Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and accompanying notes in “Item 1. Financial Statements” contained herein and in “Item 1A. Risk Factors” of our Annual Report on the Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”). The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” in the front of this report.
Overview
We operate in one reportable segment engaged in the acquisition, development, exploitation and production of oil and natural gas properties. Our management evaluates performance based on the reportable business segment as the economic environments are not different within the operation of our oil and natural gas properties. Our business activities are conducted through OLLC, our wholly owned subsidiary, and its wholly owned subsidiaries. Our assets consist primarily of producing oil and natural gas properties and are located in Oklahoma, the Rockies, federal waters offshore Southern California, East Texas / North Louisiana and the Eagle Ford. 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 half of 2022 when compared to the same period of 2021 and, as a result, we experienced a significant increase in revenues. 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 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
Borrowing Base Redetermination and Sixth Amendment
On June 21, 2022, OLLC entered into the Sixth Amendment. The Sixth Amendment amends the Revolving Credit Facility to, among other things:
● terminate the automatic monthly reductions of the borrowing base;
● reaffirm the borrowing base under the Revolving Credit Facility at $225.0 million; and
● modify the affirmative hedging covenant.
Special Case Royalty Relief
On June 8, 2022, the Special Case Royalty Relief for our interest in the Beta Unit was terminated.
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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. Ms. 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
We use a variety of financial and operational metrics to assess the performance of our oil and natural gas operations, including: (i) production volumes; (ii) realized prices on the sale of our production; (iii) cash settlements on our commodity derivatives; (iv) lease operating expense; (v) gathering, processing and transportation; (vi) general and administrative expense; and (vii) Adjusted EBITDA (as defined below).
Sources of Revenues
Our revenues are derived from the sale of natural gas and oil production, as well as the sale of NGLs that are extracted from natural gas during processing. Production revenues are derived entirely from the continental United States. Natural gas, NGL and oil prices are inherently volatile and are influenced by many factors outside our control. 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 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
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; fair value estimates; revenue recognition; and contingencies and insurance accounting. These estimates, in our opinion, are subjective in nature, require the use of professional judgment and involve complex analysis.
When used in the preparation of our consolidated financial statements, such estimates are based on our current knowledge and understanding of the underlying facts and circumstances and may be revised as a result of actions we take in the future. Changes in these estimates will occur as a result of the passage of time and the occurrence of future events. Subsequent changes in these estimates may have a significant impact on our consolidated financial position, results of operations and cash flows.
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Results of Operations
The results of operations for the three and six months ended June 30, 2022 and 2021 have been derived from our unaudited condensed 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 Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
($ In thousands except per unit amounts)
Oil and natural gas sales
$
112,878
$
80,338
$
206,750
$
152,669
Other revenues
8,899
55
26,460
193
Lease operating expense
33,285
28,653
66,205
57,559
Gathering, processing and transportation
7,281
5,050
15,291
9,629
Taxes other than income
8,623
5,071
16,176
9,684
Depreciation, depletion and amortization
5,864
7,389
11,499
14,736
General and administrative expense
8,628
6,030
16,399
12,951
Loss (gain) on commodity derivative instruments
18,571
63,898
111,975
98,486
Pipeline incident loss
5,092
—
5,672
—
Interest expense, net
3,084
3,137
5,525
6,249
Gain on extinguishment of debt
—
5,516
—
5,516
Net income (loss)
29,220
(35,023)
(19,394)
(54,351)
Oil and natural gas revenues:
Oil sales
$
58,918
$
56,510
$
111,292
$
106,205
NGL sales
13,604
8,876
27,085
16,547
Natural gas sales
40,356
14,952
68,373
29,917
Total oil and natural gas revenues
$
112,878
$
80,338
$
206,750
$
152,669
Production volumes:
Oil (MBbls)
557
905
1,137
1,824
NGLs (MBbls)
347
368
685
710
Natural gas (MMcf)
5,725
6,161
11,235
11,922
Total (MBoe)
1,858
2,300
3,695
4,521
Average net production (MBoe/d)
20.4
25.3
20.4
25.0
Average realized sales price (excluding commodity derivatives):
Oil (per Bbl)
$
105.79
$
62.47
$
97.84
$
58.21
NGL (per Bbl)
39.18
24.09
39.51
23.30
Natural gas (per Mcf)
7.05
2.43
6.09
2.51
Total (per Boe)
$
60.74
$
34.93
$
55.95
$
33.76
Average unit costs per Boe:
Lease operating expense
$
17.91
$
12.46
$
17.92
$
12.73
Gathering, processing and transportation
3.92
2.20
4.14
2.13
Taxes other than income
4.64
2.20
4.38
2.14
General and administrative expense
4.64
2.62
4.44
2.86
Depletion, depreciation and amortization
3.16
3.21
3.11
3.26
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For the Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021
Net income of $29.2 million and a net loss of $35.0 million were recorded for the three months ended June 30, 2022 and 2021, respectively.
Oil, natural gas and NGL revenues were $112.9 million and $80.3 million for the three months ended June 30, 2022 and 2021, respectively. Average net production volumes were approximately 20.4 MBoe/d and 25.3 MBoe/d for the three months ended June 30, 2022 and 2021, respectively. The change in production volumes was primarily due to the suspension of operations at our Beta properties and natural declines. For the three months ended June 30, 2021, production from our Beta properties was 3.6 MBoe/d. The average realized sales price was $60.74 per Boe and $34.93 per Boe for the three months ended June 30, 2022 and 2021, respectively. The increase in average realized sales price was primarily due to the increase in commodity prices.
Other revenues were $8.9 million and less than $0.1 million for the three months ended June 30, 2022 and 2021, respectively. For the three months ended June 30, 2022, we recognized $8.8 million of LOPI proceeds related to the suspension of operations at our Beta properties resulting from the Incident which includes two months of LOPI.
Lease operating expense was $33.3 million and $28.7 million for the three months ended June 30, 2022 and 2021, respectively. The change in lease operating expense was primarily related to a $2.8 million increase in workover expense and an increase of $2.1 million in lease operating expenses, offset by the natural decline in production. The increase was primarily attributable to increased expense workover projects in Oklahoma and the Rockies. On a per Boe basis, lease operating expense was $17.91 and $12.46 for the three months ended June 30, 2022 and 2021, respectively. The change in lease operating expense on a per Boe basis was due mainly to higher costs and lower production.
Gathering, processing and transportation was $7.3 million and $5.1 million for the three months ended June 30, 2022 and 2021, respectively. The increase was primarily attributable to 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 $3.92 and $2.20 for the three months ended June 30, 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 $8.6 million and $5.1 million for the three months ended June 30, 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 $4.64 and $2.20 for the three months ended June 30, 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 $5.9 million and $7.4 million for the three months ended June 30, 2022 and 2021, respectively. The change in DD&A expense was primarily due to a decrease in production of 442 MBoe, which equates to a decrease of approximately $1.4 million.
General and administrative expense was $8.6 million and $6.0 million for the three months ended June 30, 2022 and 2021, respectively. The change in general and administrative expense was primarily related to (1) an increase of $1.4 million in salaries and other payroll benefits; (2) an increase of $0.6 million in legal expenses, and (3) an increase of $0.7 million in professional services.
Net loss on commodity derivative instruments of $18.6 million were recognized for the three months ended June 30, 2022, consisting of a $30.0 million increase in the fair value of open positions and $48.6 million of cash settlements paid on expired positions. Net loss on commodity derivative instruments of $63.9 million was recognized for the three months ended June 30, 2021, consisting of a $47.0 million decrease in the fair value of open positions and $16.9 million of cash settlements paid on expired positions.
Pipeline incident loss was $5.1 million for the three months ended June 30, 2022. The $5.1 million reflects legal expenses that the Company has determined will not be reimbursed through the insurance claims process. No expense was recorded for the three months ended June 30, 2021. See Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report for additional information.
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Interest expense, net was $3.1 million and $3.1 million for the three months ended June 30, 2022 and 2021, respectively. Interest expense included a gain position on our interest rate swaps of $0.3 million for the three months ended June 30, 2022, compared to a loss position on interest rate swaps of less than $0.1 million for the three months ended June 30, 2021. In addition, we had an increase of $0.3 million in interest expense due to higher rates on our Revolving Credit Facility.
Average outstanding borrowings under our Revolving Credit Facility were $219.4 million and $242.8 million for the three months ended June 30, 2022 and 2021, respectively.
For the Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
Net losses of $19.4 million and $54.4 million were recorded for the six months ended June 30, 2022 and 2021, respectively.
Oil, natural gas and NGL revenues were $206.8 million and $152.7 million for the six months ended June 30, 2022 and 2021, respectively. Average net production volumes were approximately 20.4 MBoe/d and 25.0 MBoe/d for the six months ended June 30, 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 half of 2021, production from our Beta properties was 3.6 MBoe/d. The average realized sales price was $55.95 per Boe and $33.76 per Boe for the six months ended June 30, 2022 and 2021, respectively. The increase in average realized sales price was primarily due to the increase in commodity prices.
Other revenues were $26.5 million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively. During the first half of 2022, we recognized $26.2 million of LOPI proceeds related to the suspension of operations at our Beta properties resulting from the Incident which includes six months of LOPI.
Lease operating expense was $66.2 million and $57.6 million for the six months ended June 30, 2022 and 2021, respectively. The change in lease operating expense was primarily related to a $5.5 million increase in workover expense and $4.7 million increase in lease operating expense, offset by the natural decline in production. The increase was primarily attributable to increased expense workover projects in Oklahoma and the Rockies. On a per Boe basis, lease operating expense was $17.92 and $12.73 for the six months ended June 30, 2022 and 2021, respectively. The change in lease operating expense on a per Boe basis was due mainly to higher costs and lower production.
Gathering, processing and transportation was $15.3 million and $9.6 million for the six months ended June 30, 2022 and 2021, respectively. The increase was primarily attributable to 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 $4.14 and $2.13 for the six months ended June 30, 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 $16.2 million and $9.7 million for the six months ended June 30, 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 $4.38 and $2.14 for the six months ended June 30, 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 $11.5 million and $14.7 million for the six months ended June 30, 2022 and 2021, respectively. The change in DD&A expense was primarily due to a decrease in production of 826 MBoe, which equates to a decrease of approximately $2.7 million.
General and administrative expense was $16.4 million and $13.0 million for the six months ended June 30, 2022 and 2021, respectively. The change in general and administrative expense was primarily related to (1) an increase of $1.6 million in salaries and other payroll benefits, (2) an increase of $0.7 million in stock compensation expense, (3) an increase of $0.7 million in legal expenses, and (4) an increase of $0.4 million in professional services.
Net loss on commodity derivative instruments of $112.0 million were recognized for the six months ended June 30, 2022, consisting of a $32.4 million decrease in the fair value of open positions and $79.5 million of cash settlements paid on expired positions. Net losses on commodity derivative instruments of $98.5 million was recognized for the six months ended June 30, 2021, consisting of a $71.0 million decrease in the fair value of open positions and $27.5 million of cash settlements paid on expired positions.
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Pipeline incident loss was $5.7 million for the six months ended June 30, 2022. The $5.7 million reflects legal expenses that the Company has determined will not be reimbursed through the insurance claims process. No expense was recorded for the six months ended June 30, 2021. See Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report for additional information.
Interest expense, net was $5.5 million and $6.2 million for the six months ended June 30, 2022 and 2021, respectively. Interest expense included a gain position on our interest rate swaps of $0.8 million for the six months ended June 30, 2022, compared to a gain position on interest rate swaps of less than $0.1 million for the six months ended June 30, 2021. In addition, we had an increase of $0.1 million in interest expense due to higher rates on our Revolving Credit Facility.
Average outstanding borrowings under our Revolving Credit Facility were $223.7 million and $248.0 million for the six months ended June 30, 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 define Adjusted EBITDA as net income (loss):
Plus:
● Interest expense;
● Income tax expense;
● DD&A;
● Impairment of goodwill and long-lived assets (including oil and natural gas properties);
● Accretion of AROs;
● Loss on commodity derivative instruments;
● Cash settlements received on expired commodity derivative instruments;
● Amortization of gain associated with terminated commodity derivatives;
● Losses on sale of assets;
● Share-based compensation expenses;
● Exploration costs;
● Acquisition and divestiture related expenses;
● Reorganization items, net;
● Severance payments; and
● Other non-routine items that we deem appropriate.
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Less:
● Interest income;
● Income tax benefit;
● Gain on commodity derivative instruments;
● Cash settlements paid on expired commodity derivative instruments;
● Gains on sale of assets and other, net; and
● Other non-routine items that we deem appropriate.
We believe that Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure.
Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (loss) or cash flows from operating activities as determined in accordance with GAAP or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. We believe that Adjusted EBITDA is a widely followed measure of operating performance and may also be used by investors to measure our ability to meet debt service requirements.
In addition, we use Adjusted EBITDA to evaluate actual cash flow available to develop existing reserves or acquire additional oil and natural gas properties.
The following tables present our reconciliation of the Company’s net income (loss ) and cash flows from operating activities to Adjusted EBITDA, our most directly comparable GAAP financial measures, for each of the periods indicated.
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Reconciliation of Net Income (Loss) to Adjusted EBITDA
For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
(In thousands)
Net income (loss)
$
29,220
$
(35,023)
$
(19,394)
$
(54,351)
Interest expense, net
3,084
3,137
5,525
6,249
DD&A
5,864
7,389
11,499
14,736
Accretion of AROs
1,749
1,638
3,469
3,253
Losses (gains) on commodity derivative instruments
18,571
63,898
111,975
98,486
Cash settlements (paid) received on expired commodity derivative instruments
(48,596)
(16,855)
(79,539)
(27,491)
Amortization of gain associated with terminated commodity derivatives
—
4,166
—
9,951
Pipeline incident loss
5,092
—
5,672
—
Acquisition and divestiture related expenses
36
7
41
19
Share-based compensation expense
856
903
1,496
1,234
Gain on extinguishment of debt
—
(5,516)
—
(5,516)
Exploration costs
10
7
26
23
Loss on settlement of AROs
396
5
415
73
Bad debt expense
(4)
91
6
94
Reorganization items, net
—
—
—
6
Other
—
—
—
16
Adjusted EBITDA
$
16,278
$
23,847
$
41,191
$
46,782
Reconciliation of Net Cash from Operating Activities to Adjusted EBITDA
For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
(In thousands)
Net cash provided by operating activities
$
20,677
$
20,845
$
30,396
$
36,403
Changes in working capital
(13,582)
(4,526)
(2,209)
(7,248)
Interest expense, net
3,084
3,137
5,525
6,249
Gain (loss) on interest rate swaps
286
(18)
843
44
Cash settlements paid (received) on interest rate swaps
93
476
307
940
Amortization of gain associated with terminated commodity derivatives
—
4,166
—
9,951
Pipeline incident loss
5,092
—
5,672
—
Amortization and write-off of deferred financing fees
(203)
(221)
(336)
(360)
Acquisition and divestiture related expenses
36
7
41
19
Income tax expense - current portion
—
—
—
—
Exploration costs
10
7
26
23
Plugging and abandonment cost
785
5
804
235
Reorganization items, net
—
—
—
6
Other
—
(31)
122
520
Adjusted EBITDA
$
16,278
$
23,847
$
41,191
$
46,782
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Liquidity and Capital Resources
Overview. Our ability to finance our operations, including funding capital expenditures and acquisitions, to meet our indebtedness obligations, to refinance our indebtedness or to meet our collateral requirements will depend on our ability to generate cash in the future. Our primary sources of liquidity and capital resources have historically been cash flows generated by operating activities and borrowings under our Revolving Credit Facility. As we pursue reserve and production growth, we plan to monitor which capital resources, including equity and debt financings, are available to us to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. Based on our current oil and natural gas price expectations, we believe our cash flows provided by operating activities and availability under our Revolving Credit Facility will provide us with the financial flexibility necessary to meet our cash requirements, including normal operating needs, and to pursue our currently planned 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. 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. 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.
Capital Markets. We do not currently anticipate any near-term capital markets activity, but we will continue to evaluate the availability of public debt and equity for funding potential future growth projects and acquisition activity.
Hedging. Commodity hedging has been and remains an important part of our strategy to reduce cash flow volatility. Our hedging activities are intended to support oil, NGL and natural gas prices at targeted levels and to manage our exposure to commodity price fluctuations. We intend to enter into commodity derivative contracts at times and on terms desired to maintain a portfolio of commodity derivative contracts covering at least 50%-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. Additionally, we may take advantage of opportunities to modify our commodity derivative portfolio to change the percentage of our hedged production volumes when circumstances suggest that it is prudent to do so. The current market conditions may also impact our ability to enter into future commodity derivative contracts.
We evaluate counterparty risks related to our commodity derivative contracts and trade credit. Should any of these financial counterparties not perform, we may not realize the benefit of some of our hedges under lower commodity prices. We sell our oil and natural gas to a variety of purchasers. Non-performance by a customer could also result in losses.
Capital Expenditures. Our total capital expenditures were approximately $20.4 million for the six months ended June 30, 2022, which were primarily related to capital workovers, maintenance and facilities located in Oklahoma, East Texas, the Rockies and non-operated drilling and completion activities in East Texas and the Eagle Ford.
Working Capital. Working capital is the amount by which current assets exceed current liabilities. Our working capital requirements are primarily driven by changes in accounts receivable and accounts payable, as well as the classification of our debt outstanding. These changes are impacted by changes in the prices of commodities that we buy and sell. In general, our working capital requirements increase in periods of rising commodity prices and decrease in periods of declining commodity prices. However, our working capital needs do not necessarily change at the same rate as commodity prices because both accounts receivable and accounts payable are impacted by the same commodity prices. In addition, the timing of payments received by our customers or paid to our suppliers can also cause fluctuations in working capital because we settle with most of our larger customers on a monthly basis and often near the end of the month. We expect that our future working capital requirements will be impacted by these same factors.
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As of June 30, 2022, we had a working capital deficit of $78.1 million primarily due to short-term derivatives of $80.0 million, accrued liabilities of $48.9 million, revenues payable of $24.5 million, and accounts payable of $35.0 million offset by accounts receivable of $77.8 million, cash on hand of $16.7 million and prepaid expenses of $15.2 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). 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.
As of June 30, 2022, we had approximately $10.0 million of available borrowings under our Revolving Credit Facility.
As of June 30, 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.
On June 20, 2022, OLLC entered into the Sixth Amendment. The Sixth Amendment amends the Revolving Credit Facility to, among other things:
● terminate the automatic monthly reductions of the borrowing base;
● reaffirm the borrowing base under the Revolving Credit Facility at $225.0 million; and
● modify the affirmative hedging covenant.
For additional information regarding our Revolving Credit Facility, see Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report.
Material Cash Requirements
Contractual commitments. We have contractual commitments under our debt agreements, including interest payments and principal payments. See Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report for additional information.
Lease Obligations. We have operating leases for office and warehouse spaces, office equipment, compressors and surface rentals related to our business obligations. See Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report for additional information.
Sinking fund payments . We have a funding requirement to fund a trust account to comply with supplemental regulatory bonding requirements related to our decommissioning obligations for our offshore Southern California production facilities. As of June 30, 2022, our future commitment under this agreement were $2.7 million for the remaining of 2022. See Note 14 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report for additional information.
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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 six months ended June 30, 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 Six Months Ended
June 30,
2022
2021
(In thousands)
Net cash provided by operating activities
$
30,396
$
36,403
Net cash used in investing activities
(16,914)
(11,575)
Net cash used in financing activities
(15,590)
(20,042)
Operating Activities. Key drivers of net operating cash flows are commodity prices, production volumes and operating costs. Net cash provided by operating activities was $30.4 million and $36.4 million for the six months ended June 30, 2022 and 2021, respectively. Production volumes were approximately 20.4 MBoe/d and 25.0 MBoe/d for the six months ended June 30, 2022 and 2021, respectively. The average realized sales price was $55.95 per Boe and $33.76 per Boe for the six months ended June 30, 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 six months ended June 30, 2022 included $79.5 million of cash paid on expired commodity derivative instruments compared to $27.5 million of cash paid on expired commodity derivatives for the six months ended June 30, 2021. For the six months ended June 30, 2022, we had net losses on commodity derivative instruments of $112.0 million compared to net losses of $98.5 million for the six months ended June 30, 2021.
Investing Activities. Net cash used in investing activities for the six months ended June 30, 2022 was $16.9 million, of which $12.9 million was used for additions to oil and natural gas properties. Net cash provided by investing activities for the six months ended June 30, 2021 was $11.6 million, of which $11.5 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 $4.0 million during the six months ended June 30, 2022.
Financing Activities . We had net repayments of $15.0 million and $20.0 million for the six months ended June 30, 2022 and 2021, respectively, related to our Revolving Credit Facility.
Off–Balance Sheet Arrangements
As of June 30, 2022, we had no off–balance sheet arrangements.
Recently Issued Accounting Pronouncements
For a discussion of recent accounting pronouncements that will affect us, see Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report for additional information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
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