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 2022 when compared to the same period of 2021 and, as a result, we experienced an 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, inflation and 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. The COVID-19 pandemic and the Russia-Ukraine conflict continue to evolve, and the extent to which these events may impact our business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence.
Recent Developments
Settlement Terms In Southern California Pipeline Civil Litigation
On August 25, 2022, we reached an agreement in principle with plaintiffs in the class action to resolve all civil claims against us and our subsidiaries. The settlement of $50.0 million, which also includes certain injunctive relief, will be funded under our insurance policies, and the final agreement will be subject to court approval. On October 17, 2022, counsel to the putative class filed a motion for preliminary approval of the final settlement agreement; that motion is noticed for a hearing with the Court on November 16, 2022.
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Agreement with Prosecutors to Resolve Matters Associated with Southern California Pipeline incident
On August 26, 2022, we reached an agreement with the United States government, which the court has approved, to resolve all federal criminal matters involving us and our subsidiaries stemming from the Incident. As part of the resolution with the United States, we have agreed to plead guilty to one count of misdemeanor negligent discharge of oil in violation of the Clean Water Act. We will pay a fine of approximately $7.1 million in installments over a period of three years, serve a term of four years’ probation and reimburse governmental agencies approximately $5.8 million for their response to this event. We also have agreed to implement certain compliance measures including installation of a new leak detection system and increased Remote Operated Vehicle inspections of the pipeline.
On September 8, 2022, we reached an agreement with the state of California to resolve all related state criminal matters. As part of the resolution with the state of California, which also has court approval, we agreed to enter a plea of No Contest to six misdemeanor charges. We will pay a fine in the amount of $4.9 million to be distributed among the state of California, including the State’s Fish and Game Preservation Fund, and Orange County. We will also serve a one-year term of probation and have agreed to certain compliance enhancements to its operations.
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 nine months ended September 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 Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
($ In thousands except per unit amounts)
Oil and natural gas sales
$
112,812
$
96,841
$
319,562
$
249,510
Other revenues
13,487
160
39,947
353
Lease operating expense
32,048
34,486
98,253
92,045
Gathering, processing and transportation
7,483
5,047
22,774
14,676
Taxes other than income
9,152
6,024
25,328
15,708
Depreciation, depletion and amortization
6,296
7,000
17,795
21,736
General and administrative expense
6,965
6,448
23,364
19,399
Loss (gain) on commodity derivative instruments
(3,300)
46,653
108,675
145,139
Pipeline incident loss
2,606
—
8,278
—
Pipeline incident settlement
12,000
—
12,000
—
Interest expense, net
3,974
3,078
9,499
9,327
Net income (loss)
47,234
(13,470)
27,840
(67,821)
Oil and natural gas revenues:
Oil sales
$
54,394
$
63,172
$
165,686
$
169,377
NGL sales
11,704
11,839
38,789
28,386
Natural gas sales
46,714
21,830
115,087
51,747
Total oil and natural gas revenues
$
112,812
$
96,841
$
319,562
$
249,510
Production volumes:
Oil (MBbls)
606
939
1,743
2,763
NGLs (MBbls)
355
369
1,041
1,080
Natural gas (MMcf)
5,844
6,023
17,079
17,944
Total (MBoe)
1,935
2,312
5,630
6,833
Average net production (MBoe/d)
21.0
25.1
20.6
25.0
Average realized sales price (excluding commodity derivatives):
Oil (per Bbl)
$
89.82
$
67.30
$
95.05
$
61.30
NGL (per Bbl)
32.96
32.05
37.28
26.30
Natural gas (per Mcf)
7.99
3.62
6.74
2.88
Total (per Boe)
$
58.31
$
41.89
$
56.76
$
36.51
Average unit costs per Boe:
Lease operating expense
$
16.56
$
14.92
$
17.45
$
13.47
Gathering, processing and transportation
3.87
2.18
4.05
2.15
Taxes other than income
4.73
2.61
4.50
2.30
General and administrative expense
3.60
2.79
4.15
2.84
Depletion, depreciation and amortization
3.25
3.03
3.16
3.18
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For the Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021
Net income of $47.2 million and a net loss of $13.5 million were recorded for the three months ended September 30, 2022 and 2021, respectively.
Oil, natural gas and NGL revenues were $112.8 million and $96.8 million for the three months ended September 30, 2022 and 2021, respectively. Average net production volumes were approximately 21.0 MBoe/d and 25.1 MBoe/d for the three months ended September 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 September 30, 2021, production from our Beta properties was 3.7 MBoe/d. The average realized sales price was $58.31 per Boe and $41.89 per Boe for the three months ended September 30, 2022 and 2021, respectively. The increase in average realized sales price was primarily due to the increase in commodity prices.
Other revenues were $13.5 million and $0.2 million for the three months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022, we recognized $13.3 million of LOPI proceeds related to the suspension of operations at our Beta properties resulting from the Incident which includes three months of LOPI.
Lease operating expense was $32.0 million and $34.5 million for the three months ended September 30, 2022 and 2021, respectively. The change in lease operating expense was primarily related to a decrease of $5.4 million at our Beta properties, mainly due to the suspension of operations, offset by an increase of $2.9 million related to inflation across our other assets. On a per Boe basis, lease operating expense was $16.56 and $14.92 for the three months ended September 30, 2022 and 2021, respectively. The change in lease operating expense on a per Boe basis was mainly due to the higher aggregate costs noted above and lower production.
Gathering, processing and transportation was $7.5 million and $5.0 million for the three months ended September 30, 2022 and 2021, respectively. The increase was primarily attributable to marketing our own natural gas in Oklahoma starting in October 2021. Marketing our own natural gas in Oklahoma has greatly improved our natural gas differentials, but we must now recognize certain revenue deductions as gathering, processing and transportation expenses on a go-forward basis. On a per Boe basis, gathering, processing and transportation was $3.87 and $2.18 for the three months ended September 30, 2022 and 2021, respectively. The change on a per BOE basis is primarily related to the marketing changes discussed above.
Taxes other than income were $9.2 million and $6.0 million for the three months ended September 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 $4.73 and $2.61 for the three months ended September 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.
Depreciation, depletion & amortization (“DD&A expense”) was $6.3 million and $7.0 million for the three months ended September 30, 2022 and 2021, respectively. The change in DD&A expense was primarily due to a decrease in production of 376 MBoe, which equates to a decrease of approximately $1.1 million offset by an increase of $0.4 million in our depletion rate.
General and administrative expense was $7.0 million and $6.4 million for the three months ended September 30, 2022 and 2021, respectively. The change in general and administrative expense was primarily related to an increase of $0.5 million in salaries and other payroll benefits and an increase of $0.2 million in stock compensation expense offset with a decrease of $0.1 million in legal expense.
Net gain on commodity derivative instruments of $3.3 million were recognized for the three months ended September 30, 2022, consisting of a $44.1 million increase in the fair value of open positions and $40.8 million of cash settlements paid on expired positions. Net loss on commodity derivative instruments of $46.7 million was recognized for the three months ended September 30, 2021, consisting of a $24.1 million decrease in the fair value of open positions and $22.6 million of cash settlements paid on expired positions. The change in commodity derivative instruments is primarily related to the rolling off of out-of-the-money commodity hedges and increased commodity prices.
Pipeline incident loss was $2.6 million for the three months ended September 30, 2022. The $2.6 million reflects certain legal expenses that are not expected to be recovered under an insurance policy. No expense was recorded for the three months ended September 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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Pipeline incident settlement was $12.0 million for the three months ended September 30, 2022, related to the resolution of the federal and state of California matters discussed in Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report. No expense was recorded for the three months ended September 30, 2021.
Interest expense, net was $4.0 million and $3.1 million for the three months ended September 30, 2022 and 2021, respectively. We had an increase of $1.1 million in interest expense due to higher interest rates on our Revolving Credit Facility offset by a decrease of $0.2 million in the change of our interest rate swaps.
Average outstanding borrowings under our Revolving Credit Facility were $214.9 million and $234.9 million for the three months ended September 30, 2022 and 2021, respectively.
For the Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
Net income of $27.8 million and a net loss of $67.8 million were recorded for the nine months ended September 30, 2022 and 2021, respectively.
Oil, natural gas and NGL revenues were $319.6 million and $249.5 million for the nine months ended September 30, 2022 and 2021, respectively. Average net production volumes were approximately 20.6 MBoe/d and 25.0 MBoe/d for the nine months ended September 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 nine months ended September 30, 2021, production from our Beta properties was 3.6 MBoe/d. The average realized sales price was $56.76 per Boe and $36.51 per Boe for the nine months ended September 30, 2022 and 2021, respectively. The increase in average realized sales price was primarily due to the increase in commodity prices.
Other revenues were $39.9 million and $0.4 million for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, we recognized $39.6 million of LOPI proceeds related to the suspension of operations at our Beta properties resulting from the Incident which includes nine months of LOPI.
Lease operating expense was $98.3 million and $92.0 million for the nine months ended September 30, 2022 and 2021, respectively. The change in lease operating expenses was primarily related to a $7.3 million increase in lease operating expenses due to inflation and a $5.9 million increase in our workover expenses primarily in Wyoming and Oklahoma. The increase was offset by a decrease of $6.9 million in lease operating expense at our Beta properties, mainly due to the suspension of operations. On a per Boe basis, lease operating expense was $17.45 and $13.47 for the nine months ended September 30, 2022 and 2021, respectively. The change in lease operating expense on a per Boe basis was due to the higher aggregate costs noted above and lower production.
Gathering, processing and transportation was $22.8 million and $14.7 million for the nine months ended September 30, 2022 and 2021, respectively. The increase was primarily attributable to marketing our own natural gas in Oklahoma starting in October 2021. Marketing our own natural gas in Oklahoma has greatly improved our natural gas differentials, but we must now recognize certain revenue deductions as gathering, processing and transportation expenses on a go-forward basis. On a per Boe basis, gathering, processing and transportation was $4.05 and $2.15 for the nine months ended September 30, 2022 and 2021, respectively. The change on a per BOE basis primarily related to the marketing changes discussed above.
Taxes other than income were $25.3 million and $15.7 million for the nine months ended September 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 $4.50 and $2.30 for the nine months ended September 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 $17.8 million and $21.7 million for the nine months ended September 30, 2022 and 2021, respectively. The change in DD&A expense was primarily due to a decrease in production of 1,201 MBoe, which equates to a decrease of approximately $3.8 million and a decrease of $0.1 million in our depletion rate.
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General and administrative expense was $23.4 million and $19.4 million for the nine months ended September 30, 2022 and 2021, respectively. The change in general and administrative expense was primarily related to (i) an increase of $2.2 million in salaries and other payroll benefits, (ii) an increase of $0.6 million in legal expenses, (iii) an increase of $0.5 million in professional services and (iv) an increase of $0.4 million in stock compensation expense,.
Net loss on commodity derivative instruments of $108.7 million were recognized for the nine months ended September 30, 2022, consisting of a $11.6 million increase in the fair value of open positions and $120.3 million of cash settlements paid on expired positions. Net loss on commodity derivative instruments of $145.1 million was recognized for the nine months ended September 30, 2021, consisting of a $95.0 million decrease in the fair value of open positions and $50.1 million of cash settlements paid on expired positions. The change in commodity derivative instruments is primarily related to the rolling off of out-of-the-money commodity hedges and increased commodity prices.
Pipeline incident loss was $8.3 million for the nine months ended September 30, 2022. The $8.3 million reflects certain legal expenses that are not expected to be recovered under an insurance policy. No expense was recorded for the nine months ended September 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.
Pipeline incident settlement was $12.0 million for the nine months ended September 30, 2022, related to the resolution of the federal and state of California matters discussed in Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report. No expense was recorded for the nine months ended September 30, 2021.
Interest expense, net was $9.5 million and $9.3 million for the nine months ended September 30, 2022 and 2021, respectively. Interest expense included a gain position on our interest rate swaps of $0.9 million for the nine months ended September 30, 2022, compared to a loss position on interest rate swaps of less than $0.1 million for the nine months ended September 30, 2021. In addition, we had an increase of $1.2 million in interest expense due to higher interest rates on our Revolving Credit Facility.
Average outstanding borrowings under our Revolving Credit Facility were $220.7 million and $243.6 million for the nine months ended September 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;
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● 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.
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 Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Net income (loss)
$
47,234
$
(13,470)
$
27,840
$
(67,821)
Interest expense, net
3,974
3,078
9,499
9,327
DD&A
6,296
7,000
17,795
21,736
Accretion of AROs
1,773
1,665
5,242
4,918
Losses (gains) on commodity derivative instruments
(3,300)
46,653
108,675
145,139
Cash settlements (paid) received on expired commodity derivative instruments
(40,771)
(22,595)
(120,310)
(50,086)
Amortization of gain associated with terminated commodity derivatives
—
4,066
—
14,017
Pipeline incident loss
2,606
—
8,278
—
Pipeline incident settlement
12,000
—
12,000
—
Share-based compensation expense
850
676
2,346
1,910
Gain on extinguishment of debt
—
—
—
(5,516)
Loss on settlement of AROs
93
—
508
73
Exploration costs
—
9
26
32
Acquisition and divestiture related expenses
—
—
41
19
Bad debt expense
(5)
14
1
108
Reorganization items, net
—
—
—
6
Other
—
(16)
—
—
Adjusted EBITDA
$
30,750
$
27,080
$
71,941
$
73,862
Reconciliation of Net Cash from Operating Activities to Adjusted EBITDA
For the Three Months Ended
For the Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Net cash provided by operating activities
$
18,934
$
18,884
$
49,330
$
55,287
Changes in working capital
(6,801)
783
(9,010)
(6,465)
Interest expense, net
3,974
3,078
9,499
9,327
Gain (loss) on interest rate swaps
87
(47)
930
(3)
Cash settlements paid (received) on interest rate swaps
(171)
485
136
1,425
Amortization of gain associated with terminated commodity derivatives
—
4,066
—
14,017
Pipeline incident loss
2,606
—
8,278
—
Pipeline incident settlement
12,000
—
12,000
—
Amortization and write-off of deferred financing fees
(133)
(133)
(469)
(493)
Acquisition and divestiture related expenses
—
—
41
19
Plugging and abandonment cost
254
—
1,058
235
Exploration costs
—
9
26
32
Reorganization items, net
—
—
—
6
Other
—
(45)
122
475
Adjusted EBITDA
$
30,750
$
27,080
$
71,941
$
73,862
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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 $30.3 million for the nine months ended September 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 September 30, 2022, we had a working capital deficit of $48.9 million primarily due to short-term derivatives of $44.9 million, accrued liabilities of $59.9 million, revenues payable of $25.4 million, and accounts payable of $25.0 million offset by accounts receivable of $78.9 million, prepaid expenses of $16.1 million and cash on hand of $10.9 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.
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.
As of September 30, 2022, we had approximately $20.0 million of available borrowings under our Revolving Credit Facility.
As of September 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.
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 September 30, 2022, our future commitment under this agreement were $1.3 million for the remaining of 2022, $8.0 million for 2023, $15.8 million a year for years 2024 through 2026 and $110.5 million thereafter. 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 nine months ended September 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 Nine Months Ended
September 30,
2022
2021
(In thousands)
Net cash provided by operating activities
$
49,330
$
55,287
Net cash used in investing activities
(31,553)
(23,253)
Net cash used in financing activities
(25,632)
(25,054)
Operating Activities. Key drivers of net operating cash flows are commodity prices, production volumes and operating costs. Net cash provided by operating activities was $49.3 million and $55.3 million for the nine months ended September 30, 2022 and 2021, respectively. Production volumes were approximately 20.6 MBoe/d and 25.0 MBoe/d for the nine months ended September 30, 2022 and 2021, respectively. The average realized sales price was $56.76 per Boe and $36.51 per Boe for the nine months ended September 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 nine months ended September 30, 2022 included $120.3 million of cash paid on expired commodity derivative instruments compared to $50.1 million of cash paid on expired commodity derivatives for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, we had net losses on commodity derivative instruments of $108.7 million compared to net losses of $145.1 million for the nine months ended September 30, 2021.
Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2022 was $31.6 million, of which $26.2 million was used for additions to oil and natural gas properties. Net cash provided by 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.
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 $5.4 million during the nine months ended September 30, 2022.
Financing Activities . We had net repayments of $25.0 million and $25.0 million for the nine months ended September 30, 2022 and 2021, respectively, related to our Revolving Credit Facility.
Off–Balance Sheet Arrangements
As of September 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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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.