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 2023 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 located in Oklahoma, the Rockies (“Bairoil”), federal waters offshore Southern California (“Beta”), East Texas/North Louisiana and the Eagle Ford (non-op). Most of our oil and natural gas properties are located in large, mature oil and natural gas reservoirs.
Industry Trends
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 natural gas and the uncertainty associated with recovering oil demand; inflation and future monetary policy; and governmental policies aimed at transitioning towards lower carbon energy. Due to these factors, among others, we expect prices for some or all commodities to remain volatile. Thus, we cannot predict with reasonable certainty the extent to which these factors may impact our business, results of operations, financial condition and cash flows.
Recent Developments
Credit Agreement Amendment
On October 25, 2024, OLLC entered into the Credit Agreement Amendment, which among other things, (i) reduced the borrowing base under the Revolving Credit Facility from $150.0 million to $145.0 million, (ii) increased the aggregate elected commitments under the Revolving Credit Facility from $135.0 million to $145.0 million and (iii) amended certain interest rates applicable to loans under the Revolving Credit Facility. The next redetermination is expected in the spring of 2025.
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.
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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 2023 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.
Revenue Payables in Suspense
In the normal course of business, we undertake efforts to research and resolve the disputes, legal reasons or uncertainties causing revenues of owners of mineral interests in our leases to go into suspense. As resolutions occur, obligations related to revenue payables in suspense are released. For the nine months ended September 30, 2024, we released $8.4 million, respectively, of net revenues in suspense as a result of these efforts. The following table presents the impact of releases of revenue payables in suspense to our statements of operations for the nine months ended September 30, 2024:
For the Nine Months Ended
September 30,
2024
(In thousands)
Oil and natural gas sales
$
4,023
Other revenues
4,829
Severance tax and other deducts
(433)
Total net revenue
$
8,419
Production volumes:
Oil (MBbls)
33
NGLs (MBbls)
31
Natural gas (MMcf)
441
Total (MBoe)
138
Total (MBoe/d)
0.50
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Results of Operations
The results of operations for the three and nine months ended September 30, 2024 and 2023 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 during 2023.
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,
2024
2023
2024
2023
($ In thousands except per unit amounts)
Oil and natural gas sales
$
68,135
$
76,403
$
215,803
$
210,080
Other revenues
1,723
367
9,857
18,531
Lease operating expense
33,255
36,493
107,850
103,953
Gathering, processing and transportation
4,290
4,984
13,959
15,735
Taxes other than income
5,997
5,532
15,539
16,433
Depreciation, depletion and amortization
8,102
7,489
24,168
20,369
General and administrative expense
8,251
8,255
26,409
24,547
Loss (gain) on commodity derivative instruments
(25,047)
23,328
(7,258)
4,371
Pipeline incident loss
247
559
1,454
15,682
Interest expense, net
3,756
4,470
10,915
13,908
Litigation settlement
—
—
—
84,875
Income tax (expense) benefit - current
(412)
(1,441)
(2,364)
(7,115)
Income tax (expense) benefit - deferred
(5,650)
4,708
(3,082)
264,130
Net income (loss)
22,652
(13,403)
20,375
349,172
Oil and natural gas revenues:
Oil sales
$
54,353
$
57,214
$
169,563
$
146,780
NGL sales
6,096
7,777
20,187
21,973
Natural gas sales
7,686
11,412
26,053
41,327
Total oil and natural gas revenues
$
68,135
$
76,403
$
215,803
$
210,080
Production volumes:
Oil (MBbls)
758
729
2,300
1,991
NGLs (MBbls)
301
334
979
984
Natural gas (MMcf)
4,165
5,006
12,953
15,573
Total (MBoe)
1,752
1,897
5,438
5,569
Average net production (MBoe/d)
19.0
20.6
19.8
20.4
Average realized sales price (excluding commodity derivatives):
Oil (per Bbl)
$
71.74
$
78.45
$
73.73
$
73.72
NGL (per Bbl)
20.29
23.33
20.62
22.36
Natural gas (per Mcf)
1.85
2.28
2.01
2.65
Total (per Boe)
$
38.88
$
40.28
$
39.69
$
37.72
Average unit costs per Boe:
Lease operating expense
$
18.98
$
19.23
$
19.83
$
18.67
Gathering, processing and transportation
2.45
2.63
2.57
2.83
Taxes other than income
3.42
2.92
2.86
2.95
General and administrative expense
4.71
4.35
4.86
4.41
Depletion, depreciation and amortization
4.62
3.95
4.44
3.66
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For the Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023
We reported net income of $22.7 million compared to a net loss of $13.4 million for the three months ended September 30, 2024 and 2023, respectively.
Oil, natural gas and NGL revenues were $68.1 million and $76.4 million for the three months ended September 30, 2024 and 2023, respectively. Average net production volumes were approximately 19.0 MBoe/d and 20.6 MBoe/d for the three months ended September 30, 2024 and 2023, respectively. The change in production volumes was driven by several days shut-in for the electrification and emissions reduction project at Beta and natural decline in well productivity over time. The average realized sales prices were $38.88 per Boe and $40.28 per Boe for the three months ended September 30, 2024 and 2023, respectively. The change in average realized sales prices was primarily due to lower commodity prices.
Other revenues were $1.7 million and $0.4 million for the three months ended September 30, 2024 and 2023, respectively. For the three months ended September 30, 2024, other revenues consisted of iodine sales, rental income with respect to our wholly owned subsidiary, Magnify Energy Services (“Magnify”), and interest income earned on our sinking fund escrow accounts.
Lease operating expenses were $33.3 million and $36.5 million for the three months ended September 30, 2024 and 2023, respectively. On a per Boe basis, lease operating expenses were $18.98 and $19.23 for the three months ended September 30, 2024 and 2023, respectively. The change in lease operating expenses was primarily due to a decrease of $1.5 million in lease operating cost and a decrease of $1.7 million in workover expense.
Gathering, processing and transportation expenses were $4.3 million and $5.0 million for the three months ended September 30, 2024 and 2023, respectively. On a per Boe basis, gathering, processing and transportation expenses were $2.45 and $2.63 for the three months ended September 30, 2024 and 2023, respectively. The change in gathering, processing and transportation expense was primarily due to lower gas volumes and natural gas prices.
Taxes other than income were $6.0 million and $5.5 million for the three months ended September 30, 2024 and 2023, respectively. On a per Boe basis, taxes other than income were $3.42 and $2.92 for the three months ended September 30, 2024 and 2023, respectively. The change was primarily related to waste emissions charges and air quality management district fees in California.
DD&A expenses were $8.1 million and $7.5 million for the three months ended September 30, 2024 and 2023, respectively. The increase in DD&A expense was primarily driven by increased production at Beta.
General and administrative expenses were $8.3 million for each of the three months ended September 30, 2024 and 2023. General and administrative expenses were previously forecasted to remain flat compared to the prior year.
Net gain on commodity derivative instruments of $25.0 million were recognized for the three months ended September 30, 2024, consisting of $18.7 million increase in the fair value of open positions, $5.6 million of cash settlements received on expired positions and $0.8 million of cash settlements received on terminated derivative instruments. Net loss on commodity derivative instruments of $23.3 million was recognized for the three months ended September 30, 2023, consisting of $3.9 million of cash settlements paid on expired positions and an increase of $20.1 million in the fair value of open position, partially offset by $0.7 million of cash settlements received on terminated derivative instruments.
Pipeline incident loss was $0.2 million and $0.6 million for the three months ended September 30, 2024 and 2023, respectively. These 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.
Interest expense, net was $3.8 million and $4.5 million for the three months ended September 30, 2024 and 2023, respectively. The change in interest expense was primarily attributable to the write-off of deferred financing costs in connection with the refinancing of the Revolving Credit Facility in July 2023.
Average outstanding borrowings under our Revolving Credit Facility were $122.5 million and $121.8 million for the three months ended September 30, 2024 and 2023, respectively.
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Litigation settlement was not recorded for the three months ended September 30, 2024 and 2023.
Current income tax benefit (expense) was ($0.4) million and ($1.4) million for the three months ended September 30, 2024 and 2023, respectively. 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.
Deferred income tax benefit (expense) was ($5.7) million and $4.7 million for the three months ended September 30, 2024 and 2023, respectively. Starting in the first quarter of 2023, we achieved three years of cumulative book income which resulted in 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.
For the Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023
We reported net income of $20.4 million compared to net income of $349.2 million for the nine months ended September 30, 2024 and 2023, respectively.
Oil, natural gas and NGL revenues were $215.8 million and $210.1 million for the nine months ended September 30, 2024 and 2023, respectively. Average net production volumes were approximately 19.8 MBoe/d and 20.4 MBoe/d for the nine months ended September 30, 2024 and 2023, respectively. The average realized sales prices were $39.69 per Boe and $37.72 per Boe for the nine months ended September 30, 2024 and 2023, respectively. The change in realized sales prices was primarily due to higher commodity prices, Beta returning to production after being offline for the first quarter of 2023 and the release of revenue suspense of $4.0 million.
Other revenues were $9.9 million and $18.5 million for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024, other revenues consisted of iodine sales, Magnify rental income, and interest income earned on our sinking fund escrow accounts. Additionally, for the nine months ended September 30, 2024, we recorded a revenue suspense release of $4.8 million. For the nine months ended September 30, 2023, other revenues were primarily related to our receipt of LOPI insurance proceeds of $17.9 million. We have not received LOPI insurance proceeds since payments under the LOPI policy terminated on March 31, 2023.
Lease operating expenses were $107.9 million and $104.0 million for the nine months ended September 30, 2024 and 2023, respectively. On a per Boe basis, lease operating expenses were $19.83 and $18.67 for the nine months ended September 30, 2024 and 2023, respectively. The change in lease operating expense was primarily related to operating costs associated with Beta returning to production after being offline for the first quarter of 2023.
Gathering, processing and transportation expenses were $14.0 million and $15.7 million for the nine months ended September 30, 2024 and 2023, respectively. On a per Boe basis, gathering, processing and transportation expenses were $2.57 and $2.83 for the nine months ended September 30, 2024 and 2023, respectively. The change in gathering, processing and transportation expense was primarily due to lower gas volumes, lower natural gas prices and the expiration of minimum volume commitments for our Oklahoma properties.
Taxes other than income were $15.5 million and $16.4 million for the nine months ended September 30, 2024 and 2023, respectively. On a per Boe basis, taxes other than income were $2.86 and $2.95 for the nine months ended September 30, 2024 and 2023, respectively. The decrease was primarily related to a reduction in production taxes and ad valorem taxes for 2024 due to lower natural gas prices, partially offset by an increase in emissions charges.
DD&A expenses were $24.2 million and $20.4 million for the nine months ended September 30, 2024 and 2023, respectively. The increase in DD&A expense was primarily driven by operations restarting at Beta.
General and administrative expenses were $26.4 million and $24.5 million for the nine months ended September 30, 2024 and 2023, respectively. The change in general and administrative expenses was primarily related to an increase of $1.5 million in stock compensation expense, an increase of $0.5 million in legal expense, and an increase of $0.5 million in office lease expense related to the early termination of our Oklahoma office lease, partially offset by a $0.2 million decrease in professional services.
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Net gain on commodity derivative instruments of $7.3 million were recognized for the nine months ended September 30, 2024, consisting of $13.6 million of cash settlements received on expired positions and $0.8 million of cash settlements received on terminated derivative instruments, partially offset by a decrease of $7.1 million in the fair value of open positions. Net loss on commodity derivative instruments of $4.4 million was recognized for the nine months ended September 30, 2023, consisting of $5.1 million of cash settlements paid on expired positions, partially offset by $0.7 million of cash settlement received on terminated derivative instruments and a less than $0.1 million increase in the fair value of open positions.
Pipeline incident loss was $1.5 million and $15.7 million for the nine months ended September 30, 2024 and 2023, 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.
Interest expense, net was $10.9 million and $13.9 million for the nine months ended September 30, 2024 and 2023, respectively. The change in interest expense was primarily driven by lower outstanding borrowings and amortization and write-off of deferred issuance costs.
Average outstanding borrowings under our Revolving Credit Facility were $119.8 million and $145.8 million for the nine months ended September 30, 2024 and 2023, respectively.
Litigation settlement was not recorded for the nine months ended September 30, 2024 and $84.9 million was recorded for the nine months ended September 30, 2023, related to the settlement with the shipping companies and the containerships whose anchors struck 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.
Current income tax benefit (expense) was ($2.4) million and ($7.1) million for the nine months ended September 30, 2024 and 2023, respectively. 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.
Deferred income tax benefit (expense) was ($3.1) million and $264.1 million for the nine months ended September 30, 2024 and 2023, respectively. Starting in the first quarter of 2023, we achieved three years of cumulative book income which resulted in 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.
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;
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● 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.
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,
2024
2023
2024
2023
(In thousands)
Net income (loss)
$
22,652
$
(13,403)
$
20,375
$
349,172
Interest expense, net
3,756
4,470
10,915
13,908
Income tax expense (benefit) - current
412
1,441
2,364
7,115
Income tax expense (benefit) - deferred
5,650
(4,708)
3,082
(264,130)
DD&A
8,102
7,489
24,168
20,369
Accretion of AROs
2,125
2,005
6,282
5,922
Losses (gains) on commodity derivative instruments
(25,047)
23,328
(7,258)
4,371
Cash settlements (paid) received on expired commodity derivative instruments
5,582
(3,890)
13,565
(5,082)
Pipeline incident loss
247
559
1,454
15,682
Litigation settlement
—
—
—
(84,875)
Share-based compensation expense
1,815
1,327
5,113
3,608
Loss on settlement of AROs
38
449
136
688
Exploration costs
—
—
51
40
Acquisition and divestiture related expenses
186
216
209
216
Bad debt expense
26
12
52
97
LOPI - timing difference
—
—
—
(4,636)
Other
—
188
686
376
Adjusted EBITDA (1)
$
25,544
$
19,483
$
81,194
$
62,841
(1) Adjusted EBITDA includes a revenue suspense release of $8.4 million for the nine months ended September 30, 2024. See “Revenue Payables in Suspense” discussion noted above for additional information.
Reconciliation of Net Cash from Operating Activities to Adjusted EBITDA
For the Three Months Ended
For the Nine Months Ended
September 30,
September 30,
2024
2023
2024
2023
(In thousands)
Net cash provided by operating activities
$
15,737
$
18,007
$
38,838
$
113,228
Changes in working capital
5,937
(4,985)
27,502
2,443
Interest expense, net
3,756
4,470
10,915
13,908
Pipeline incident loss
247
559
1,454
15,682
Litigation settlement
—
—
—
(84,875)
Income tax expense (benefit) - current
412
1,441
2,364
7,115
Amortization and write-off of deferred financing fees
(310)
(908)
(918)
(1,679)
Exploration costs
—
—
51
40
Cash settlements paid (received) on terminated derivatives
(793)
(658)
(793)
(658)
Plugging and abandonment cost
372
1,153
886
1,681
LOPI - timing difference
—
—
—
(4,636)
Acquisition and divestiture related expenses
186
216
209
216
Other
—
188
686
376
Adjusted EBITDA (1)
$
25,544
$
19,483
$
81,194
$
62,841
(1) Adjusted EBITDA includes a non-cash revenue suspense release of $8.4 million for the nine months ended September 30, 2024. See “Revenue Payables in Suspense” discussion noted above for additional information.
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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 2024 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 2024, we expect our primary funding sources to be from internally generated cash flow but retain the flexibility to utilize borrowings under our Revolving Credit Facility and/or to access the debt and equity capital markets.
Impact of the Beta Pipeline Incident. There are remaining uncertainties 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 certain costs as a result of the Incident. However, in addition to the settlement amount disclosed elsewhere in this Quarterly Report on Form 10-Q that we received from the vessels that struck and damaged the Pipeline and their respective owners and operators, we carry customary insurance policies, which have covered a material portion of aggregate costs, including loss of production income insurance to offset loss of revenue resulting from suspended operations. The loss of production income insurance related to the Incident expired on March 31, 2023. We restarted operations at Beta in April 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.
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.
Capital Expenditures. Total capital expenditures were approximately $55.3 million for the nine months ended September 30, 2024, which were primarily related to the development program at Beta, capital workovers and facilities upgrade projects at Beta and in Oklahoma 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, 2024, we had a working capital deficit (excluding commodity derivatives) of $11.6 million primarily due to accrued liabilities of $36.7 million, revenues payable of $11.4 million, and accounts payable of $18.1 million partially offset by accounts receivable of $32.3 million and prepaid expenses of $22.3 million.
Debt Agreement
Revolving Credit Facility. On July 31, 2023, OLLC and Acquisitionco entered into the Revolving Credit Facility. The Revolving Credit Facility is a replacement in full of the Prior Revolving Credit Facility. The aggregate principal amount of loans outstanding under the Revolving Credit Facility as of September 30, 2024, was $120.0 million.
As of September 30, 2024, we had approximately $15.0 million of available borrowings under our Revolving Credit Facility.
As of September 30, 2024, we were in compliance with all the financial (current ratio and total leverage ratio) and non-financial covenants associated with the Revolving Credit Facility.
On October 25, 2024, we entered into the Credit Agreement Amendment, which among other things, (i) reduced the borrowing base under the Revolving Credit Facility from $150.0 million to $145.0 million, (ii) increased the aggregate elected commitments under the Revolving Credit Facility from $135.0 million to $145.0 million and (iii) amended certain interest rates applicable to loans under the 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 two trust accounts to comply with supplemental regulatory bonding requirements related to our decommissioning obligations for the Beta production facilities. As of September 30, 2024, our future commitments under these agreements were $2.3 million for the remainder of 2024 and $9.0 million per year until the escrow accounts are fully funded. 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, 2024 and 2023 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,
2024
2023
(In thousands)
Net cash provided by operating activities
$
38,838
$
113,228
Net cash used in investing activities
(62,655)
(29,965)
Net cash used in financing activities
3,071
(76,876)
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Operating Activities. Key drivers of net operating cash flows are commodity prices, production volumes and operating costs. Net cash provided by operating activities was $38.8 million and $113.2 million for the nine months ended September 30, 2024 and 2023, respectively. 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.
Production volumes were approximately 19.8 MBoe/d and 20.4 MBoe/d for the nine months ended September 30, 2024 and 2023, respectively. The average realized sales price was $39.69 per Boe and $37.72 per Boe for the nine months ended September 30, 2024 and 2023, respectively. The change in realized sales prices was primarily due to higher commodity prices, Beta returning to production after being offline for the first quarter of 2023 and the release of revenue suspense of $8.4 million.
Net cash provided by operating activities for the nine months ended September 30, 2024 included $13.6 million of cash received on expired commodity derivative instruments compared to $5.1 million of cash paid on expired commodity derivatives for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, we had a net gain on commodity derivative instruments of $7.3 million compared to a net loss of $4.4 million for the nine months ended September 30, 2023.
Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2024 was $62.7 million, of which $54.1 million was used for additions to oil and natural gas properties and $1.0 million for additions to other property and equipment. 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 and $0.5 million for additions to other property and equipment.
Various restricted investment accounts fund certain long-term contractual and regulatory asset retirement obligations and collateralize certain regulatory bonds associated with our Beta properties. Additions to restricted investments were $7.5 million and $6.4 million during the nine months ended September 30, 2024 and 2023, respectively.
Financing Activities . We had net borrowings of $5.0 million for the nine months ended September 30, 2024 related to our Revolving Credit Facility compared to net repayments of $70.0 million for the nine months ended September 30, 2023. Shares withheld for taxes was $1.9 million and $2.2 million for the nine months ended September 30, 2024 and 2023, respectively.
Off–Balance Sheet Arrangements
As of September 30, 2024, 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.