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, 2022 (“2022 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
Commodity prices have decreased in 2023 when compared to the same period of 2022, and as a result, we experienced a decline 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, conflicts in the Middle East, 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, the Russia-Ukraine conflict and conflicts in the Middle East 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
Certain Board of Director Appointments and Departures
On October 3, 2023, the board of directors (the “Board”) of the Company appointed Vidisha Prasad to the Board, effective immediately. Ms. Prasad was also appointed to the audit committee of the Board.
In addition, Randal T. Klein has informed the Board of his decision not to seek reelection as a director on the Board at the Company’s 2024 Annual Meeting of Stockholders (the “2024 Annual Meeting”). Mr. Klein will continue to serve on the Board and the respective Board committees for the remainder of his term as a director until the 2024 Annual Meeting. Mr. Klein’s decision not to stand for reelection was not due to any disagreements with the Company on any matter relating to the Company’s operations, policies, or practices.
Borrowing Base Redetermination
On October 19, 2023, we completed the fall 2023 borrowing base redetermination, which reaffirmed the borrowing base of $150.0 million with elected commitments of $135.0 million. The next redetermination is expected to occur in the second quarter of 2024.
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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 2022 Form 10-K. Significant estimates include, but are not limited to, oil and natural gas reserves; fair value estimates; revenue recognition; and contingencies and insurance accounting. These estimates, in our opinion, are subjective in nature, require the use of professional judgment and involve complex analysis.
When used in the preparation of our consolidated financial statements, such estimates are based on our current knowledge and understanding of the underlying facts and circumstances and may be revised as a result of actions we take in the future. Changes in these estimates will occur as a result of the passage of time and the occurrence of future events. Subsequent changes in these estimates may have a significant impact on our consolidated financial position, results of operations and cash flows.
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Results of Operations
The results of operations for the three and nine months ended September 30, 2023 and 2022 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,
2023
2022
2023
2022
($ In thousands except per unit amounts)
Oil and natural gas sales
$
76,403
$
112,812
$
210,080
$
319,562
Other revenues
367
13,487
18,531
39,947
Lease operating expense
37,083
32,048
104,946
98,253
Gathering, processing and transportation
4,984
7,483
15,735
22,774
Taxes other than income
4,942
9,152
15,440
25,328
Depreciation, depletion and amortization
7,489
6,296
20,369
17,795
General and administrative expense
8,255
6,965
24,547
23,364
Loss (gain) on commodity derivative instruments
23,328
(3,300)
4,371
108,675
Pipeline incident loss
559
2,606
15,682
8,278
Pipeline incident settlement
—
12,000
—
12,000
Interest expense, net
4,470
3,974
13,908
9,499
Litigation settlement
—
—
84,875
—
Income tax (expense) benefit - current
(1,441)
—
(7,115)
—
Income tax (expense) benefit - deferred
4,708
—
264,130
—
Net income (loss)
(13,403)
47,234
349,172
27,840
Oil and natural gas revenues:
Oil sales
$
57,214
$
54,394
$
146,780
$
165,686
NGL sales
7,777
11,704
21,973
38,789
Natural gas sales
11,412
46,714
41,327
115,087
Total oil and natural gas revenues
$
76,403
$
112,812
$
210,080
$
319,562
Production volumes:
Oil (MBbls)
729
606
1,991
1,743
NGLs (MBbls)
334
355
984
1,041
Natural gas (MMcf)
5,006
5,844
15,573
17,079
Total (MBoe)
1,897
1,935
5,569
5,630
Average net production (MBoe/d)
20.6
21.0
20.4
20.6
Average realized sales price (excluding commodity derivatives):
Oil (per Bbl)
$
78.45
$
89.82
$
73.72
$
95.05
NGL (per Bbl)
23.33
32.96
22.36
37.28
Natural gas (per Mcf)
2.28
7.99
2.65
6.74
Total (per Boe)
$
40.28
$
58.31
$
37.72
$
56.76
Average unit costs per Boe:
Lease operating expense
$
19.54
$
16.56
$
18.84
$
17.45
Gathering, processing and transportation
2.63
3.87
2.83
4.05
Taxes other than income
2.60
4.73
2.77
4.50
General and administrative expense
4.35
3.60
4.41
4.15
Depletion, depreciation and amortization
3.95
3.25
3.66
3.16
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For the Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022
We reported a net loss of $13.4 million and net income of $47.2 million for the three months ended September 30, 2023 and 2022, respectively.
Oil, natural gas and NGL revenues were $76.4 million and $112.8 million for the three months ended September 30, 2023 and 2022, respectively. Average net production volumes were approximately 20.6 MBoe/d and 21.0 MBoe/d for the three months ended September 30, 2023 and 2022, respectively. The average realized sales price was $40.28 per Boe and $58.31 per Boe for the three months ended September 30, 2023 and 2022, respectively. The decrease in revenue and average realized sales price was primarily due to lower commodity prices.
Other revenues were $0.4 million and $13.5 million for the three months ended September 30, 2023 and 2022, respectively. The change in other revenues was primarily related to the termination of LOPI insurance proceeds.
Lease operating expense was $37.1 million and $32.0 million for the three months ended September 30, 2023 and 2022, respectively. On a per Boe basis, lease operating expense was $19.54 and $16.56 for the three months ended September 30, 2023 and 2022, respectively. The change in lease operating expense was primarily driven by higher costs associated with the restart of operations at Beta.
Gathering, processing and transportation expense was $5.0 million and $7.5 million for the three months ended September 30, 2023 and 2022, respectively. On a per Boe basis, gathering, processing and transportation expense was $2.63 and $3.87 for the three months ended September 30, 2023 and 2022, respectively. The decrease in gathering, processing and transportation expense was primarily driven by the expiration of the minimum volume commitment (“MVC”) fee in East Texas/North Louisiana (November 2022) and Oklahoma (June 2023) and lower commodity prices.
Taxes other than income were $4.9 million and $9.2 million for the three months ended September 30, 2023 and 2022, respectively. On a per Boe basis, taxes other than income were $2.60 and $4.73 for the three months ended September 30, 2023 and 2022, respectively. The decrease was primarily related to a reduction in production taxes due to lower commodity prices.
DD&A expense was $7.5 million and $6.3 million for the three months ended September 30, 2023 and 2022, respectively. The change in DD&A expense was primarily driven by three months of production at Beta.
General and administrative expenses were $8.3 million and $7.0 million for the three months ended September 30, 2023 and 2022, respectively. The change in general and administrative expense was primarily related to (i) an increase of $0.5 million in stock compensation expense, (ii) an increase of $0.3 million in salaries and other payroll benefits, and (iii) an increase of $0.3 million in professional services.
Net loss on commodity derivative instruments of $23.3 million were recognized for the three months ended September 30, 2023, consisting of a $3.9 million of cash settlements paid on expired positions, an increase of $20.1 million in the fair value of open positions and $0.7 million of cash settlements received on terminated derivative instruments. Net gain on commodity derivative instruments of $3.3 million was 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.
Pipeline incident loss was $0.5 million and $2.6 million for the three months ended September 30, 2023 and 2022, respectively. The costs reflect certain expenses not expected to be recovered under an insurance policy. 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.
Litigation settlement was not recorded for the three months ended September 30, 2023 and 2022.
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Interest expense, net was $4.5 million and $4.0 million for the three months ended September 30, 2023 and 2022, respectively. The change in interest expense was primarily due to higher interest rates and the amortization and write-off of deferred issuance costs partially offset by lower debt outstanding during the period.
Average outstanding borrowings under our Revolving Credit Facility were $121.8 million and $214.9 million for the three months ended September 30, 2023 and 2022, respectively.
Current income tax (expense) benefit was ($1.4) million for the three months ended September 30, 2023. See additional information discussed in Note 15 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report. No current income tax expense was recorded for the three months ended September 30, 2022.
Deferred income tax benefit (expense) was $4.7 million for the three months ended September 30, 2023. Starting in the first quarter of 2023, we achieved three years of cumulative income which allowed the release of the valuation allowance. See additional information discussed in Note 15 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report. No deferred income tax benefit was recorded for the three months ended September 30, 2022.
For the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022
We reported net income of $349.2 million and $27.8 million for the nine months ended September 30, 2023 and 2022, respectively.
Oil, natural gas and NGL revenues were $210.1 million and $319.6 million for the nine months ended September 30, 2023 and 2022, respectively. Average net production volumes were approximately 20.4 MBoe/d and 20.6 MBoe/d for the nine months ended September 30, 2023 and 2022, respectively. The average realized sales price was $37.72 per Boe and $56.76 per Boe for the nine months ended September 30, 2023 and 2022, respectively. The decrease in revenue and average realized sales price was primarily due to lower commodity prices.
Other revenues were $18.5 million and $39.9 million for the nine months ended September 30, 2023 and 2022, respectively. The change in other revenues was primarily related to LOPI insurance proceeds of $17.9 million for the nine months ended September 30. 2023 compared to $39.6 million of LOPI proceeds for the nine months ended September 30, 2022.
Lease operating expense was $104.9 million and $98.3 million for the nine months ended September 30, 2023 and 2022, respectively. On a per Boe basis, lease operating expenses were $18.84 and $17.45 for the nine months ending September 30, 2023 and 2022, respectively. The change in lease operating expense was primarily related to higher costs associated with the restart of operations at Beta.
Gathering, processing and transportation expense was $15.7 million and $22.8 million for the nine months ended September 30, 2023 and 2022, respectively. On a per Boe basis, gathering, processing and transportation expenses were $2.83 and $4.05 for the nine months ending September 30, 2023 and 2022, respectively. The decrease in gathering, processing and transportation expense was primarily driven by the expiration of the MVC fee in East Texas/North Louisiana (November 2022) and in Oklahoma (June 2023) and lower commodity prices.
Taxes other than income were $15.4 million and $25.3 million for the nine months ended September 30, 2023 and 2022, respectively. On a per Boe basis, taxes other than income were $2.77 and $4.50 for the nine months ended September 30, 2023 and 2022, respectively. The decrease was primarily related to a reduction in production taxes due to lower commodity prices. In addition, we received a $0.4 million from a one-time positive severance tax adjustment related to our non-operated Eagle Ford operations.
DD&A expense was $20.4 million and $17.8 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in DD&A expense was primarily driven by production at Beta.
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General and administrative expenses were $24.5 million and $23.4 million for the nine months ended September 30, 2023 and 2022, respectively. The change in general and administrative expenses was primarily related to (i) an increase of $1.2 million in salaries and other payroll benefits and (ii) an increase of $1.3 million in stock compensation expense, partially offset by a decrease of $1.1 million in professional services.
Net loss on commodity derivative instruments of $4.4 million were recognized for the nine months ended September 30, 2023, consisting of less than $0.1 million increase in the fair value of open positions, $0.7 million of cash settlement received on terminated derivative instruments partially offset by $5.1 million of cash settlements paid on expired positions. Net loss on commodity derivative instruments of $108.7 million was 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.
Pipeline incident loss was $15.7 million and $8.3 million for the nine months ended September 30, 2023 and 2022, respectively. The costs reflect certain expenses not expected to be recovered under an insurance policy. 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.
Litigation settlement was $84.9 million for the nine months ended September 30, 2023, related to the settlement with the shipping companies related to the containerships’ anchor strikes of the Company’s pipeline. See additional information discussed in Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report. No litigation settlement was recorded for the nine months ended September 30, 2022.
Interest expense, net was $13.9 million and $9.5 million for the nine months ended September 30, 2023 and 2022, respectively. The change in interest expense was primarily driven by (i) higher interest rates, (ii) amortization and write-off of deferred issuance cost, and (iii) the change in interest rate swaps.
Average outstanding borrowings under our Revolving Credit Facility were $145.8 million and $220.7 million for the nine months ended September 30, 2023 and 2022, respectively.
Current income tax (expense) benefit was ($7.1) million for the nine months ended September 30, 2023. See additional information discussed in Note 15 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report. No current income tax expense was recorded for the nine months ended September 30, 2022.
Deferred income tax benefit (expense) was $264.1 million for the nine months ended September 30, 2023. Starting in the first quarter of 2023, we achieved three years of cumulative income which allowed the release of the valuation allowance. See additional information discussed in Note 15 of the Notes to Unaudited Condensed Consolidated Financial Statements included under “Item 1. Financial Statements” of this quarterly report. No deferred income tax benefit was recorded for the nine months ended September 30, 2022.
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;
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● 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.
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 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.
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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
For the Three Months Ended
For the Nine Months Ended
September 30,
September 30,
2023
2022
2023
2022
(In thousands)
Net income (loss)
$
(13,403)
$
47,234
$
349,172
$
27,840
Interest expense, net
4,470
3,974
13,908
9,499
Income tax expense (benefit) - current
1,441
—
7,115
—
Income tax expense (benefit) - deferred
(4,708)
—
(264,130)
—
DD&A
7,489
6,296
20,369
17,795
Accretion of AROs
2,005
1,773
5,922
5,242
Losses (gains) on commodity derivative instruments
23,328
(3,300)
4,371
108,675
Cash settlements (paid) received on expired commodity derivative instruments
(3,890)
(40,771)
(5,082)
(120,310)
Pipeline incident loss
559
2,606
15,682
8,278
Pipeline incident settlement
—
12,000
—
12,000
Litigation settlement
—
—
(84,875)
—
Share-based compensation expense
1,327
850
3,608
2,346
Loss on settlement of AROs
449
93
688
508
Exploration costs
—
—
40
26
Acquisition and divestiture related expenses
216
—
216
41
Bad debt expense
12
(5)
97
1
LOPI - timing difference
—
—
(4,636)
—
Other
188
—
376
—
Adjusted EBITDA
$
19,483
$
30,750
$
62,841
$
71,941
Reconciliation of Net Cash from Operating Activities to Adjusted EBITDA
For the Three Months Ended
For the Nine Months Ended
September 30,
September 30,
2023
2022
2023
2022
(In thousands)
Net cash provided by operating activities
$
18,007
$
18,934
$
113,228
$
49,330
Changes in working capital
(4,985)
(6,801)
2,443
(9,010)
Interest expense, net
4,470
3,974
13,908
9,499
Pipeline incident loss
559
2,606
15,682
8,278
Pipeline incident settlement
—
12,000
—
12,000
Litigation settlement
—
—
(84,875)
—
Income tax expense (benefit) - current
1,441
—
7,115
—
Amortization and write-off of deferred financing fees
(908)
(133)
(1,679)
(469)
Exploration costs
—
—
40
26
Gain (loss) on interest rate swaps
—
87
—
930
Cash settlements paid (received) on interest rate swaps
—
(171)
—
136
Cash settlements paid (received) on terminated derivatives
(658)
—
(658)
—
Plugging and abandonment cost
1,153
254
1,681
1,058
Acquisition and divestiture related expenses
216
—
216
41
LOPI - timing difference
—
—
(4,636)
—
Other
188
—
376
122
Adjusted EBITDA
$
19,483
$
30,750
$
62,841
$
71,941
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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 New Credit Facility will provide us with the financial flexibility necessary to meet our cash requirements, including normal operating needs, and to pursue our currently planned 2023 development activities. However, future cash flows are subject to a number of variables, including the level of our oil and natural gas production and the prices we receive for our oil and natural gas production, and significant additional capital expenditures will be required to more fully develop our properties. We cannot assure you that operations and other needed capital will be available on acceptable terms, or at all. For the remainder of 2023, we expect our primary funding sources to be from internally generated cash flow, borrowings under our New Credit Facility, and equity and debt capital markets.
Impact of the Southern California Pipeline Incident. We have incurred and will continue to incur certain costs as a result of the Incident.
We carry customary insurance policies, which have covered a material portion of the aggregate costs, including LOPI insurance, to offset loss of revenue resulting from suspended operations in Southern California. LOPI coverage specific to the Incident expired on March 31, 2023. 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.
In connection with the settlement between the Company and the vessels that struck and damaged the pipeline and their respective owners and operators, the Company received a net payment of approximately $85.0 million. Proceeds from the settlement have been used to reduce debt outstanding under the Company’s Revolving Credit Facility and to enhance liquidity.
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% - 75% of our estimated production from total proved developed producing reserves over a one-to-three-year period at any given point of time. We may, however, from time to time, hedge more or less than this approximate amount. Additionally, we may take advantage of opportunities to modify our commodity derivative portfolio to change the percentage of our hedged production volumes when circumstances suggest that it is prudent to do so. The current market conditions may also impact our ability to enter into future commodity derivative contracts.
We evaluate counterparty risks related to our commodity derivative contracts and trade credit. Should any of these financial counterparties not perform, we may not realize the benefit of some of our hedges under lower commodity prices. We sell our oil and natural gas to a variety of purchasers. Non-performance by a customer could also result in losses.
Valuation Allowance. Net deferred tax assets relate to net operating loss carryforwards, interest expense carryforwards, tax credits, and other temporary differences expected to produce tax deductions in future periods. The realization of these assets depends on recognition of sufficient future taxable income in specific federal and state tax jurisdictions in which those temporary differences are deductible. In assessing the need for a valuation allowance on our deferred tax assets, we consider whether it is more likely than not that some portion of or all our deferred tax assets will not be realized. On December 31, 2022, our valuation allowance was $284.9 million, which offset all net deferred tax assets as of such date.
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As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. The assessment considers all available information including historical and forecasted taxable income and operating history. The three months ended March 31, 2023 marked the first time that we had achieved three years of cumulative income. Furthermore, management determined that our ability to maintain long-term profitability despite near-term changes in commodity prices and capital and operating costs demonstrated that there is sufficient positive evidence to conclude that it is more likely than not that all net deferred tax asset is realizable. As a result of our assessment, during the quarter ended September 30, 2023, we released substantially all of our valuation allowance previously recorded. The result of the valuation allowance release during the nine months ended September 30, 2023 was a tax benefit of $278.8 million.
Capital Expenditures. Our total capital expenditures were approximately $26.6 million for the nine months ended September 30, 2023, which were primarily related to capital workovers and facilities upgrades located in Oklahoma and California and non-operated drilling and completion activities in 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.
As of September 30, 2023, we had a working capital deficit (excluding commodity derivatives) of $17.0 million primarily due to accrued liabilities of $55.4 million, revenues payable of $21.2 million, and accounts payable of $18.7 million partially offset by accounts receivable of $47.9 million, prepaid expenses of $24.0 million and cash on hand of $6.4 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 National Association serves as the administrative agent.
On July 31, 2023, OLLC and Acquisitionco entered into the New Credit Facility. The New Credit Facility is a replacement in full of the prior Revolving Credit Facility. The aggregate principal amount of loans outstanding under the New Credit Facility as of September 30, 2023, was $120.0 million.
As of September 30, 2023, we had approximately $15.0 million of available borrowings under our New Credit Facility.
As of September 30, 2023, we were in compliance with all the financial (current ratio and total leverage ratio) and non-financial covenants associated with the New Credit Facility.
Subsequent Event . On October 19, 2023, we completed the fall 2023 borrowing base redetermination, which reaffirmed the borrowing base of $150.0 million with elected commitments of $135.0 million. The next redetermination is expected to occur in the second quarter of 2024.
For additional information regarding our Revolving Credit Facility and New 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.
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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, 2023, our future commitment under this agreement was $2.0 million for the remainder of 2023, and $15.8 million per year for years 2024 through 2033. 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.
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, 2023 and 2022 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,
2023
2022
(In thousands)
Net cash provided by operating activities
$
113,228
$
49,330
Net cash used in investing activities
(29,965)
(31,553)
Net cash used in financing activities
(76,876)
(25,632)
Operating Activities. Key drivers of net operating cash flows are commodity prices, production volumes and operating costs. Net cash provided by operating activities was $113.2 million and $49.3 million for the nine months ended September 30, 2023 and 2022, respectively. Production volumes were approximately 20.4 MBoe/d and 20.6 MBoe/d for the nine months ended September 30, 2023 and 2022, respectively. The average realized sales price was $37.72 per Boe and $56.76 per Boe for the nine months ended September 30, 2023 and 2022, respectively. The change in average realized sales price was primarily due to lower commodity prices.
For the nine months ended September 30, 2023, we received $84.9 million in connection with the settlement between the Company and the vessels that struck and damaged the pipeline and their respective owners and operators.
Net cash provided by operating activities for the nine months ended September 30, 2023 included $5.1 million of cash paid on expired commodity derivative instruments and $0.7 million of cash received on terminated derivatives compared to $120.3 million of cash paid on expired commodity derivatives for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, we had net losses on commodity derivative instruments of $4.4 million compared to net losses of $108.7 million for the nine months ended September 30, 2022.
Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2023 was $30.0 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, 2022 was $31.6 million, of which $26.2 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 $6.4 million and $5.4 million during the nine months ended September 30, 2023 and 2022, respectively.
Financing Activities . We had net repayments of $70.0 million and $25.0 million for the nine months ended September 30, 2023 and 2022, respectively, related to our Revolving Credit Facility.
For the nine months ended September 30, 2023, we paid $4.7 million in deferred financing costs under the New Credit Facility.
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Off–Balance Sheet Arrangements
As of September 30, 2023, 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.