Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Unaudited Condensed
Consolidated Financial Statements and accompanying notes in "Item 1. Financial
Statements" contained herein and in "Item 1A. Risk Factors" of our Annual Report
on the Form 10-K for the year ended
Overview
We operate in one reportable segment engaged in the acquisition, development,
exploitation and production of oil and natural gas properties. Our management
evaluates performance based on the reportable business segment as the economic
environments are not different within the operation of our oil and natural gas
properties. Our business activities are conducted through OLLC, our wholly owned
subsidiary, and its wholly owned subsidiaries. Our assets consist primarily of
producing oil and natural gas properties and are located in
Industry Trends
Oil, natural gas and NGLs prices have decreased in 2023 when compared to the
same period of 2022 and, as a result, we experienced a decrease in revenues. We
continue to monitor the impact of the actions of the
Recent Developments
Commences Restart Operations at Beta Field
On
Certain Officer Departures and Appointments
On
On
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Settlement with the Shipping Companies and Marine Exchange related to the Containerships' Anchor Strike
On
Business Environment and Operational Focus
We use a variety of financial and operational metrics to assess the performance of our oil and natural gas operations, including: (i) production volumes; (ii) realized prices on the sale of our production; (iii) cash settlements on our commodity derivatives; (iv) lease operating expense; (v) gathering, processing and transportation; (vi) general and administrative expense; and (vii) Adjusted EBITDA (as defined below).
Sources of Revenues
Our revenues are derived from the sale of natural gas and oil production, as
well as the sale of NGLs that are extracted from natural gas during processing.
Production revenues are derived entirely from the continental
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates, including a discussion regarding the estimation uncertainty and the impact that our critical accounting estimates have had, or are reasonably likely to have, on our financial condition or results of operations, are described in Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Form 10-K. Significant estimates include, but are not limited to, oil and natural gas reserves; fair value estimates; revenue recognition; and contingencies and insurance accounting. These estimates, in our opinion, are subjective in nature, require the use of professional judgment and involve complex analysis.
When used in the preparation of our consolidated financial statements, such estimates are based on our current knowledge and understanding of the underlying facts and circumstances and may be revised as a result of actions we take in the future. Changes in these estimates will occur as a result of the passage of time and the occurrence of future events. Subsequent changes in these estimates may have a significant impact on our consolidated financial position, results of operations and cash flows.
32 Table of Contents Results of Operations
The results of operations for the three months ended
The following table summarizes certain of the results of operations for the periods indicated. For the Three Months Ended March 31, 2023 2022 ($ In thousands except per unit amounts) Oil and natural gas sales$ 66,284 $ 93,872 Other revenues 13,586 17,561 Lease operating expense 32,960 32,920 Gathering, processing and transportation 5,602 8,010 Taxes other than income 5,293 7,553 Depreciation, depletion and amortization 5,808 5,635 General and administrative expense 8,514 7,771 Loss (gain) on commodity derivative instruments (15,159) 93,404 Pipeline incident loss 8,279 580 Interest expense, net 5,737 2,441 Litigation settlement 84,875 - Income tax (expense) benefit - current (12,527) - Income tax (expense) benefit - deferred 259,470 - Net income (loss) 352,759 (48,614) Oil and natural gas revenues: Oil sales$ 38,816 $ 52,374 NGL sales 7,785 13,481 Natural gas sales 19,683 28,017 Total oil and natural gas revenues$ 66,284 $ 93,872 Production volumes: Oil (MBbls) 535 581 NGLs (MBbls) 325 338 Natural gas (MMcf) 5,303 5,511 Total (MBoe) 1,745 1,837 Average net production (MBoe/d) 19.4 20.4 Average realized sales price (excluding commodity derivatives): Oil (per Bbl)$ 72.52 $ 90.22 NGL (per Bbl) 23.92 39.86 Natural gas (per Mcf) 3.71 5.08 Total (per Boe)$ 37.99 $ 51.10 Average unit costs per Boe: Lease operating expense$ 18.89 $ 17.92 Gathering, processing and transportation 3.21 4.36 Taxes other than income 3.03 4.11 General and administrative expense 4.88 4.23 Depletion, depreciation and amortization 3.33 3.07 33 Table of Contents
For the Three Months Ended
Net income of
Oil, natural gas and NGL revenues were
Other revenues were
Lease operating expense was
Gathering, processing and transportation expense was
Taxes other than income were
DD&A expense was
General and administrative expense was
Net gain on commodity derivative instruments of
Pipeline incident loss was
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Litigation settlement was
Interest expense, net was
Average outstanding borrowings under our Revolving Credit Facility were
Current income tax expense was
Deferred income tax benefit was
Adjusted EBITDA
We include in this report the non-GAAP financial measure of Adjusted EBITDA and provide our reconciliation of Adjusted EBITDA to net income (loss) and net cash flows from operating activities, our most directly comparable financial measures calculated and presented in accordance with GAAP. We define Adjusted EBITDA as net income (loss):
Plus: ? Interest expense; ? Income tax expense; ? DD&A;
? Impairment of goodwill and long-lived assets (including oil and natural gas
properties); ? Accretion of AROs;
? Loss on commodity derivative instruments;
? Cash settlements received on expired commodity derivative instruments;
? Amortization of gain associated with terminated commodity derivatives;
? Losses on sale of assets;
? Share-based compensation expenses;
? Exploration costs; 35 Table of Contents
? Acquisition and divestiture related expenses;
? Reorganization items, net;
? Severance payments; and
? Other non-routine items that we deem appropriate.
Less: ? Interest income; ? Income tax benefit;
? Gain on commodity derivative instruments;
? Cash settlements paid on expired commodity derivative instruments;
? Gains on sale of assets and other, net; and
? Other non-routine items that we deem appropriate.
We believe that Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure.
Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (loss) or cash flows from operating activities as determined in accordance with GAAP or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. We believe that Adjusted EBITDA is a widely followed measure of operating performance and may also be used by investors to measure our ability to meet debt service requirements.
In addition, we use Adjusted EBITDA to evaluate actual cash flow available to develop existing reserves or acquire additional oil and natural gas properties.
The following tables present our reconciliation of the Company's net income (loss ) and cash flows from operating activities to Adjusted EBITDA, our most directly comparable GAAP financial measures, for each of the periods indicated.
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Reconciliation of Net Income (Loss) to Adjusted EBITDA
For the Three Months Ended March 31, 2023 2022 ($ In thousands) Net income (loss)$ 352,759 $ (48,614) Interest expense, net 5,737 2,441 Income tax expense (benefit) - current 12,527 - Income tax expense (benefit) - deferred (259,470) - DD&A 5,808 5,635 Accretion of AROs 1,942 1,720 Losses (gains) on commodity derivative instruments (15,159) 93,404
Cash settlements (paid) received on expired commodity derivative instruments
(2,709) (30,943) Pipeline incident loss 8,279 580 Litigation settlement (84,875) - Share-based compensation expense 941 640 Loss on settlement of AROs - 19 Exploration costs 26 16 Acquisition and divestiture related expenses - 5 Bad debt expense - 10 Adjusted EBITDA$ 25,806 $ 24,913
Reconciliation of
For the Three Months Ended March 31, 2023 2022 ($ In thousands) Net cash provided by operating activities$ 90,313 $ 9,719 Changes in working capital (5,740) 11,373 Interest expense, net 5,737 2,441 Pipeline incident loss 8,279 580 Litigation settlement (84,875) - Income tax expense (benefit) - current 12,527 - Amortization and write-off of deferred financing fees (461) (133) Exploration costs 26 16 Gain (loss) on interest rate swaps - 557 Cash settlements paid (received) on interest rate swaps - 214 Plugging and abandonment cost - 19 Acquisition and divestiture related expenses - 5 Other - 122 Adjusted EBITDA$ 25,806 $ 24,913 37 Table of Contents
Liquidity and Capital Resources
Overview. Our ability to finance our operations, including funding capital expenditures and acquisitions, to meet our indebtedness obligations, to refinance our indebtedness or to meet our collateral requirements will depend on our ability to generate cash in the future. Our primary sources of liquidity and capital resources have historically been cash flows generated by operating activities and borrowings under our Revolving Credit Facility. As we pursue reserve and production growth, we plan to monitor which capital resources, including equity and debt financings, are available to us to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. Based on our current oil and natural gas price expectations, we believe our cash flows provided by operating activities and availability under our Revolving Credit Facility will provide us with the financial flexibility necessary to meet our cash requirements, including normal operating needs, and to pursue our currently planned 2023 development activities. However, future cash flows are subject to a number of variables, including the level of our oil and natural gas production and the prices we receive for our oil and natural gas production, and significant additional capital expenditures will be required to more fully develop our properties. We cannot assure you that operations and other needed capital will be available on acceptable terms, or at all. For the remainder of 2023, we expect our primary funding sources to be from internally generated cash flow, borrowings under our Revolving Credit Facility, and equity and debt capital markets.
Impact of the Southern California Pipeline Incident. We have incurred and will continue to incur certain costs as a result of the Incident. In addition, although the Company has returned the Beta Field to production and initial production rates have exceeded Company forecasts, the full impact to production from the prolonged shut-in remains uncertain and may have a material adverse impact on our business, results of operations and financial condition.
We carry customary insurance policies, which have covered a material portion of
the aggregate costs, including LOPI insurance, to offset loss of revenue
resulting from suspended operations in
In connection with the settlement between the Company and the vessels that
struck and damaged the pipeline and their respective owners and operators, the
Company received a net payment of approximately
Capital Markets. We do not currently anticipate any near-term capital markets activity, but we will continue to evaluate the availability of public debt and equity for funding potential future growth projects and acquisition activity.
Hedging. Commodity hedging has been and remains an important part of our strategy to reduce cash flow volatility. Our hedging activities are intended to support oil, NGL and natural gas prices at targeted levels and to manage our exposure to commodity price fluctuations. We intend to enter into commodity derivative contracts at times and on terms desired to maintain a portfolio of commodity derivative contracts covering at least 30% - 75% of our estimated production from total proved developed producing reserves over a one-to-three-year period at any given point of time. We may, however, from time to time, hedge more or less than this approximate amount. Additionally, we may take advantage of opportunities to modify our commodity derivative portfolio to change the percentage of our hedged production volumes when circumstances suggest that it is prudent to do so. The current market conditions may also impact our ability to enter into future commodity derivative contracts.
We evaluate counterparty risks related to our commodity derivative contracts and trade credit. Should any of these financial counterparties not perform, we may not realize the benefit of some of our hedges under lower commodity prices. We sell our oil and natural gas to a variety of purchasers. Non-performance by a customer could also result in losses.
Valuation Allowance. Net deferred tax assets relate to net operating loss
carryforwards, interest expense carryforwards, tax credits, and other temporary
differences expected to produce tax deductions in future periods. The
realization of these assets depends on recognition of sufficient future taxable
income in specific federal and state tax jurisdictions in which those temporary
differences are deductible. In assessing the need for a valuation allowance on
our deferred tax assets, we consider whether it is more likely than not that
some portion of or all our deferred tax assets will not be realized. On
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As of each reporting date, management considers new evidence, both positive and
negative, that could affect its view of the future realization of deferred tax
assets. The assessment considers all available information including historical
and forecasted taxable income and operating history. The three months ended
Capital Expenditures. Our total capital expenditures were approximately
Working Capital. Working capital is the amount by which current assets exceed current liabilities. Our working capital requirements are primarily driven by changes in accounts receivable and accounts payable, as well as the classification of our debt outstanding. These changes are impacted by changes in the prices of commodities that we buy and sell. In general, our working capital requirements increase in periods of rising commodity prices and decrease in periods of declining commodity prices. However, our working capital needs do not necessarily change at the same rate as commodity prices because both accounts receivable and accounts payable are impacted by the same commodity prices. In addition, the timing of payments received by our customers or paid to our suppliers can also cause fluctuations in working capital because we settle with most of our larger customers on a monthly basis and often near the end of the month. We expect that our future working capital requirements will be impacted by these same factors.
As of
Debt Agreement
Revolving Credit Facility. On
As of
As of
For additional information regarding our Revolving Credit Facility, see Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements included under "Item 1. Financial Statements" of this quarterly report.
Material Cash Requirements
Contractual commitments. We have contractual commitments under our debt agreements, including interest payments and principal payments. See Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements included under "Item 1. Financial Statements" of this quarterly report for additional information.
Lease Obligations. We have operating leases for office and warehouse spaces, office equipment, compressors and surface rentals related to our business obligations. See Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements included under "Item 1. Financial Statements" of this quarterly report for additional information.
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Sinking fund payments. We have a funding requirement to fund a trust account to
comply with supplemental regulatory bonding requirements related to our
decommissioning obligations for our offshore
Cash Flows from Operating, Investing and Financing Activities
The following table summarizes our cash flows from operating, investing and
financing activities for the periods indicated. The cash flows for the three
months ended
For the Three Months EndedMarch 31, 2023 2022 (In thousands)
Net cash provided by operating activities
(10,417) (7,847) Net cash used in financing activities (67,141) (5,066)
Operating Activities. Key drivers of net operating cash flows are commodity
prices, production volumes and operating costs. Net cash provided by operating
activities was
Net cash provided by operating activities for the three months ended
Investing Activities. Net cash used in investing activities for the three months
ended
Various restricted investment accounts fund certain long-term contractual and
regulatory asset retirement obligations and collateralize certain regulatory
bonds associated with our offshore
Financing Activities. We had net repayments of
Off-Balance Sheet Arrangements
As of
Recently Issued Accounting Pronouncements
For a discussion of recent accounting pronouncements that will affect us, see Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements included under "Item 1. Financial Statements" of this quarterly report for additional information.
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