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Item 1A. Risk Factors

2021-02-17 compared with 2020-03-02 · 114 added, 250 removed, 104 unchanged (78% of the section changed)

You should carefully consider the following risk factors as well as the other information contained or incorporated by reference in this report, as these important factors, among others, could cause our actual results to differ from our expected or historical results.

You should carefully consider the following material risk factors as well as the other information contained or incorporated by reference in this report, as these important factors, among others, could cause our actual results to differ from our expected or historical results.

It is not possible to predict or identify all such factors.

Consequently, you should not consider any such list to be a complete statement of all of our potential risks or uncertainties.

Based on the information currently known to us, we believe the following information identifies the most significant risk ‎factors affecting us, but the below risks and uncertainties are not the only ones related to our businesses and are not necessarily ‎listed in the order of their significance.

Based on the information currently known to us, we believe the following information identifies the most material risk factors affecting us, but the below risks and uncertainties are not the only ones related to our businesses and are not necessarily listed in the order of their significance.

Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

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Historically, the prices for oil and natural gas have been volatile and are likely to remain volatile in the future.

During 2019, commodity prices fluctuated significantly, with the settlement price for West Texas Intermediate ("WTI") crude oil ranging from a high of approximately $66.24 per barrel to a low of approximately $46.31 per barrel and settlement prices for Henry Hub natural gas ranging from a high of approximately $4.25 per Mcf to a low of approximately $1.75 per Mcf.

Oil and natural gas price volatility continued into 2020 and, through February 28, 2020, the WTI settlement price of crude oil had a low of approximately $44.76 per barrel, and the Henry Hub settlement price of natural gas reached a low of approximately $1.72 per Mcf.

The prices we receive for our oil and natural gas production are subject to wide fluctuations and depend on numerous factors beyond our control, including the foll owing:

During 2020, commodity prices fluctuated significantly, with the settlement price for West Texas Intermediate ("WTI") crude oil ranging from a high of approximately $ 63.27 per barrel to a low of approximately negative $ 36.98 per barrel and settlement prices for Henry Hub natural gas ranging from a high of approximately $ 3.14 per Mcf to a low of approximately $ 1.33 per Mcf.

The prices we receive for our oil and natural gas production are subject to wide fluctuations and depend on numerous factors beyond our control, including the following:

• the domestic and foreign supply of oil, natural gas liquids and natural gas;

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• our ability to obtain additional capital.

Our future production and revenues depend on our ability to replace our reserves.

Our future production and revenues depend upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable.

Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both.

To increase reserves and production, we must continue our acquisition and drilling activities.

We cannot assure you that we will have adequate capital resources to conduct acquisition and drilling activities or that our acquisition and drilling activities will result in significant additional reserves or that we will have continuing success drilling productive wells at low finding and development costs.

Furthermore, while our revenues may increase if prevailing oil and natural gas prices increase significantly, our finding costs for additional reserves could also increase.

Our access to capital markets may be limited in the future.

Adverse changes in the financial and credit markets could negatively impact our ability to grow production and reserves and meet our future obligations.

In addition, the continuation of the current low oil and natural gas price environment, or further declines of oil and natural gas prices, will affect our ability to obtain financing for acquisitions and drilling activities and could result in a reduction in drilling activity, which could lead to a loss of acreage due to lease expirations, both of which could negatively affect our ability to replace reserves.

Drilling and completion activities are typically regulated by state oil and natural gas commissions.

Our drilling and completion activities are conducted primarily in Louisiana and Texas.

Texas adopted a law in June 2012 requiring disclosure to the Railroad Commission of Texas and the public of certain information regarding the components used in the hydraulic-fracturing process.

In addition, Congress has considered legislation that, if implemented, would subject the process of hydraulic fracturing to regulation under the Safe Drinking Water Act.

In June 2015, the EPA released a draft report on the potential impacts of hydraulic fracturing on drinking water resources, which concluded that hydraulic fracturing activities have not led to widespread, systemic impacts on drinking water resources in the United States, although there may be above and below ground mechanisms by which hydraulic fracturing activities have the potential to impact drinking water resources.

The draft report was finalized in December 2016.

Other governmental agencies, including the U.S.

Department of Energy, have evaluated or are evaluating various other aspects of hydraulic fracturing.

These ongoing or proposed studies have the potential to impact the likelihood or scope of future legislation or regulation.

State and federal regulatory agencies have recently focused on a possible connection between the hydraulic fracturing related activities and the increased occurrence of seismic activity.

When caused by human activity, such events are called induced seismicity.

In a few instances, operators of injection wells in the vicinity of seismic events have been ordered to reduce injection volumes or suspend operations.

Some state regulatory agencies, including those in Arkansas, California, Colorado, Illinois, Kansas, Ohio, Oklahoma, and Texas, have modified their regulations to account for induced seismicity.

Regulatory agencies at all levels are continuing to study the possible linkage between oil and gas activity and induced seismicity.

A 2012 report published by the National Academy of Sciences concluded that only a very small fraction of the tens of thousands of injection wells have been suspected to be, or have been, the likely cause of induced seismicity;

and a 2015 report by researchers at the University of Texas has suggested that the link between seismic activity and wastewater disposal may vary by region.

In 2015, the United States Geological Survey identified eight states, including Texas, with areas of increased rates of induced seismicity that could be attributed to fluid injection or oil and gas extraction.

In March 2016, the United States Geological Survey identified six states with the most significant hazards from induced seismicity, including Texas, Colorado, Oklahoma, Kansas, New Mexico, and Arkansas.

In addition, a number of lawsuits have been filed, most recently in Oklahoma, alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal.

Future regulatory developments could adversely affect our operations by placing restrictions on the use of injection wells and hydraulic fracturing.

Substantial exploration and development activities could require significant outside capital, which could dilute the value of our common shares and restrict our activities.

Also, we may not be able to obtain needed capital or financing on satisfactory terms, which could lead to a limitation of our future business opportunities and a decline in our oil and natural gas reserves.

We expect to expend substantial capital in the acquisition of, exploration for and development of oil and natural gas reserves.

In order to finance these activities, we may need to alter or increase our capitalization substantially through the issuance of debt or equity securities, the sale of non-strategic assets or other means.

The issuance of additional equity securities could have a dilutive effect on the value of our common shares, and may not be possible on terms acceptable to us given the current volatility in the financial markets.

The issuance of additional debt would likely require that a portion of our cash flow from operations be used for the payment of interest on our debt, thereby reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions, dividends and general corporate requirements, which could place us at a competitive disadvantage relative to other competitors.

Our cash flow from operations and access to capital is subject to a number of variables, including:

• our estimated proved reserves;

• the level of oil and natural gas we are able to produce from existing wells;

• our ability to extract natural gas liquids from the natural gas we produce;

• the prices at which oil, natural gas liquids and natural gas are sold;

• our ability to acquire, locate and produce new reserves.

If our revenues decrease as a result of lower oil or natural gas prices, operating difficulties or declines in reserves, our ability to obtain the capital necessary to undertake or complete future exploration and development programs and to pursue other opportunities may be limited, which could result in a curtailment of our operations relating to exploration and development of our prospects, which in turn could result in a decline in our oil and natural gas reserves.

We pursue acquisitions as part of our growth strategy and there are risks associated with such acquisitions.

Our growth has been attributable in part to acquisitions of producing properties and companies.

More recently we have been focused on acquiring acreage for our drilling program.

We expect to continue to evaluate and, where appropriate, pursue acquisition opportunities on terms we consider favorable.

However, we cannot assure you that suitable acquisition candidates will be identified in the future, or that we will be able to finance such acquisitions on favorable terms.

In addition, we compete against other companies for acquisitions, and we cannot assure you that we will successfully acquire any material property interests.

Further, we cannot assure you that future acquisitions by us will be integrated successfully into our operations or will increase our profits.

The successful acquisition of producing properties requires an assessment of numerous factors beyond our control, including, without limitation:

• recoverable reserves;

• exploration potential;

• future oil and natural gas prices;

• operating costs;

• potential environmental and other liabilities.

In connection with such assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices.

The resulting assessments are inexact and their accuracy uncertain, and such a review may not reveal all existing or potential problems, nor will it necessarily permit us to become sufficiently familiar with the properties to fully assess their merits and deficiencies.

Inspections may not always be performed on every well, and structural and environmental problems are not necessarily observable even when an inspection is made.

Additionally, significant acquisitions can change the nature of our operations and business depending upon the character of the acquired properties, which may be substantially different in operating and geologic characteristics or geographic location than our existing properties.

While our current operations are focused in Texas and Louisiana, we may pursue acquisitions or properties located in other geographic areas.

Our hedging transactions could result in financial losses or could reduce our income.

To the extent we have hedged a significant portion of our expected production and our actual production is lower than we expected or the costs of goods and services increase, our profitability would be adversely affected.

To achieve more predictable cash flows and to reduce our exposure to adverse fluctuations in the prices of oil and gas, we have entered into and may continue to enter into hedging transactions for certain of our expected oil and natural gas production.

These transactions could result in both realized and unrealized hedging losses.

Further, these hedges may be inadequate to protect us from continuing and prolonged declines in the price of oil and natural gas.

To the extent that the prices of oil and natural gas remain at current levels or declines further, we will not be able to hedge future production at the same level as our current hedges, and our results of operations and financial condition would be negatively impacted.

The extent of our commodity price exposure is related largely to the effectiveness and scope of our derivative activities.

For example, the derivative instruments we utilize are primarily based on NYMEX futures prices, which may differ significantly from the actual crude oil and gas prices we realize in our operations.

Furthermore, we have adopted a policy that requires, and our revolving credit facility also requires, that we enter into derivative transactions related to only a portion of our expected production volumes and, as a result, we will continue to have direct commodity price exposure on the portion of our production volumes not covered by these derivative financial instruments.

Our actual future production may be significantly higher or lower than we estimate at the time we enter into derivative transactions.

If our actual future production is higher than we estimated, we will have greater commodity price exposure than we intended.

If our actual future production is lower than the nominal amount that is subject to our derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions without the benefit of the cash flow from our sale or purchase of the underlying physical commodity, resulting in a substantial diminution in our profitability and liquidity.

As a result of these factors, our derivative activities may not be as effective as we intend in reducing the volatility of our cash flows, and in certain circumstances may actually increase the volatility of our cash flows.

In addition, our hedging transactions are subject to the following risks:

• we may be limited in receiving the full benefit of increases in oil and gas prices as a result of these transactions;

• a counterparty may not perform its obligation under the applicable derivative financial instrument or may seek bankruptcy protection;

• there may be a change in the expected differential between the underlying commodity price in the derivative instrument and the actual price received;

• the steps we take to monitor our derivative financial instruments may not detect and prevent violations of our risk management policies and procedures, particularly if deception or other intentional misconduct is involved.

Market conditions or operational impediments may hinder our access to oil and natural gas markets or delay our production.

Market conditions or the unavailability of satisfactory oil and natural gas transportation arrangements may hinder our access to oil and natural gas markets or delay our production.

The availability of a ready market for our oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of reserves to pipelines and processing facilities.

Our ability to market our production depends in a substantial part on the availability and capacity of gathering systems, pipelines and processing facilities, which, in some cases, may be owned and operated by third parties.

Our failure to obtain such services on acceptable terms could materially harm our business.

We may be required to shut in wells due to a lack of market demand or because of the inadequacy or unavailability of pipelines or gathering system capacity.

If that were to occur, then we would be unable to realize revenue from those wells until arrangements were made to deliver our production to market.

Our debt service requirements could adversely affect our operations and limit our growth.

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Complying with these covenants may cause us to take actions that we otherwise would not take or not take actions that we otherwise would take.

Our future production and revenues depend on our ability to replace our reserves.

Our future production and revenues depend upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable.

To increase reserves and production, we must continue our acquisition and drilling activities.

Furthermore, while our revenues may increase if prevailing oil and natural gas prices increase significantly, our finding costs for additional reserves could also increase.

Prospects that we decide to drill may not yield oil or natural gas in commercially viable quantities or quantities sufficient to meet our targeted rate of return and firm transportation commitments.

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Further, unsuccessful drilling may impact our ability to fulfill our firm transportation commitments.

We recently entered into an agreement with Enterprise Products Partner to be an anchor shipper on its new one Bcf per day Haynesville Acadian Extension to transport gas to the Gillis Hub.

We recently entered into an agreement with Enterprise Products Partners to be an anchor shipper on its new one Bcf per day Haynesville Acadian Extension to transport natural gas to the Gillis Hub.

As part of this agreement, we entered into firm transportation commitments that may be incurred in the event of unsuccessful drilling operations.

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Exploration activities involve numerous risks, including the risk that no commercially productive natural gas or oil reserves will be discovered.

In addition, these activitie s may be unsuccessful for many reasons, including weather, cost overruns, equipment shortages and mechanical difficulties.

In addition, these activities may be unsuccessful for many reasons, including weather, cost overruns, equipment shortages and mechanical difficulties.

Moreover, the successful drilling of a natural gas or oil well does not ensure we will realize a profit on our investment.

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• unusual or unexpected geological formations;

• explosions;

• blow-outs and surface cratering;

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The occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on our financial condition and results of operations.

We operate in a highly competitive industry, and our failure to remain competitive with our competitors, many of which have greater resources than we do, could adversely affect our results of operations.

The oil and natural gas industry is highly competitive in the search for and development and acquisition of reserves.

Our competitors often include companies that have greater financial and personnel resources than we do.

These resources could allow those competitors to price their products and services more aggressively than we can, which could hurt our profitability.

Moreover, our ability to acquire

additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to close transactions in a highly competitive environment.

If oil and natural gas prices decline further or continue to remain low for an extended period of time, we may be required to further write-down the carrying values and/or the estimates of total reserves of our oil and natural gas properties, which would constitute a non-cash charge to earnings and adversely affect our results of operations.

Accounting rules applicable to us require that we periodically review the carrying value of our oil and natural gas properties for possible impairment.

Based on specific market factors and circumstances at the time of prospective impairment reviews and the continuing evaluation of development plans, production data, economics and other factors, we may be required to write down the carrying value of our oil and natural gas properties.

A write-down constitutes a non-cash charge to earnings.

We did not recognize any impairments in 2018 or 2019.

We may however, incur non-cash impairment charges in the future, which could have a material adverse effect on our results of operations in the period taken.

We may also reduce our estimates of the reserves that may be economically recovered, which could have the effect of reducing the total value of our reserves.

Our reserve estimates depend on many assumptions that may turn out to be inaccurate.

Any material inaccuracies in our reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.

Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil and natural gas that cannot be precisely measured.

The accuracy of any reserve estimate depends on the quality of available data, production history and engineering and geological interpretation and judgment.

Because all reserve estimates are to some degree imprecise, the quantities of oil and natural gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future oil and natural gas prices may all differ materially from those assumed in these estimates.

The information regarding the present value of future net cash flows attributable to our proved oil and natural gas reserves is only an estimate and should not be construed as the current market value of the oil and natural gas reserves attributable to our properties.

Thus, such information includes revisions of certain reserve estimates attributable to proved properties included in the preceding year's estimates.

Such revisions reflect additional information from subsequent activities, production history of the properties involved and any adjustments in the projected economic life of such properties resulting from changes in product prices.

Any future downward revisions could adversely affect our financial condition, our borrowing ability, our future prospects and the value of our common stock.

As of December 31, 2019, 64% of our total proved reserves were undeveloped and 1% were developed non-producing.

These reserves may not ultimately be developed or produced.

Furthermore, not all of our undeveloped or developed non-producing reserves may be ultimately produced at the time periods we have planned, at the costs we have budgeted, or at all.

As a result, we may not find commercially viable quantities of oil and natural gas, which in turn may result in a material adverse effect on our results of operations.

Some of our undeveloped leasehold acreage is subject to leases that will expire unless production is established on units containing the acreage.

Leases on oil and gas properties normally have a term of three to five years and will expire unless, prior to expiration of the lease term, production in paying quantities is established.

If the leases expire and we are unable to renew them, we will lose the right to develop the leased properties.

Our drilling plans for these areas are subject to change based upon various factors, including drilling results,

commodity prices, the availabi lity and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals.