What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-15 · 107 added, 227 removed, 156 unchanged (68% of the section changed)

12 unchanged sentences

Most of our oil and natural gas properties are located in large, mature oil and natural gas reservoirs.

The Company’s properties consist primarily of operated and non-operated working interests in producing and undeveloped leasehold acreage and working interests in identified producing wells.

Industry Trends and Outlook

In March 2020, the World Health Organization classified the outbreak of COVID-19 as a pandemic.

The nature of COVID-19 led to worldwide shutdowns, reductions in commercial and interpersonal activity and changes in consumer behavior.

In attempting to control the spread of COVID-19, governments around the world imposed laws and regulations such as shelter-in-place orders, quarantines, executive orders and similar restrictions.

As a result, the global economy had been marked by significant slowdown and uncertainty, which in turn led to a precipitous decline in commodity prices in response to decreased demand, further exacerbated by certain actions taken by members of the Organization of Petroleum Exporting Countries (“OPEC”) and other non-OPEC producer nations (collectively with OPEC members, “OPEC+”) beginning in the first quarter of 2020 that maintained high levels of global oil production.

As of the first quarter of 2021, commodity prices have recovered to pre-pandemic levels, due in part to the accessibility of vaccines, reopening of economies after the lockdown, and optimism about the economic recovery.

The continued spread of COVID-19, including vaccine resistant strains, or repeated deterioration in oil and natural gas prices could result in additional adverse impacts on the Company’s results of operations, cash flows and financial position, including further asset impairments.

Our properties consist primarily of operated and non-operated working interests in producing and undeveloped leasehold acreage and working interests in identified producing wells.

Industry Trends

Since the start of the COVID-19 pandemic, governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions and stay-at-home orders, among other actions, which caused a significant decrease in activity in the global economy and the demand for oil and to a lesser extent natural gas and NGLs.

As vaccines have become widely available, social distancing guidelines, travel restrictions and stay-at-home orders have eased, activity in the global economy has increased and demand for oil, natural gas and NGLs and related commodity pricing, has improved.

Additionally, oil, natural gas and NGLs prices increased in the first quarter of 2022 when compared to the same period of 2021 and, as a result, we experienced a significant increase in revenues.

As we continue to monitor the impact of the actions of the Organization of the Petroleum Exporting Countries and other large producing nations, the Russia-Ukraine conflict, global inventories of oil and gas and the uncertainty associated with recovering oil demand, future monetary policy and governmental policies aimed at transitioning towards lower carbon energy, we expect prices for some or all of the commodities we produce to remain volatile.

Other factors such as the duration of the COVID-19 pandemic and the speed and effectiveness of vaccine distributions or other medical advances to combat the virus may impact the recovery of world economic growth and the demand for oil, natural gas and NGLs.

Recent Developments

Southern California Pipeline Incident

On October 2, 2021, contractors operating under the direction of Beta Operating Company, LLC (“Beta”), one of our subsidiaries, observed an oil sheen on the water approximately four miles off the coast of Newport Beach, California (the “Incident”).

Beta platform personnel were notified and promptly initiated our Oil Spill Response Plan, which was reviewed and approved by the Bureau of Safety and Environmental Enforcement’s Oil Spill Preparedness Division within the United States Department of the Interior, and which included the required notifications of specified regulatory agencies.

On October 3, 2021, a Unified Command, consisting of the Company, the U.S.

Coast Guard and California Department of Fish and Wildlife’s Office of Spill Prevention and Response, was established to respond to the Incident.

We are and have been fully committed to working cooperatively within the Unified Command and with all relevant agencies to respond to the Incident and supporting all associated ongoing investigations.

On October 5, 2021, the Unified Command announced that reports from its contracted commercial divers and Remotely Operated Vehicle footage indicated that a 4,000-foot section of our pipeline had been displaced with a maximum lateral movement of approximately 105 feet and that the pipeline had a 13-inch split, running parallel to the pipe.

On October 14, 2021, the U.S.

Coast Guard announced that it had a high degree of confidence the size of the release was approximately 588 barrels of oil, which is below the previously reported maximum estimate of 3,134 barrels.

On October 16, 2021, the U.S.

Coast Guard announced that it had identified the Mediterranean Shipping Company (DANIT) as a “vessel of interest” in connection with an anchor-dragging incident, which occurred in close proximity to our pipeline, and that additional vessels of interest continue to be investigated.

The cause, timing and details regarding the Incident are currently under investigation and any information regarding the Incident is preliminary.

Following the Incident, we deployed contractors so that at the height of the Incident response there were over 1,800 personnel working under the guidance and at the direction of the Unified Command to aid in cleanup operations.

As of October 14, 2021, all beaches that had been closed following the Incident have reopened.

On October 15, 2021, the Unified Command announced that reports from trained oil observers and beach cleanup contractors working for the Unified Command showed significant progress in cleanup operations.

On October 18, 2021, the Unified Command stated that segments of beach are recommended for no further clean-up activities.

While the Unified Command has significantly reduced the number of personnel conducting remediation activities from the height of the effort, remediation efforts remain ongoing at November 15, 2021.

We are currently subject to a number of ongoing investigations related to the Incident by certain federal and state agencies.

The outcomes of these investigations and the nature of any remedies pursued will depend on the discretion of the relevant authorities and may result in regulatory or other enforcement actions, as well as civil and criminal liability.

As of November 5, 2021, we and certain of our subsidiaries were named defendants in approximately 13 putative class action suits filed in the United States District Court for the Central District of California, and one complaint for damages was filed against us and one of our subsidiaries in the Superior Court of the State of California, County of Orange - Civil Division, which we removed to the United States District Court for the Central District of California.

All of the actions generally allege that we caused a discharge of oil off the Southern California coast in early October 2021.

The plaintiffs seek unspecified monetary damages, and certain plaintiffs seek various forms of injunctive relief.

We understand that certain plaintiffs intend to file one or more amended consolidated complaints, and the matters may be consolidated into a single action.

Regarding all 14 matters, we deny the allegations and intends to vigorously defend against them.

As of November 5, 2021, there have been no responsive pleadings filed, discovery schedules ordered, or trial dates set in any of the 14 matters.

We are also participating in a related claims process organized under the Oil Pollution Act of 1990, 33 U.S.C.

S 2701 et seq.

Future litigation may be necessary, among other things, to defend ourselves by determining the scope, enforceability, and validity of claims.

The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

Under the OPA 90, our pipeline was designated by the United States Coast Guard as the source of the oil discharge and therefore we are financially responsible for remediation and for certain costs and economic damages as provided for in OPA 90, as well as certain natural resource damages associated with the spill and certain costs determined by federal and state trustees engaged in a joint assessment of such natural resource damages.

We are currently processing covered claims under OPA 90 as expeditiously as possible.

We may, in the future, seek contribution from any third parties, including any vessels that may have played a role in the causes of the Incident, that are liable or potentially liable under OPA or any other law in connection with the Incident.

For additional discussion of the legal proceedings associated with the Incident, see “Part I - Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II - Item 1A.

Risk Factors — Risks Related to the Southern California Pipeline Incident.”

We are unable to estimate total costs for remediation efforts with respect to the Incident because remediation and related activity are still ongoing and because the evaluation and approval of certain incurred third-party and contractor claims related to remediation efforts are in progress.

As of November 11, 2021, we have paid or authorized to pay approximately $17.3 million in costs related to remediation efforts regarding the Incident, of which $3.8 million has been received as a reimbursement by our insurance carriers and the remaining $13.5 million has been approved for reimbursement by our insurance carriers, less the applicable deductible.

There is substantial uncertainty surrounding the full impact that the Incident will have on our financial condition and cash flow generation going forward.

We have incurred and will continue to incur costs as a result of the Incident, and we anticipate that the suspension of production from Beta will lead to a material reduction in revenue from these assets.

We carry customary industry insurance policies, including loss of production income insurance, which we expect will cover a material portion of the total aggregate costs associated with the Incident, including loss of revenue resulting from suspended operations.

However, we can provide no assurance that our coverage will adequately protect us against liability from all potential consequences, damages and losses related to the Incident.

Given the timing of the Incident, no obligation related to the Incident was recorded for the quarter ended September 30, 2021.

Additionally, due to the limited time that has elapsed since the Incident, the ongoing remediation efforts, and the progress of current investigations, we cannot reasonably estimate the total aggregate costs related to the Incident at this time.

For additional discussion of the risks associated with the Incident, see “Item 1A.

Risk Factors — Risks Related to the Southern California Pipeline Incident.”

In accordance with customary insurance practice, we maintain insurance policies, including loss of production income insurance, against many potential losses or liabilities arising from our operations and at costs that we believe to be economic.

We regularly review our risk of loss and the cost and availability of insurance and revise our insurance accordingly.

Our insurance does not cover every potential risk associated with our operations.

While we expect our insurance policies will cover a material portion of the total aggregate costs associated with the Incident, including defense costs and loss of revenue resulting from suspended operations, we can provide no assurance that our coverage will adequately protect us against liability from all potential consequences, damages and losses related to the Incident and such view and understanding is preliminary and subject to change.

In response to the Incident, all operations have been suspended and the pipeline has been shut-in until the we receive the required regulatory approvals to begin operations.

On October 4, 2021, the Pipeline and Hazardous Materials Safety Administration (PHMSA), Office of Pipeline Safety (OPS) issued a Corrective Action Order (CAO) pursuant to 49 U.S.C.

§ 60112, which makes clear that no restart of the affected pipeline may occur until PHMSA has approved a written restart plan.

We are working expeditiously and cooperatively to comply with the requirements of the CAO in order to gain such approvals and any other regulatory approvals that are necessary to restart operations.

At present, given that the pipeline to shore is not operational, no operations are underway in the Beta field.

Borrowing Base Reaffirmation

On November 10, 2021, we completed our scheduled semi-annual borrowing base redetermination process, pursuant to which the borrowing base under the Revolving Credit Facility was reaffirmed at $245.0 million;

provided that, beginning on February 28, 2022, the borrowing base will be reduced by $5.0 million per month on the last calendar day of each month until the next regularly scheduled redetermination, which is expected to occur in April 2022.

Appointment of Certain Directors

On April 7, 2022, the board of directors of the Company appointed Deborah G.

Adams and Eric T.

Greager to the board of directors, effective April 7, 2022.

Adams has also been appointed to the nominating and governance committee of the board of directors, and Mr.

Greager has also been appointed to the compensation committee of the board of directors.

Business Environment and Operational Focus

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In order to reduce the impact of fluctuations in natural gas and oil prices on revenues, we intend to periodically enter into derivative contracts that fix the future prices received.

At the end of each period the fair value of these commodity derivative instruments are estimated and because hedge accounting is not elected, the changes in the fair value of unsettled commodity derivative instruments are recognized in earnings at the end of each accounting period.

At the end of each period, the fair value of these commodity derivative instruments is estimated and because hedge accounting is not elected, the changes in the fair value of unsettled commodity derivative instruments are recognized in earnings at the end of each accounting period.

Critical Accounting Policies and Estimates

A discussion of our critical accounting policies and estimates is included in our 2020 Form 10-K.

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 2021 Form 10 K.

Significant estimates include, but are not limited to, oil and natural gas reserves;

depreciation, depletion and amortization of proved oil and natural gas properties;

future cash flows from oil and natural gas properties;

impairment of long-lived assets;

fair value of derivatives;

fair value of equity compensation;

fair values of assets acquired and liabilities assumed in business combinations and asset retirement obligations.

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.

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Results of Operations

The results of operations for the three and nine months ended September 30, 2021 and 2020 have been derived from our consolidated financial statements.

The results of operations for the three months ended March 31, 2022 and 2021 have been derived from our consolidated financial statements.

The comparability of the results of operations among the periods presented below is impacted by the Incident and suspension of operations at our Beta properties.

The following table summarizes certain of the results of operations for the periods indicated.

For the Three Months Ended

For the Nine Months Ended

September 30,

($ In thousands except per unit amounts)

Oil and natural gas sales

Other revenues

Lease operating expense

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Depreciation, depletion and amortization

Impairment expense

General and administrative expense

Accretion of asset retirement obligations

Loss (gain) on commodity derivative instruments

Loss on commodity derivative instruments

Interest expense, net

Gain on extinguishment of debt

Income tax expense

Oil and natural gas revenues:

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Average net production (MBoe/d)

Average sales price (excluding commodity derivatives):

Average realized sales price (excluding commodity derivatives):

Oil (per Bbl)

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Depletion, depreciation and amortization

For the Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020

Net losses of $13.5 million and $17.7 million were recorded for the three months ended September 30, 2021 and 2020, respectively.

Oil, natural gas and NGL revenues were $96.8 million and $52.5 million for the three months ended September 30, 2021 and 2020, respectively.

Average net production volumes were approximately 25.1 MBoe/d and 27.7 MBoe/d for the three months ended September 30, 2021 and 2020, respectively.

The change in production volumes was primarily due to natural decline.

The average realized sales price was $41.89 per Boe and $20.63 per Boe for the three months ended September 30, 2021 and 2020, respectively.

The increase in average realized sales price was primarily due to the increase in commodity prices.

Commodity prices were depressed in the third quarter of 2020 due to the impact of the pandemic and the effects of OPEC production related to supply and demand decisions.

Lease operating expense was $34.5 million and $27.6 million for the three months ended September 30, 2021 and 2020, respectively.

The change in lease operating expense is primarily due to platform structure inspections at our Beta properties which are performed approximately every 10 years and increase workover expenses.

On a per Boe basis, lease operating expense was $14.92 and $10.86 for the three months ended September 30, 2021 and 2020, respectively.

The increase in lease operating expense on a per Boe basis is primarily driven by higher costs and lower production.

Gathering, processing and transportation was $5.0 million and $5.3 million for the three months ended September 30, 2021 and 2020, respectively.

On a per Boe basis, gathering, processing and transportation was $2.18 and $2.07 for the three months ended September 30, 2021 and 2020, respectively.

The change in gathering, processing and transportation on a per Boe basis is due to higher costs and lower production.

Taxes other than income were $6.0 million and $3.8 million for the three months ended September 30, 2021 and 2020, respectively.

The increase in taxes other than income is due to an increase in production taxes as a result of the increase in commodity prices.

On a per Boe basis, taxes other than income were $2.61 and $1.48 for the three months ended September 30, 2021 and 2020, respectively.

The change in taxes other than income on a per Boe basis was primarily due to the increase in commodity prices.

Depreciation, depletion & amortization (“DD&A expense”) was $7.0 million and $8.0 million for the three months ended September 30, 2021 and 2020, respectively.

The change in DD&A expense was primarily due to a decrease in production from natural decline.

Impairment expense.

No impairment expense recorded for the three months ended September 30, 2021 and 2020, respectively.

General and administrative expense was $6.4 million and $6.4 million for the three months ended September 30, 2021 and 2020, respectively.

The change in general and administrative expense was primarily related to a decrease of $0.3 million in legal expenses and a decrease of $0.1 million in professional services partially offset by an increase of $0.3 million in stock compensation expense.

Net losses (gains) on commodity derivative instruments of $46.7 million were recognized for the three months ended September 30, 2021, consisting of $24.1 million decrease in the fair value of open positions and $22.6 million of cash settlements paid on expired positions.

Net losses on commodity derivative instruments of $14.4 million were recognized for the three months ended September 30, 2020, consisting of a $28.4 million decrease in the fair value of open positions offset by $14.1 million of cash settlement received on expired positions.

Given the volatility of commodity prices, it is not possible to predict future reported mark-to-market net gains or losses and the actual net gains or losses that will ultimately be realized upon settlement of the hedge positions in future years.

If commodity prices at settlement are lower than the prices of the hedge positions, the hedges are expected to partially mitigate the otherwise negative effect on earnings of lower oil, natural gas and NGL prices.

However, if commodity prices at settlement are higher than the prices of the hedge positions, the hedges are expected to dampen the otherwise positive effect on earnings of higher oil, natural gas and NGL prices and will, in this context, be viewed as having resulted in an opportunity cost.

Interest expense, net was $3.1 million and $3.4 million for the three months ended September 30, 2021 and 2020, respectively.

The change in interest expense is primarily related to a decrease of $0.4 million in interest expense primarily due to lower interest rates related to our Revolving Credit Facility.

Average outstanding borrowings under our Revolving Credit Facility were $234.9 million and $274.5 million for the three months ended September 30, 2021 and 2020, respectively.

Gain on extinguishment of debt.

No gain on extinguishment of debt recorded for the three months ended September 30, 2021 and 2020.

For the Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020

Net losses of $67.8 million and $426.2 million were recorded for the nine months ended September 30, 2021 and 2020, respectively.

Oil, natural gas and NGL revenues were $249.5 million and $145.2 million for the nine months ended September 30, 2021 and 2020, respectively.

Average net production volumes were approximately 25.0 MBoe/d and 28.3 MBoe/d for the nine months ended September 30, 2021 and 2020, respectively.

The change in production volumes was primarily due to natural decline and the impact of Winter Storm Uri that caused a severe freeze in areas where we operate, including Texas, Oklahoma and Louisiana, resulting in shut-ins for wells, pipelines and plants for approximately two weeks in February 2021.

The average realized sales price was $36.51 per Boe and $18.69 per Boe for the nine months ended September 30, 2021 and 2020, respectively.

For the Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

Net losses of $48.6 million and $19.3 million were recorded for the three months ended March 31, 2022 and 2021, respectively.

Oil, natural gas and NGL revenues were $93.9 million and $72.3 million for the three months ended March 31, 2022 and 2021, respectively.

Average net production volumes were approximately 20.4 MBoe/d and 24.7 MBoe/d for the three months ended March 31, 2022 and 2021, respectively.

The change in production volumes was primarily due to the suspension of operations at our Beta properties and natural declines.

During the first quarter of 2021, production from our Beta properties was 3.6 MBoe/d.

The average realized sales price was $51.10 per Boe and $32.56 per Boe for the three months ended March 31, 2022 and 2021, respectively.

The increase in average realized sales price was primarily due to the increase in commodity prices.

Commodity prices were depressed in the first half of 2020 due to the impact of the pandemic and the effects of OPEC production related to supply and demand decisions.

Lease operating expense was $92.0 million and $91.2 million for the nine months ended September 30, 2021 and 2020, respectively.

The change in lease operating expense was primarily related to an increase for 2021 projects compared to 2020 offset by the employee retention credit received of $2.0 million for the first and second quarters of 2021, and natural decline in production.

On a per Boe basis, lease operating expense was $13.47 and $11.74 for the nine months ended September 30, 2021 and 2020, respectively.

Other revenues were $17.6 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively.

During the first quarter of 2022, we recognized $17.5 million in loss of production insurance income (“LOPI”) proceeds related to the suspension of operations at our Beta properties resulting from the Incident which includes four months of LOPI.

Lease operating expense was $32.9 million and $28.9 million for the three months ended March 31, 2022 and 2021, respectively.

The change in lease operating expense was primarily related to a $1.7 million increase in workover expense offset by the natural decline in production.

The increase was primarily attributable to increase expense workover projects in Oklahoma and the Rockies.

On a per Boe basis, lease operating expense was $17.92 and $13.01 for the three months ended March 31, 2022 and 2021, respectively.

The change in lease operating expense on a per Boe basis was due mainly to higher cost and lower production.

Gathering, processing and transportation was $14.7 million and $15.0 million for the nine months ended September 30, 2021 and 2020, respectively.

The decrease in gathering, processing and transportation was primarily driven by the decrease in production in first quarter 2021 from Winter Storm Uri partially offset by additional fees from our non-operated wells offset by fee increases from our processing plants and minimum volume commitments.

On a per Boe basis, gathering, processing and transportation was $2.15 and $1.93 for the nine months ended September 30, 2021 and 2020, respectively.

The change in gathering, processing and transportation on a per Boe basis was due to higher costs and lower production.

Taxes other than income were $15.7 million and $9.9 million for the nine months ended September 30, 2021 and 2020, respectively.

Gathering, processing and transportation was $8.0 million and $4.6 million for the three months ended March 31, 2022 and 2021, respectively.

The increase was primarily attributable to us marketing our own natural gas in Oklahoma, resulting in a reclassification of certain revenue deductions to gathering, processing and transportation expenses.

On a per Boe basis, gathering, processing and transportation was $4.36 and $2.06 for the three months ended March 31, 2022 and 2021, respectively.

The change on a per BOE basis primarily related to higher commodity prices and the accounting reclassification discussed above.

Taxes other than income were $7.6 million and $4.6 million for the three months ended March 31, 2022 and 2021, respectively.

The increase in taxes other than income is due to an increase in production taxes as a result of the increase in commodity prices.

On a per Boe basis, taxes other than income were $2.30 and $1.28 for the nine months ended September 30, 2021 and 2020, respectively.

On a per Boe basis, taxes other than income were $4.11 and $2.08 for the three months ended March 31, 2022 and 2021, respectively.

The change in taxes other than income on a per Boe basis was primarily due to the increase in commodity prices.

DD&A expense was $21.7 million and $31.1 million for the nine months ended September 30, 2021 and 2020, respectively.

The change in DD&A expense was primarily due to a decrease in production and a decrease in our DD&A rate.

Impairment expense was $455.0 million for the nine months ended September 30, 2020.

We recognized $405.7 million of impairment expense on proved properties for the nine months ended September 30, 2020.

The estimated future cash flows expected from these properties were compared to their carrying values and determined to be unrecoverable primarily as a result of declining commodity prices in 2020.

We recognized $49.3 million of impairment expense on unproved properties for the nine months ended September 30, 2020, which was related to expiring leases and the evaluation of qualitative and quantitative factors related to the decline in commodity prices in 2020.

No impairment expense was recorded for the nine months ended September 30, 2021.

General and administrative expense was $19.4 million and $21.6 million for the nine months ended September 30, 2021 and 2020, respectively.

The change in general and administrative expense was primarily related to (1) the employee retention credit received of $0.8 million for the first and second quarters of 2021;

(2) a decrease of $0.8 million in salaries and other payroll benefits, (3) a decrease of $0.7 million in professional services, and (4) a decrease of $0.7 million in legal expenses.

The decreases in general and administrative expense were offset with an increase of $1.0 million in stock compensation expense.

Net losses (gains) on commodity derivative instruments of $145.1 million were recognized for the nine months ended September 30, 2021, consisting of $95.0 million decrease in the fair value of open positions and $50.1 million of cash settlements paid on expired positions.

Net gains on commodity derivative instruments of $74.2 million were recognized for the nine months ended September 30, 2020, consisting of $2.3 million increase in the fair value of open positions and $53.9 million of cash settlement paid on expired positions and $18.0 million of cash settlements received on terminated positions.

Interest expense, net was $9.3 million and $17.2 million for the nine months ended September 30, 2021 and 2020, respectively.

Interest expense included $0.5 million and $3.1 million for the amortization and write-off of deferred financing costs for the nine months ended September 30, 2021 and 2020, respectively.

Furthermore, we had a loss position on our interest rate swaps of less than $0.1 million for the nine months ended September 30, 2021, compared to a loss position on interest rate swaps of $4.0 million for the nine months ended September 30, 2020.

DD&A expense was $5.6 million and $7.3 million for the three months ended March 31, 2022 and 2021, respectively.

The change in DD&A expense was primarily due to a decrease in production of 4.3 MBoe/d, which equates to a decrease of approximately $1.2 million.

General and administrative expense was $7.8 million and $6.9 million for the three months ended March 31, 2022 and 2021, respectively.

The change in general and administrative expense was primarily related to (1) an increase of $0.5 million in stock compensation expense, (2) an increase of $0.4 million in salaries and other payroll benefits, and (3) an increase of $0.1 million in legal expenses.

The increases in general and administrative expense were offset by a decrease of $0.3 million in professional services.

Net loss on commodity derivative instruments of $93.4 million were recognized for the three months ended March 31, 2022, consisting of a $62.5 million decrease in the fair value of open positions and $30.9 million of cash settlements paid on expired positions.

Net loss on commodity derivative instruments of $34.6 million was recognized for the three months ended March 31, 2021, consisting of a $24.0 million decrease in the fair value of open positions and $10.6 million of cash settlements paid on expired positions.

Interest expense, net was $2.4 million and $3.1 million for the three months ended March 31, 2022 and 2021, respectively.

Interest expense included a gain position on our interest rate swaps of $0.5 million for the three months ended March 31, 2022, compared to a gain position on interest rate swaps of less than $0.1 million for the three months ended March 31, 2021.

In addition, we had a decrease of $0.2 million in interest expense due to lower borrowings on our Revolving Credit Facility.

Average outstanding borrowings under our Revolving Credit Facility were $243.6 million and $285.6 million for the nine months ended September 30, 2021 and 2020, respectively.

Gain on extinguishment of debt was $5.5 million for the nine months ended September 30, 2021 which is related to the forgiveness of the PPP Loan.

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 regarding the PPP Loan.

Average outstanding borrowings under our Revolving Credit Facility were $228.1 million and $253.3 million for the three months ended March 31, 2022 and 2021, respectively.

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 include in this report the non-GAAP financial measure of Adjusted EBITDA and provide our reconciliation of Adjusted EBITDA to net 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):

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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, management uses 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.

Reconciliation of Net Income (Loss) to Adjusted EBITDA

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 loss and cash flows from operating activities to Adjusted EBITDA, our most directly comparable GAAP financial measures, for each of the periods indicated.

Reconciliation of Net Loss to Adjusted EBITDA

For the Three Months Ended

For the Nine Months Ended

September 30,

(In thousands)

Net income (loss)

Interest expense, net

Income tax expense

Impairment expense

Accretion of AROs

Losses (gains) on commodity derivative instruments

Cash settlements received (paid) on expired commodity derivative instruments

Losses on commodity derivative instruments

Cash settlements paid on expired commodity derivative instruments

Amortization of gain associated with terminated commodity derivatives

1 unchanged sentence

Share-based compensation expense

Pipeline incident loss

Exploration costs

1 unchanged sentence

Bad debt expense

Gain on extinguishment of debt

Reorganization items, net

Severance payments

Adjusted EBITDA

1 unchanged sentence

For the Three Months Ended

For the Nine Months Ended

September 30,

(In thousands)

Net cash provided by operating activities

1 unchanged sentence

Interest expense, net

Gain (loss) on interest rate swaps

Cash settlements paid (received) on interest rate swaps

Cash settlements paid (received) on terminated derivatives

Gain on interest rate swaps

Cash settlements paid on interest rate swaps

Amortization of gain associated with terminated commodity derivatives

Pipeline incident loss

Amortization and write-off of deferred financing fees

Acquisition and divestiture related expenses

Income tax expense - current portion

Exploration costs

1 unchanged sentence

Reorganization items, net

Severance payments

Adjusted EBITDA

Liquidity and Capital Resources

Our ability to finance our operations, including funding capital expenditures and acquisitions, meet our indebtedness obligations, refinance our indebtedness or 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 on hand, cash flows provided by operating activities and borrowings under our Revolving Credit Facility.

For the remainder of 2021, we expect our primary funding sources to be cash flows provided by operating activities, cash on hand and available borrowing capacity under our Revolving Credit Facility.

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 2022 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 2022, 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.

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Although we carry customary insurance policies, including loss of production income insurance, which we expect will cover a material portion of the total aggregate costs associated with the Incident, including loss of revenue resulting from suspended operations, we can provide no assurance that our coverage will adequately protect us against liability from all potential consequences, damages and losses related to the Incident.

Additionally, as discussed in greater detail below, on November 10, 2021, the Company completed its scheduled semi-annual borrowing base redetermination process, pursuant to which the borrowing base under the Revolving Credit Facility was reaffirmed at $245.0 million;

This impact on our borrowing base may limit our liquidity position and may impact our ability to finance our operations.

Capital Markets.

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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%-65% of our estimated production from total proved developed producing reserves over a one-to-three year period at any given point of time to satisfy the hedging covenants in our Revolving Credit Facility and pursuant to our internal policies.

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%-60% 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.

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Capital Expenditures.

Our total capital expenditures were approximately $27.3 million for the nine months ended September 30, 2021, which were primarily related to capital workovers, maintenance and facilities located in Oklahoma, the Rockies and California and non-operated completion activities in the Eagle Ford.

Our total capital expenditures were approximately $6.9 million for the three months ended March 31, 2022, which were primarily related to capital workovers, maintenance and facilities located in Oklahoma and East Texas and non-operated completion activities in the Eagle Ford.

Working Capital.

We expect to fund our working capital needs primarily with operating cash flows.

Furthermore, our expected capital expenditures and debt service requirements are expected to be funded by operating cash flows.

See Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1.

Financial Statements” and “—Overview” of this quarterly report for additional information.

As of September 30, 2021, we had a working capital deficit of $69.3 million primarily due to short-term derivatives of $83.6 million, accrued liabilities of $28.2 million, revenues payable of $21.1 million, and accounts payable of $9.2 million offset by accounts receivable of $44.7 million, cash on hand of $17.3 million and prepaid expenses of $10.7 million.

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 March 31, 2022, we had a working capital deficit of $84.2 million primarily due to short-term derivatives of $103.9 million, accrued liabilities of $53.9 million, revenues payable of $21.9 million, and accounts payable of $26.6 million offset by accounts receivable of $91.9 million, cash on hand of $15.6 million and prepaid expenses of $14.3 million.

Debt Agreement

Revolving Credit Facility.

On November 2, 2018, OLLC as borrower, entered into the Revolving Credit Facility (as amended and supplemented to date) with Bank of Montreal, as administrative agent.

On November 2, 2018, OLLC as borrower, we entered into our Revolving Credit Facility (as amended and supplemented to date).

KeyBank serves as the administrative agent.

Our borrowing base under our Revolving Credit Facility is subject to redetermination on at least a semi-annual basis primarily based on a reserve engineering report.

On June 16, 2021, the Company completed its scheduled semi-annual borrowing base redetermination process, pursuant to which the borrowing base under the Revolving Credit Facility was decreased from $260.0 million to $245.0 million.

Additionally, the administrative agent under the Revolving Credit Facility agreement was changed from Bank of Montreal to KeyBank.

As of September 30, 2021, we had approximately $245.0 million of available borrowings under our Revolving Credit Facility.

As of March 31, 2022, we had approximately $10.0 million of available borrowings under our Revolving Credit Facility.

As of March 31, 2022, we were in compliance with all the financial (current ratio and total leverage ratio) and non-financial covenants associated with our Revolving Credit Facility.

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 regarding our Revolving Credit Facility.

As of September 30, 2021, we were in compliance with all the financial (current ratio and total leverage ratio) and other covenants associated with our Revolving Credit Facility.

On November 10, 2021, the Company completed its scheduled semi-annual borrowing base redetermination process, pursuant to which the borrowing base under the Revolving Credit Facility was reaffirmed at $245.0 million;

This impact on our borrowing base may limit our liquidity position and may impact our ability to finance our operations.

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 regarding our Revolving Credit Facility.

COVID-19 Relief Funding.

On June 22, 2021, the Company was notified by the bank that the PPP Loan was approved for full and complete forgiveness by the Small Business Association.

For the nine months ended September 30, 2021, the Company recorded a gain on extinguishment of debt for $5.5 million in the Unaudited Condensed Consolidated Statements of Operations.

Under the Consolidated Appropriations Act 2021 passed by the U.S.

Congress and signed by the President on December 27, 2020, provisions of the CARES Act were extended and modified making the Company eligible for the employee retention credit subject to meeting certain criteria.

The Company met the criteria for the first and second quarters of 2021 and recognized a $2.8 million employee retention credit during the nine months ended September 30, 2021, which is included as a credit to general and administrative expense and to lease operating expense in the Unaudited Condensed Consolidated Statements of Operations.

Financial Statements” of this quarterly report for additional information.

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 nine months ended September 30, 2021 and 2020 have been derived from our Unaudited Condensed Consolidated Financial Statements.

For information regarding the individual components of our cash flow amounts, see the Unaudited Condensed Consolidated Statements of Cash Flows included under “Item 1.

The cash flows for the three months ended March 31, 2022 and 2021 have been derived from our Unaudited Condensed Consolidated Financial Statements.

For information regarding the individual components of our cash flow amounts, see our Unaudited Condensed Consolidated Statements of Cash Flows included under “Item 1.

Financial Statements” of this quarterly report.

For the Nine Months Ended

September 30,

For the Three Months Ended

(In thousands)

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Key drivers of net operating cash flows are commodity prices, production volumes and operating costs.

Net cash provided by operating activities was $55.3 million and $63.6 million for the nine months ended September 30, 2021 and 2020, respectively.

Production volumes were approximately 25.0 MBoe/d and 28.3 MBoe/d for the nine months ended September 30, 2021 and 2020, respectively.

The average realized sales price was $36.51 per Boe and $18.69 per Boe for the nine months ended September 30, 2021 and 2020, respectively.

Net cash provided by operating activities was $9.7 million and $15.6 million for the three months ended March 31, 2022 and 2021, respectively.

Production volumes were approximately 20.4 MBoe/d and 24.7 MBoe/d for the three months ended March 31, 2022 and 2021, respectively.

The average realized sales price was $51.10 per Boe and $32.56 per Boe for the three months ended March 31, 2022 and 2021, respectively.

The change in average realized sales price was primarily due to the increase in commodity prices.

Net cash provided by operating activities for the nine months ended September 30, 2021 included $51.5 million of cash paid on expired derivative instruments compared to $53.1 million of cash receipts on expired derivatives and $18.0 million of cash receipts on terminated derivative instruments for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, we had net losses on derivative instruments of $145.1 million compared to a net gains of $70.2 million for the nine months ended September 30, 2020.

In addition, the Company recorded a $5.5 million gain on extinguishment of debt related to the forgiveness of the PPP Loan.

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 regarding the PPP Loan.

Net cash provided by operating activities for the three months ended March 31, 2022 included $30.9 million of cash paid on expired commodity derivative instruments compared to $10.6 million of cash paid on expired commodity derivatives for the three months ended March 31, 2021.

For the three months ended March 31, 2022, we had net losses on commodity derivative instruments of $93.4 million compared to net losses of $34.6 million for the three months ended March 31, 2021.

Investing Activities.

Net cash used in investing activities for the nine months ended September 30, 2021 was $23.3 million, of which $23.1 million was used for additions to oil and natural gas properties.

Net cash provided by investing activities for the nine months ended September 30, 2020 was $32.1 million, of which $31.2 million was used for additions to oil and natural gas properties.

Net cash used in investing activities for the three months ended March 31, 2022 was $7.8 million, of which $5.2 million was used for additions to oil and natural gas properties.

Net cash provided by investing activities for the three months ended March 31, 2021 was $4.1 million, of which $3.8 million was used for additions to oil and natural gas properties.

Various restricted investment accounts fund certain long-term contractual and regulatory asset retirement obligations and collateralize certain regulatory bonds associated with our offshore Southern California properties.

Additions to restricted investments were $2.7 million during the three months ended March 31, 2022.

Financing Activities .

The Company had net repayments of $25.0 million and $20.0 million for the nine months ended September 30, 2021 and 2020, respectively, related to our Revolving Credit Facility.

For the nine months ended September 30, 2020, the Company paid out $3.8 million in dividends on March 30, 2020 to stockholders of record at the close of business on March 16, 2020.

The board of directors subsequently suspended quarterly dividends.

Future dividends, if any, are subject to debt covenants under our Revolving Credit Facility and discretionary approval by the board of directors.

As noted above, the Company received forgiveness for the $5.5 million PPP Loan received in April 2020.

We had net repayments of $5.0 million for the three months ended March 31, 2022 and 2021, respectively, related to our Revolving Credit Facility.

Off–Balance Sheet Arrangements

As of September 30, 2021, we had no off–balance sheet arrangements.

As of March 31, 2022, we had no off–balance sheet arrangements.

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis