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.




                                       27

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:




                   Three months ended                             Six

months ended


                        June 30,                Change                June 30,               Change
Revenue (In
$ '000s):           2020         2019         $          %        2020       2019          $          %
Oil sales        $    11,733   $ 46,147   $ (34,414)     (75)   $ 40,089   $  86,943   $ (46,854)     (54)
Natural gas
sales                  1,191      3,516      (2,325)     (66)      3,378       6,794      (3,416)     (50)
NGL sales              2,103      3,238      (1,135)     (35)      3,903       6,904      (3,001)     (43)
Other                    103          -          103      100        103

- 103 100 Total revenue $ 15,130 $ 52,901 $ (37,771) (71) $ 47,473 $ 100,641 $ (53,168) (53)







                   Three months ended                                 Six months ended
                        June 30,                  Change                  June 30,                   Change
Net sales
volumes:           2020         2019         Volume        %         2020          2019         Volume        %
Oil (Bbls)         507,224       745,129     (237,905)     (32)     1,151,752     1,467,525     (315,773)     (22)
Natural gas
(Mcf)              836,040     1,688,005     (851,965)     (50)     2,038,493     2,960,551     (922,058)     (31)
NGL (Bbls)         127,038       238,221     (111,183)     (47)       272,586       410,957     (138,371)     (34)
Oil equivalent
(Boe)              773,602     1,264,684     (491,082)     (39)     1,764,087     2,371,907     (607,820)     (26)
Average daily
production
(Boe/d)              8,501        13,898       (5,397)     (39)        

9,693        13,104       (3,411)     (26)





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 oil­weighted, 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.



                                       28

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.



                                       29

The following table provides a summary of our operating expenses on a per Boe
basis:




                        Three months ended June 30,              Change              Six months ended June 30,              Change
Selected per Boe
metrics                   2020               2019             $           %            2020              2019            $           %
Total oil, natural
gas and NGL
revenues (price
received)            $         19.56    $         41.83      (22.27)       (53)   $        26.91    $        42.43      (15.52)       (37)
Effect of
commodity
derivatives on
average price                  26.47             (0.13)        26.60   (20,462)            15.50              1.51        13.99        926
Total oil, natural
gas and NGL
revenues (price
realized)            $         46.03    $         41.70         4.33         10   $        42.41    $        43.94       (1.53)        (3)
Lease operating
expense (1)          $        (6.94)    $        (5.49)       (1.45)       (26)   $       (6.84)    $       (6.59)       (0.25)        (4)
Workover expense
(1)                  $        (0.02)    $        (1.14)         1.12         98   $       (0.84)    $       (1.22)         0.38         31
Gathering,
processing and
transportation
expense              $        (3.53)    $        (2.96)       (0.57)       (19)   $       (3.60)    $       (2.77)       (0.83)       (30)
Production taxes     $          0.37    $        (2.46)         2.83        115   $       (0.98)    $       (2.63)         1.65         63
Depreciation,
depletion and
amortization (2)     $       (26.15)    $       (18.05)       (8.10)       (45)   $      (25.13)    $      (18.63)       (6.50)       (35)
General and
administrative
expense              $        (5.13)    $        (4.29)       (0.84)       (20)   $       (5.40)    $       (4.52)       (0.88)       (19)

(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.



                                       30


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.

                                       31

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):




                                  Three months ended                      Six months ended
                                       June 30,                               June 30,
                                   2020         2019       $ Change      2020         2019       $ Change
Unrealized gains (losses)       $ (43,498)    $ 10,455    $ (53,953)   $ 45,506    $ (26,639)    $  72,145
Realized gains (losses)             20,480       (168)        20,648     27,339         3,583       23,756
Total gain (loss) on
commodity derivative
financial instruments           $ (23,018)    $ 10,287    $ (33,305)   $ 72,845    $ (23,056)    $  95,901

Interest expenses, net of amounts capitalized. The components of interest expense, net of amounts capitalized was as follows (in thousands):




                                    Three months ended June 30,      Change      Six months ended June 30,      Change
Interest Expense                     2020               2019            $          2020             2019           $
Interest expense on Term Loan,
Revolving Facility and other            7,585               8,177      (592)        15,375            16,174      (799)
Amortization of debt issuance
costs                                     909                 832         77         1,843             1,597        246
Expense incurred with debt
modification                              143                   -        143         1,199                 -      1,199
Loss on interest rate swap                248               2,406    (2,158)         3,085             4,026      (941)
Capitalized interest                    (241)               (809)        568         (481)           (1,412)        931
Total                                   8,644              10,606    (1,962)        21,021            20,385        636




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.

                                       32

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):




                                        Three months ended June 30,                      Six months ended June 30,
Income tax expense (benefit)                2020              2019       Change in $      2020             2019         Change in $
Current tax expense (benefit)                       13              -             13         (70)                  -           (70)
Deferred tax expense/(benefit)                (10,205)            323       (10,528)        1,445            (4,051)          5,496
Total income tax expense (benefit)            (10,192)            323      

(10,515)        1,375            (4,051)          5,426
Effective tax rate                               22.2%          10.9%                        5.3%              10.5%

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.

                                       33


                                                                     Three months ended June 30,         Six months ended June 30,
                                                                       2020               2019             2020                 2019

Reconciliation of Net Income (Loss) to Adjusted
EBITDAX (in $ 000's)
Net income (loss)                                                 $

(35,771) $ 2,643 $ 24,471 $ (34,566) Add back: Current and deferred income tax expense (benefit)

                       (10,192)                323           1,375                 (4,051)
Interest expense                                                           8,644             10,606          21,021                  20,385
Loss (gain) on commodity derivative financial instruments, net            23,018           (10,287)        (72,845)                  23,056
Settlement of commodity derivatives financial instruments                 20,480              (168)          27,339                   3,583
Depreciation, depletion and amortization expense                          20,415             22,958          44,769                  44,462
Impairment expense                                                             -              5,753               -                   9,083
Exploration expense                                                           24                  7             173                      22

Noncash stock-based compensation expense                                      91                142             195                     277

Transaction-related expenses included in general and administrative expenses (1)

                                                  640                487             859                   1,014

Reduction-in-force related expenses included in general and administrative expenses

                                                      188                  -             188                       -
Other expense (income), net (2)                                          (2,559)                230         (2,559)                     210
Adjusted EBITDAX                                                  $       24,978     $       32,694    $     44,986      $           63,475




     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

(1) 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.

                                       34


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:


                                               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






                                       35

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).

                                       36

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.



                                       37

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.

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