independent operation from each of the other obligations referred to therein. Employee understands and acknowledges that this restraint is reasonable to protect Sundance’s business. |
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| d) | If any restriction set forth in paragraph 6(b) is found by any court of competent jurisdiction to be unenforceable because of its excessive duration, range of activities or geographic area, or because it otherwise conflicts with applicable law, it will be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable, or as otherwise necessary to comply with applicable law. |
| e) | Employee agrees that he will not, without the prior written consent of the Board, either directly or indirectly participate in or be engaged, concerned or interested in the commission of each prescribed act set forth in this paragraph 6, within the Market Area, during the Restrictive Period. |
| f) | For the purposes of this Agreement, the “Market Area” shall be (i) the counties in the State of Texas in which any part of the Eagle Ford Shale is located and (ii) any other counties in the State of Texas or the State of Colorado that Sundance has, to Employee’s knowledge as of the date of the termination of Employee’s employment, engaged in the Business, or actively pursued material plans to engage in the Business, during the twelve (12) months prior to the date of termination of Employee’s employment. |
| g) | Employee acknowledges that: |
| h) | Employee acknowledges that each of the separate obligations referred to in paragraph 6: |
| i) | If Employee contravenes any of the obligations contained in paragraph 6, then notwithstanding any other provision of this Agreement and any other remedies available to Sundance, Sundance may seek injunctive relief, it being acknowledged that damages would not be an adequate remedy. |
| j) | Notice to Sundance. Employee agrees to notify Sundance immediately of any employers for whom Employee works or provides services (whether or not for remuneration to Employee or a third party) during the Services Term. |
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| k) | Confidential and Proprietary Information; Trade Secrets. Employee covenants and agrees that Employee shall not at any time after the Services Term, without Sundance’s prior written consent, such consent to be within Sundance’s sole and absolute discretion, disclose or make known to any person or entity outside of Sundance any Trade Secret (as defined below), or proprietary or other confidential information concerning Sundance, including, without limitation, Sundance’s customers and its scientific, business or other data practices, procedures, management policies or any other information regarding Sundance, which is not already and generally known to the public through no wrongful act of Employee or any other party. Employee covenants and agrees that Employee shall not at any time during the Services Term, or thereafter, without the Sundance’s prior written consent, utilize any such Trade Secrets, proprietary or confidential information in any way, including communications with or contact with any such customer other than in connection with employment hereunder. For purposes of this paragraph 6, “Trade Secrets” is defined as data or information, including a formula, pattern, compilation, program, device, method, know-how, technique or process, that derives any economic value, present or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who may or could obtain any economic value from its disclosure or use. |
| l) | Former Employer Information. Employee will not intentionally, during the Services Term, improperly use or disclose any proprietary information or Trade Secrets of any former employer or other person or entity and will not improperly bring onto the premises of the Sundance any unpublished document or proprietary information belonging to any such employer, person or entity. |
| m) | Third Party Information. Employee acknowledges that Sundance has received and in the future will receive from third parties their confidential or proprietary information subject to a duty to maintain the confidentiality of such information and to use it only for certain limited purposes. Employee will hold all such confidential or proprietary information in the strictest confidence and will not disclose it to any person or entity or to use it except as necessary in carrying out Employee’s duties hereunder consistent with Sundance’s agreement with such third party. |
| n) | Sundance Property. Employee hereby confirms that Trade Secrets, proprietary or confidential information including, but not limited to, all information concerning Sundance’s processes, procedures, customers, pricing, employee matters, scientific date, etc. constitute Employer’s exclusive property. Employee agrees that upon termination of employment, Employee shall promptly return to Sundance all notes, notebooks, memoranda, computer disks, and any other similar repositories of information containing or relating in any way to the Trade Secrets or proprietary or confidential information of Sundance, including but not limited to, the documents referred to in paragraph 6(k). Such repositories of information also include but are not limited to any so-called personal files or other personal data compilations in any form, which in any manner contain any Trade Secrets, or proprietary or confidential information of Sundance. |
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| o) | Immunity From Liability For Confidential Disclosure Of Trade Secret(s). Pursuant to the Defend Trade Secrets Act of 2016 (18 U.S.C. 1833(b)), Employee shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made in confidence either directly or indirectly to a Federal, State, or local government official, or to an attorney, solely for the purpose of reporting or investigating, a violation of law. Employee shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret made in a complaint, or other document filed in a lawsuit or other proceeding, if such filing is made under seal. If Employee files a lawsuit alleging retaliation by Sundance for reporting a suspected violation of the law, Employee may disclose the trade secret to Employee’s attorney and use the trade secret in the court proceeding, so long as any document containing the trade secret is filed under seal and does not disclose the trade secret, except pursuant to court order. This paragraph will govern to the extent it may conflict with any other provision of this Agreement. |
| p) | Protected Rights. No section in this Agreement, including the sections addressing Employee’s confidentiality obligations, is intended to or shall limit, prevent, impede or interfere in any way with Employee’s right, without prior notice to Sundance, to provide information to the government, participate in investigations, testify in proceedings regarding Employer’s past or future conduct, or engage in any activities protected under whistleblower statutes. |
| q) | Ownership of Intellectual Property. To the extent permitted by law, all rights worldwide with respect to any and all intellectual or other property of any nature produced, created, developed or written, or suggested by Employee resulting from Employee’s services for Sundance shall be deemed to be a work made for hire and shall be the sole and exclusive property of Sundance. Employee agrees to execute, acknowledge and deliver to Employer, at Sundance’s request, such further documents as Sundance finds appropriate to evidence Sundance’s rights in such property. |
| 7. | Termination |
Employee’s employment may be terminated either by Employer or Employee at any time, for any reason, with or without Good Cause, upon written notice specifying the effective date of termination in accordance with this paragraph 7, and without any additional compensation, except as otherwise provided in this paragraph 7.
| a) | Termination by Employer for Good Cause. In the event Employer terminates the employment of Employee for Good Cause, all of the obligations of Employer and Sundance hereunder shall terminate immediately, except that Employer shall be obligated to pay or accord to Employee the Base Salary, benefits and other compensation provided herein accruing or earned through the date of termination (together, the “Final Pay”) within five (5) business days following the date of Employee’s termination or by such earlier date as required by applicable law. As used hereunder, “Good Cause” shall mean: |
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Notwithstanding the foregoing, “Good Cause” shall not be deemed to exist unless Employee has received written notice of termination for Good Cause (which written notice shall state the cause), and, if curable, Employee fails to cure such element of Good Cause within fifteen (15) business days following receipt of such notice or, if longer, such reasonable period as is required to cure such element, as determined by the Board, provided Employee pursues such cure diligently.
| b) | Termination by Employer Without Good Cause or Employee’s Resignation for Good Reason Not in Connection with a Change in Control. In the event Employer terminates Employee’s employment without Good Cause, or Employee resigns for Good Reason (as defined in paragraph 7(h)), in each case other than during the twenty-four (24) months following a Change in Control (as defined in paragraph 7(g)), all of the obligations of Employer and Sundance hereunder shall terminate immediately, except that Employer will pay Employee the Final Pay within five (5) business days following the date of Employee’s termination or by such earlier date as required by applicable law. In addition to the Final Pay, Employer shall pay or provide to Employee: |
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Upon a termination of employment under this paragraph 7(b), Employee shall be entitled only to the benefits provided under this paragraph and will remain bound by the continuing obligations under this Agreement, including without limitation those set forth in paragraphs 6 and 14.
| c) | Employee’s Death. In the event of Employee’s death during the Services Term, this Agreement shall terminate and Employer shall only be obligated to pay Employee’s estate or legal representative the Final Pay, which payment shall be made within five (5) business days following the date of Employee’s death. |
| d) | Employee’s Disability. In the event Employee is unable to perform substantially the services required of Employee hereunder as a result of any disability due to physical or mental injury, disability or illness and such disability continues for a period of one hundred fifty (150) or more consecutive days or an aggregate of two hundred (200) or more days during any twelve (12) month period during the Services Term, then at any time thereafter while such disability continues, Employer shall have the right, at its option, to terminate Employee’s employment hereunder. In the event of such termination, all of the obligations of Employer and Sundance hereunder shall terminate immediately, except that Employer shall be obligated to pay or accord to Employee the Final Pay within five (5) business days following the date of Employee’s termination or by such earlier date as required by applicable law. Unless and until so terminated, during any period of disability during which Employee is unable to perform the services required of Employee hereunder, Employee’s Base Salary hereunder shall nevertheless be paid, and Employer shall be obligated to pay or accord to Employee the benefits and other compensation provided herein. |
| e) | Voluntary Resignation by Employee. This Agreement can be voluntarily terminated by Employee with ninety (90) days written notice to Employer. If Employee so terminates the Agreement pursuant to this paragraph 7(e), then this Agreement shall terminate and Employer shall only be obligated to pay Employee the Final Pay within five (5) business days following the date of Employee’s termination or by such earlier date as required by applicable law. |
| f) | Termination by Employer Without Good Cause or Employee’s Resignation for Good Reason in Connection with a Change in Control. In the event that, during the twenty-four (24) month period following the occurrence of a Change in Control, Employer terminates Employee’s employment without Good Cause or Employee resigns for Good Reason, all of the obligations of Employer and Sundance hereunder shall terminate immediately, except that Employer will pay Employee the Final Pay within five (5) business days following the date of Employee’s termination or by such earlier date as required by applicable law. In addition to the Final Pay, Employer shall pay or provide to Employee: |
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| A. | Notwithstanding the foregoing, if at any time Employer determines, in its sole discretion, that the payment of COBRA premiums or the provision of benefits hereunder is likely to result in a violation of the nondiscrimination rules of Section 105(h)(2) of the Code or any statute or regulation of similar effect (including, without limitation, the 2010 Patient Protection and Affordable Care Act, as amended by the 2010 Health Care and Education Reconciliation Act), then in lieu of providing the COBRA premiums, Employer will instead pay Employee, on the first day of each month of the remainder of the CIC COBRA Payment Period, a fully taxable cash payment equal to the COBRA premiums for that month, subject to applicable tax withholdings and deductions. |
| B. | If Employee becomes eligible for coverage under another employer’s group health plan or otherwise ceases to be eligible for COBRA during the CIC COBRA Payment Period, Employee must immediately notify Employer of such event, and all payments and obligations under this paragraph 7(f)(iii) will cease. For purposes of this paragraph 7(f)(iii), references to COBRA also refer to analogous provisions of state law. Any applicable insurance premiums that are paid by Employer will not include any amounts payable by Employee under a Code Section 125 health care reimbursement plan, which are the sole responsibility of Employee; and |
(iv) acceleration of the vesting of any outstanding LTI Awards granted to Employee, with any such LTI Awards that are subject to performance-based vesting becoming payable at the target level and in an amount that is pro-rated to reflect the portion of the applicable performance or vesting period served by Employee prior to his date of termination, with payment of any such vested awards within sixty (60) days following Employee’s termination or on such earlier date as provided for under the terms of such LTI Awards.
Upon a termination of employment under this paragraph 7(f), Employee shall be entitled only to the benefits provided under this paragraph and will remain bound by the continuing obligations under this Agreement, including without limitation those set forth in paragraphs 6 and 14.
| g) | Good Reason. For purposes of this Agreement, “Good Reason” means the occurrence of any of the following events without Employee’s consent, and subject to Employee’s satisfaction of the conditions in paragraph 7(g)(iv): |
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| h) | Change in Control. For purposes of this Agreement, a “Change in Control” means the occurrence of any of the following events: |
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| i) | Notwithstanding anything in paragraph 7(h) to the contrary, a transaction shall not constitute a Change in Control if it is effected solely for the purpose of changing the place of incorporation or form of organization of Sundance (including where Sundance is succeeded by an issuer incorporated under the laws of another state, country or foreign government for such purpose and whether or not Sundance remains in existence following such transaction), where all or substantially all of the persons or group that beneficially own all or substantially all of the combined voting power of the Sundance’s voting securities immediately prior to the transaction beneficially own all or substantially all of the combined voting power of Sundance in substantially the same proportions of their ownership after the transaction. |
| j) | No Mitigation. If this Agreement shall be terminated by Employer for any reason, Employee shall have no duty to seek other employment or otherwise mitigate damages, and any compensation or other consideration received by Employee followed by any such termination shall not be offset against any of Employer’s obligations hereunder. |
| 8. | Assignment |
In connection with a Change in Control or other transaction involving a merger, consolidation, sale of all or substantially all of Employer’s assets, or other sale of the Business to which this Agreement relates, Employer or Sundance may assign this Agreement or all or any part of its rights and obligations hereunder to an acquiring or surviving party that succeeds to all or substantially all of Employer’s business or assets, and this Agreement shall inure to the benefit of such assignee; provided that nothing shall diminish Employee’s rights, status, position or duties hereunder. Such assignment shall not constitute a breach of this Agreement by Employer or Sundance. Employee acknowledges that this Agreement is a personal services contract and that Employee’s rights and obligations hereunder are not assignable.
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| 9. | Forfeiture and Recoupment |
Notwithstanding any other provision of the Agreement to the contrary, if the Board learns of any material misconduct by Employee that materially contributed to Sundance having to restate all or a portion of its financial statements, the Board will have the right, to the full extent permitted by governing law, in all appropriate cases, to effect the cancellation and recoupment of incentive compensation provided for under paragraphs 4(b) and (c) to the extent that the amount of such incentive compensation was calculated based upon the achievement of financial results that were the subject of the restatement and such amount would have been lower had the financial results been properly reported. In addition, all incentive compensation provided for under paragraphs 4(b) and (c) shall be subject to (a) any recoupment requirement imposed under applicable laws, rules, regulations or stock exchange listing standards, including, without limitation, recoupment requirements imposed pursuant to Section 954 of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or any regulations promulgated thereunder, or recoupment requirements under the laws of any other jurisdiction; (b) the terms and conditions of any recoupment policy adopted by Sundance from time to time to implement such requirements or to facilitate corporate governance; or (c) any other forfeiture or recoupment as provided for in any plan or award agreement governing such incentive compensation.
| 10. | Notices |
All notices, statements and other documents required or desired to be given shall be made in writing and should be made by personal (or messenger) delivery by mail, or by email or fax, and should be addressed to the parties as follows:
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To Employer or Sundance: |
Sundance Energy Inc.
1050 17th Street, Suite 700
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To Employee: |
Christopher I. Humber ************* ************* |
Any party may change its address for purposes of receiving notices, statements or other documents by a notice to the other parties. Notice given by mail shall be deemed to be given three (3) days after the date of mailing thereof. Notice given by email or fax shall be deemed given upon confirmed receipt. Notice by personal (or messenger) delivery shall be deemed given upon confirmed receipt.
| 11. | Waiver |
Employee acknowledges that any consent, waiver, negotiation, decision or approval by Employer or Sundance pursuant to this Agreement (including, without limitation, any amendment to this Agreement) may only be made with the approval of the Board.
| 12. | Representations and Warranties of Employee |
Employee hereby represents and warrants that:
| a) | Employee has full power and authority to enter into this Agreement; |
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| b) | the execution, delivery and performance of this Agreement and the transactions contemplated hereby will not result in a breach of or constitute (with due notice or lapse of time or both) a default under any contact or agreement to which such Employee is a party or by which Employee is bound; and |
| c) | Employee is under no obligations or commitments, whether contractual or otherwise, that are inconsistent with Employee’s obligations under this Agreement. |
| 13. | Specific Enforcement |
Employee acknowledges that a breach of this Agreement is likely to result in irreparable and unreasonable harm to Employer, and that injunctive relief, as well as damages would be an appropriate remedy.
| 14. | Arbitration |
Any dispute or claim arising out of or in connection with any provision of this Agreement will be finally settled by binding arbitration in Denver County, Colorado in accordance with the rules of the American Arbitration Association by one arbitrator appointed in accordance with said rules. The arbitrator shall apply Colorado law, without reference to rules of conflicts of law or rules or statutory arbitration, to the resolution of any dispute. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, the parties may apply to any court of competent jurisdiction for preliminary or interim equitable relief, or to compel arbitration in accordance with this paragraph, without breach of this arbitration provision.
| 15. | Internal Revenue Code Section 409A Compliance |
| a) | The time and form of payment of any payments paid on account of Employee’s termination of employment shall be made in accordance with the above terms of this Agreement, provided that with respect to termination of employment for reasons other than Employee’s death, the payment at such time can be characterized as a “short-term deferral” for purposes of Section 409A of the Code, or as otherwise exempt from the provisions of Code Section 409A as “separation pay,” or if any portion of the payment cannot be so characterized, and Employee is a “specified employee” under Code Section 409A, such portion of the payment shall be delayed until the earlier to occur of Employee’s death or the date that is six (6) months and one day following Employee’s termination of employment (the “Delay Period”). Upon the expiration of the Delay Period, all payments delayed pursuant to this paragraph 15(a) shall be paid or reimbursed to Employee in a lump sum, and any remaining payments due shall be payable at the same time and in the same form as such amounts would have been paid in accordance with their original payment schedule. For purposes of applying the provisions of Code Section 409A, each separately identified amount to which Employee is entitled under this Agreement shall be treated as a separate payment. For purposes of this Agreement, the terms “terminate,” “termination,” “termination of employment,” and variations thereof, as used in this Agreement, are intended to mean a termination of employment that constitutes a “separation from service” under Code Section 409A. |
| b) | The time or schedule of any payment or amount scheduled to be paid pursuant to the terms of this Agreement that provides for the deferral of compensation subject to Code Section 409A, may not be accelerated except as otherwise permitted under Code Section 409A and the guidance and Treasury regulations issued thereunder. |
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| c) | Whenever a payment under this Agreement specifies a payment period, the actual date of payment within such specified period shall be within the sole discretion of Employer, and Employee shall have no right (directly or indirectly) to determine the year in which such payment is made. In the event a payment period straddles two (2) consecutive calendar years, the payment shall be made in the later of such calendar years. |
| d) | Except to the extent any expense, reimbursement or in-kind benefit provided pursuant to this Agreement does not constitute a deferral of compensation subject to Code Section 409A, (i) the amount of expenses eligible for reimbursement or in-kind benefits provided to Employee during any calendar year will not affect the amount of expenses eligible for reimbursement or in-kind benefits provided to Employee in any other calendar year, (ii) the reimbursements for expenses for which Employee is entitled to be reimbursed shall be made on or before the last day of the calendar year following the calendar year in which the applicable expense is incurred, and (iii) the right to payment or reimbursement or in-kind benefits hereunder may not be liquidated or exchanged for any other benefit. |
| e) | Employer and Employee intend that this Agreement and the benefits provided hereunder be interpreted and construed to comply with Code Section 409A to the extent applicable thereto. |
| 16. | Miscellaneous |
| a) | This Agreement supersedes all prior or contemporaneous agreements and statements, whether written or oral, concerning the terms of Employee’s employment, and no amendment or modification of this Agreement shall be binding against Employer unless set forth in writing signed by Employer and delivered to Employee. No waiver by either party of any breach by the other party of any provision or condition of this Agreement shall be deemed a waiver of any similar or dissimilar provision or condition at the same or any prior or subsequent time. |
| b) | The headings set forth herein are included solely for the purpose of identification and shall not be used for the purpose of construing the meaning of the provisions of this agreement. |
| c) | Nothing herein contained shall be construed so as to require the commission of any act contrary to law, and wherever there is any conflict between any provision of this Agreement and any present or future statute, law, ordinance or regulation, the latter shall prevail, but in such event the provision of this Agreement affected shall be curtailed and limited only to the extent necessary to bring it within legal requirements. |
| d) | This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado, without regard to any choice of law provision of that state or the laws of any jurisdiction. In accordance with the Immigration Reform and Control Act of 1986, employment hereunder is conditioned upon satisfactory proof of Employee’s identity and legal ability to work in the United States. |
| e) | All payments and other compensation provided or to be provided to Employee pursuant to this Agreement shall be subject to reduction for withholding requirements in accordance with applicable law. |
| f) | This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. |
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| g) | In the event of any action or suit based upon or arising out of this Agreement, the prevailing party will be entitled to recover reasonable attorneys’ fees and other costs of such action or suit from other party. |
| h) | Part or all of any clause of this Agreement that is illegal or unenforceable will be severed from this Agreement and the remaining provisions of this Agreement will continue in force. |
| i) | To the extent that Employer or Sundance are unable to provide any of the payments or benefits provided for under this Agreement due to an inability to obtain requisite approval by Sundance’s stockholders, then such payments or benefits shall not be paid or provided and such non-payment or provision will not amount to a breach of this Agreement. |
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
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Employer: |
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Employee: |
/s/ Christopher I. Humber |
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Sundance Energy, Inc., a Colorado corporation |
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Date: |
July 8, 2020 |
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By: |
/s/ Eric P. McCrady |
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Eric P. McCrady |
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Chief Executive Officer |
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Date: |
July 8, 2020 |
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Sundance: |
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Sundance Energy Inc., a Delaware corporation |
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By: |
/s/ Eric P. McCrady |
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Eric P. McCrady |
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Chief Executive Officer |
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Date: |
July 8, 2020 |
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Exhibit A
LIST OF BENEFITS
| ● | 200 hours per year of paid time off |
| ● | All Employer-observed holidays |
| ● | Medical insurance for Employee |
A-1
Exhibit 31.1
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
I, Eric P. McCrady, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, of Sundance Energy Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 10, 2020/s/ Eric P. McCrady
Eric P. McCrady
Chief Executive Officer
Exhibit 31.2
CERTIFICATE OF CHIEF FINANCIAL OFFICER
I, Cathy L. Anderson, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, of Sundance Energy Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 10, 2020/s/ Cathy L. Anderson
Cathy L. Anderson
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, for the purposes of 18 U.S.C. Section 1350, in his capacity as Chief Executive Officer of Sundance Energy Inc. (the “Company”), that, to such person’s knowledge:
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(a) |
the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(b) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: August 10, 2020
/s/ Eric P. McCrady
Eric P. McCrady
Chief Executive Officer
This certification is not deemed to be “filed” for purposes of section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. This certification is not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, for the purposes of 18 U.S.C. Section 1350, in her capacity as Chief Financial Officer of Sundance Energy Inc. (the “Company”), that, to such person’s knowledge:
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(a) |
the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(b) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: August 10, 2020
/s/ Cathy L. Anderson
Cathy L. Anderson
Chief Financial Officer
This certification is not deemed to be “filed” for purposes of section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. This certification is not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.