CIMAREX ENERGY CO. Cimarex is an independent oil and gas exploration and production company. Our operations are entirely located inthe United States , mainly inTexas ,New Mexico , andOklahoma . Currently our operations are focused in two main areas: thePermian Basin and the Mid-Continent. OurPermian Basin region encompasses westTexas and southeastNew Mexico . Our Mid-Continent region consists ofOklahoma and the TexasPanhandle . Our principal business objective is to increase shareholder value through the profitable long-term growth of our proved reserves and production while seeking to minimize our impact on the communities in which we operate for the long-term. Our strategy centers on maximizing cash flow from producing properties so that we can reinvest in exploration and development opportunities and provide cash returns to shareholders through dividends. We consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest non-strategic assets. OnMarch 1, 2019 , we completed the acquisition ofResolute Energy Corporation ("Resolute"), an independent oil and gas company focused on the acquisition and development of unconventional oil and gas properties in theDelaware Basin area of thePermian Basin of westTexas . See Note 13 to the Condensed Consolidated Financial Statements for more information on the acquisition. We believe that detailed technical analysis, operational focus, and a disciplined capital investment process mitigate risk and position us to continue to achieve profitable increases in proved reserves and production. Our drilling inventory and limited long-term commitments provide the flexibility to respond quickly to industry volatility. Our investments are generally funded with cash flow provided by operating activities together with cash on hand, bank borrowings, sales of non-strategic assets, and, from time to time, public financing based on our monitoring of capital markets and our balance sheet.
Market Conditions
The oil and gas industry is cyclical and commodity prices can fluctuate significantly. We expect this volatility to persist. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, inventory storage levels, weather conditions, and other factors. Local market prices for oil and gas can be impacted by pipeline capacity constraints limiting takeaway and increasing basis differentials.
The reduction in economic activity from the COVID-19 pandemic resulted in unprecedented demand destruction and inventory increases for oil and natural gas liquids. WTI oil prices dropped from an average of$57.53 per barrel inJanuary 2020 to$16.70 per barrel inApril 2020 . SinceApril 2020 , average oil prices have risen to$38.31 per barrel inJune 2020 . The oil price improvement and or stabilization has coincided with some recovery of global economic activity, lower supply from major oil producing countries, and moderating inventory levels. In response to the decline in oil prices in the second quarter 2020, we took immediate steps to reduce our capital investment, including releasing all but one drilling rig by mid-May and deferring completion activity. This resulted in a reduction in capital investments from$248.7 million in the first quarter of 2020 to$83.8 million in the second quarter of 2020. Further, as a result of low oil prices we curtailed approximately 20% of our production in the month of May; however, with the subsequent improvement in oil prices we did not curtail volumes in June, and we are not currently curtailing volumes. At current price levels we have added two drilling rigs and expect to add one additional rig over the remainder of the year, exiting 2020 with four rigs. We also expect to begin completing wells starting in September with two completion crews. As a result, total capital expenditures for 2020 are expected to be approximately$600 million . 32 -------------------------------------------------------------------------------- Table of Contents The table below shows average NYMEX prices and our company-wide average realized prices and price differentials for the periods indicated. Our average realized prices have declined for all products in the 2020 periods as compared to the 2019 periods, with the exception of the average realized gas price in the second quarter of 2020. Average NYMEX prices have declined for all products in the 2020 periods as compared to the 2019 periods. However, our price differentials have improved for all products in the 2020 periods as compared to the 2019 periods, with the exception of our oil price differential in the second quarter of 2020. Three Months Ended Six Months Ended Variance June 30, Variance Between June 30, Between 2020 2019 2020 / 2019 2020 2019 2020 / 2019 Average NYMEX price Oil - per barrel$ 27.85 $ 59.82 (53)%$ 37.01 $ 57.36 (35)% Gas - per Mcf$ 1.71 $ 2.64 (35)%$ 1.83 $ 2.90 (37)% Average realized price Oil - per barrel$ 19.57 $ 54.24 (64)%$ 32.74 $ 51.64 (37)% Gas - per Mcf$ 0.91 $ 0.50 82%$ 0.72 $ 1.19 (39)% NGL - per barrel$ 7.52 $ 13.08 (43)%$ 8.71 $ 14.67 (41)% Average price differential Oil - per barrel$ (8.28) $ (5.58) (48)%$ (4.27) $ (5.72) 25% Gas - per Mcf$ (0.80) $ (2.14) 63%$ (1.11) $ (1.71) 35%
The average price differentials that we realized in our two primary areas of operation are shown in the table below for the periods indicated.
Average Price Differentials
2020 2019
Second First Fourth Third Second First
Year-to-date Quarter Quarter Year Quarter Quarter Quarter Quarter
Oil
Permian Basin $ (4.17) $ (8.12) $ (2.00) $ (4.48) $ (2.18) $ (3.76) $ (5.80) $ (6.90)
Mid-Continent $ (5.18) $ (9.53) $ (2.02) $ (3.14) $ (2.05) $ (3.72) $ (4.39) $ (2.17)
Total Company $ (4.27) $ (8.28) $ (1.99) $ (4.26) $ (2.16) $ (3.74) $ (5.58) $ (6.03)
Gas
Permian Basin $ (1.48) $ (1.09) $ (1.85) $ (2.14) $ (1.67) $ (1.83) $ (3.10) $ (1.91)
Mid-Continent $ (0.44) $ (0.31) $ (0.57) $ (0.68) $ (0.74) $ (0.66) $ (0.86) $ (0.46)
Total Company $ (1.11) $ (0.80) $ (1.40) $ (1.52) $ (1.31) $ (1.35) $ (2.14) $ (1.24)
Pipeline expansion projects in the Permian Basin are expected to ease capacity
constraints as they come online over the next few years, which is reflected in
the current futures markets that show narrowing differentials. In addition, as a
result of current market expectations for lower near-term production volumes
from the basin, gas differentials have recently improved. However, if pipeline
projects are delayed or canceled, production resumes or increases faster than
capacity increases, the basin experiences pipeline disruptions or other
constraints, higher differentials will persist or potentially worsen. Our
revenue, profitability, and future growth are highly dependent on the prices we
receive for our oil and gas production and can be adversely affected by realized
price decreases. See RESULTS OF OPERATIONS Revenues below for further
information regarding our realized commodity prices.
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See RISK FACTORS in Item 1A of this Form 10-Q and in our Annual Report on Form
10-K for the year ended December 31, 2019 , for a discussion of risk factors that
affect our business, financial condition, and results of operations. Also, see
CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS in this report for
important information about these types of statements.
Summary of Operating and Financial Results for the Six Months Ended
•Total production volumes remained flat at 48.3 MMBOE.
•Oil volumes increased 3% to 83.9 MBbls per day.
•Gas volumes increased 3% to 675.2 MMcf per day.
•NGL volumes decreased 10% to 69.3 MBbls per day.
•Total production revenue decreased 37%, or
•Cash flow provided by operating activities decreased 32%, or
•Exploration and development expenditures decreased 52%, or
•Net loss was
RESULTS OF OPERATIONS
Three and Six Months Ended
Revenues Our revenues are derived from sales of our oil, gas, and NGL production. Increases or decreases in our revenues, profitability, and future production growth are highly dependent on the commodity prices we receive. Prices are market driven and we expect that future prices will continue to fluctuate due to supply and demand factors, availability of transportation, seasonality, and geopolitical and economic factors. See QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK for more information regarding the sensitivity of our revenues to price fluctuations. Production volumes were lower for all products during the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . This was due to strategic curtailment or shut in of production in certain areas during the three months endedJune 30, 2020 as a result of the unprecedented demand destruction and inventory increases for oil and NGLs, and resulting severe price decreases, stemming from the COVID-19 pandemic. Realized prices were lower for oil and NGLs, while realized prices for gas were higher during the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . Gas price differentials improved during the 2020 period as compared to the 2019 period. For the six months endedJune 30, 2020 , average realized prices were lower for all products as compared to average realized prices for the six months endedJune 30, 2019 , while production volumes for oil and gas were higher and production volumes for NGLs were lower. Our revenue decreased 56%, or$298.7 million , during the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . Our revenue decreased 37%, or$406.5 million , during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . The following tables show our production revenue for the periods indicated as well as the change in revenue due to changes in volumes and prices. 34
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Three Months Ended
June 30 , Price/Volume VarianceProduction Revenue (in thousands) 2020 2019 Variance Between 2020 / 2019 Price Volume Total Oil sales$ 138,817 $ 411,766 $ (272,949) (66)%$ (245,949) $ (27,000) $ (272,949) Gas sales 54,154 30,362 23,792 78% 24,474 (682) 23,792 NGL sales 46,107 95,682 (49,575) (52)% (34,103) (15,472) (49,575)$ 239,078 $ 537,810 $ (298,732) (56)%$ (255,578) $ (43,154) $ (298,732) Six Months Ended June 30, Price/Volume Variance Production Revenue (in thousands) 2020 2019 Variance Between 2020 / 2019 Price Volume Total Oil sales$ 499,797 $ 761,072 $ (261,275) (34)%$ (288,508) $ 27,233 $ (261,275) Gas sales 88,984 140,338 (51,354) (37)% (57,752) 6,398 (51,354) NGL sales 109,758 203,621 (93,863) (46)% (75,118) (18,745) (93,863)$ 698,539 $ 1,105,031 $ (406,492) (37)%$ (421,378) $ 14,886 $ (406,492)
The table below presents our production volumes by region.
Three Months Ended Six Months Ended
June 30, June 30,
Production Volumes 2020 2019 2020 2019
Oil (Bbls per day)
Permian Basin 68,791 70,669 74,198 67,835
Mid-Continent 9,063 12,623 9,502 13,419
Other 102 138 173 179
77,956 83,430 83,873 81,433
Gas (MMcf per day)
Permian Basin 417.8 379.3 433.4 360.1
Mid-Continent 237.3 285.5 240.7 291.3
Other 0.9 1.0 1.1 1.1
656.0 665.8 675.2 652.5
NGL (Bbls per day)
Permian Basin 47,291 54,813 48,111 50,567
Mid-Continent 20,068 25,496 21,089 26,060
Other 43 53 51 53
67,402 80,362 69,251 76,680
Total (BOE per day)
Permian Basin 185,717 188,703 194,548 178,413
Mid-Continent 68,675 85,696 70,705 88,028
Other 295 368 396 427
254,687 274,767 265,649 266,868
35-------------------------------------------------------------------------------- Table of Contents The table below presents our production volumes by commodity, our average realized commodity prices, and certain majorU.S. index prices. The sale of ourPermian Basin oil production is typically tied to the WTI Midland benchmark price and the sale of our Mid-Continent oil production is typically tied to the WTI Cushing benchmark price. During the six months endedJune 30, 2020 , approximately 88% of our oil production was in thePermian Basin , up from approximately 83% during the six months endedJune 30, 2019 . Our realized prices do not include settlements of commodity derivative contracts. Three Months Ended Six Months Ended Variance June 30, Variance Between June 30, Between 2020 2019 2020 / 2019 2020 2019 2020 / 2019 Oil Total volume - MBbls 7,094 7,592 (7)% 15,265 14,739 4% Total volume - MBbls per day 78.0 83.4 (7)% 83.9 81.4 3% Percentage of total production 31 % 30 % 32 % 30 % Average realized price - per barrel$ 19.57 $ 54.24 (64)%$ 32.74 $ 51.64 (37)% Average WTI Midland price - per barrel$ 28.06 $ 57.72 (51)%$ 37.55 $ 54.35 (31)% Average WTI Cushing price - per barrel$ 27.85 $ 59.82 (53)%$ 37.01 $ 57.36 (35)%
Gas
Total volume - MMcf 59,694 60,592 (1)% 122,877 118,108 4% Total volume - MMcf per day 656.0 665.8 (1)% 675.2 652.5 3% Percentage of total production 43 % 41 % 42 % 41 % Average realized price - per Mcf$ 0.91 $ 0.50 82%$ 0.72 $ 1.19 (39)% AverageHenry Hub price - per Mcf$ 1.71 $ 2.64 (35)%$ 1.83 $ 2.90 (37)% NGL Total volume - MBbls 6,134 7,313 (16)% 12,604 13,879 (9)% Total volume - MBbls per day 67.4 80.4 (16)% 69.3 76.7 (10)% Percentage of total production 26 % 29 % 26 % 29 % Average realized price - per barrel$ 7.52 $ 13.08 (43)%$ 8.71 $ 14.67 (41)% Total Total production - MBOE 23,177 25,004 (7)% 48,348 48,303 -% Total production - MBOE per day 254.7 274.8 (7)% 265.6 266.9 -% Average realized price - per BOE$ 10.32 $ 21.51 (52)%$ 14.45 $ 22.88 (37)% 36
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Other revenues
We transport, process, and market some third-party gas that is associated with
our equity gas. We market and sell gas for other working interest owners under
short-term agreements and may earn a fee for such services. The table below
reflects revenues from third-party gas gathering and processing and our net
marketing margin for marketing third-party gas.
Three Months Ended Six Months Ended
June 30, June 30, Variance
Gas Gathering and Marketing Variance Between Between
Revenues (in thousands) 2020 2019 2020 / 2019 2020 2019 2020 / 2019 Gas gathering and other$ 11,589 $ 9,769 $ 1,820 $ 25,172 $ 20,031 $ 5,141 Gas marketing$ (1,284) $ (1,116) $ (168) $ (1,498) $ (1,642) $ 144 Fluctuations in revenues from gas gathering and gas marketing activities are a function of increases and decreases in volumes, commodity prices, and gathering rate charges. Operating Costs and Expenses Costs associated with producing oil and gas are substantial. Among other factors, some of these costs vary with commodity prices, some trend with the volume of production, some are a function of the number of wells we own, some depend on the prices charged by service companies, and some fluctuate based on a combination of the foregoing. Total operating costs and expenses for the three months endedJune 30, 2020 were higher by 260%, or$1.035 billion , compared to the three months endedJune 30, 2019 . The primary reasons for the increase were: (i) the$941.2 million ceiling test impairment incurred during the three months endedJune 30, 2020 and (ii) the$164.7 million increase in net losses on derivative instruments. Three Months Ended June 30, Variance Per BOE Operating Costs and Expenses Between 2020 / (in thousands, except per BOE) 2020 2019 2019 2020 2019 Impairment of oil and gas properties$ 941,198 $ -$ 941,198 N/A N/A Depreciation, depletion, and amortization 194,954 213,327 (18,373)$ 8.41 $ 8.53 Asset retirement obligation 1,661 2,157 (496)$ 0.07 $ 0.09 Production (1) 64,337 88,995 (24,658)$ 2.78 $ 3.56 Transportation, processing, and other operating (1) 53,282 54,107 (825)$ 2.30 $ 2.16 Gas gathering and other (1) 3,526 6,560 (3,034)$ 0.15 $ 0.26 Taxes other than income 16,486 41,033 (24,547)$ 0.71 $ 1.64 General and administrative 26,226 24,911 1,315$ 1.13 $ 1.00 Stock compensation 6,747 6,494 253$ 0.29 $ 0.26 Loss (gain) on derivative instruments, net 123,885 (40,768) 164,653 N/A N/A Other operating expense, net 130 590 (460) N/A N/A$ 1,432,432 $ 397,406 $ 1,035,026
________________________________________
(1) In order to conform with the 2020 presentation, the 2019 amount presented
reflects the reclassification of certain "Gas gathering and other" expenses to
"Transportation, processing, and other operating" expenses and "Production"
expense. These reclassifications were made to reflect an allocation of the costs
incurred to operate our gas gathering facilities as a cost to transport our
equity share of gas produced and operate our wells. See
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Total operating costs and expenses for the six months endedJune 30, 2020 were higher by 190%, or$1.761 billion , compared to the six months endedJune 30, 2019 . The primary reasons for the increase were: (i) the$1.275 billion in ceiling test impairments incurred during the six months endedJune 30, 2020 and (ii) the$714.4 million impairment of goodwill incurred during the six months endedJune 30, 2020 , partially offset by (iii) the$177.7 million increase in net gains on derivative instruments. Six Months Ended June 30, Variance Per BOE Operating Costs and Expenses Between 2020 / (in thousands, except per BOE) 2020 2019 2019 2020 2019 Impairment of oil and gas properties$ 1,274,849 $ -$ 1,274,849 N/A N/A Depreciation, depletion, and amortization 410,040 403,744 6,296$ 8.48 $ 8.36 Asset retirement obligation 6,385 4,206 2,179$ 0.13 $ 0.09 Impairment of goodwill 714,447 - 714,447 N/A N/A Production (1) 151,573 167,399 (15,826)$ 3.14 $ 3.47 Transportation, processing, and other operating (1) 108,204 113,682 (5,478)$ 2.24 $ 2.35 Gas gathering and other (1) 11,824 11,742 82$ 0.24 $ 0.24 Taxes other than income 47,447 74,727 (27,280)$ 0.98 $ 1.55 General and administrative 51,735 53,995 (2,260)$ 1.07 $ 1.12 Stock compensation 13,141 13,207 (66)$ 0.27 $ 0.27 (Gain) loss on derivative instruments, net (103,055) 74,684 (177,739) N/A N/A Other operating expense, net 381 8,916 (8,535) N/A N/A$ 2,686,971 $ 926,302 $ 1,760,669
________________________________________
(1) In order to conform with the 2020 presentation, the 2019 amount presented reflects the reclassification of certain "Gas gathering and other" expenses to "Transportation, processing, and other operating" expenses and "Production" expense. These reclassifications were made to reflect an allocation of the costs incurred to operate our gas gathering facilities as a cost to transport our equity share of gas produced and operate our wells. See Note 1 to the Condensed Consolidated Financial Statements for further information regarding these prior year reclassifications.
Impairment of
We use the full cost method of accounting for our oil and gas operations. Under
this method, we are required to perform quarterly ceiling test calculations to
test our oil and gas properties for possible impairment. If the net capitalized
cost of our oil and gas properties, as adjusted for income taxes, exceeds the
ceiling limitation, the excess is charged to expense. The ceiling limitation is
equal to the sum of: (i) the present value discounted at 10% of estimated future
net revenues from proved reserves, (ii) the cost of properties not being
amortized, and (iii) the lower of cost or estimated fair value of unproven
properties included in the costs being amortized, as adjusted for income
taxes. We currently do not have any unproven properties that are being
amortized. Estimated future net revenues are determined based on trailing
twelve-month average commodity prices and estimated proved reserve quantities,
operating costs, and capital expenditures.
The quarterly ceiling test is primarily impacted by commodity prices, changes in
estimated reserve quantities, reserves produced, overall exploration and
development costs, depletion expense, and deferred taxes. If pricing conditions
decline, or if there is a negative impact on one or more of the other components
of the calculation, we may incur a full cost ceiling test impairment. The
calculated ceiling limitation is not intended to be indicative of the fair
market value of our proved reserves or future results. Impairment charges do not
affect cash flow from
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operating activities, but do adversely affect our net income and various
components of our balance sheet. Any impairment of oil and gas properties is not
reversible at a later date.
For the six months ended June 30, 2020 , we incurred ceiling test impairments
totaling $1.275 billion ($941.2 million for the three months ended June 30, 2020
and $333.7 million for the three months ended March 31, 2020 ). These impairments
resulted primarily from the impact of decreases in the 12-month average trailing
prices for oil, gas, and NGLs as well as significant basis differentials
utilized in determining the estimated future net cash flows from proved
reserves. We expect these conditions to continue at least through September 30,
2020 and possibly beyond and, therefore, expect to incur another ceiling test
impairment at September 30, 2020 .
Depreciation, Depletion, and Amortization
Depletion of our producing properties is computed using the units-of-production method. The economic life of each producing well depends upon the estimated proved reserves for that well, which in turn depend upon the assumed realized sales price for future production. Therefore, fluctuations in oil and gas prices will impact the level of proved reserves used in the calculation. Higher prices generally have the effect of increasing reserves, which reduces depletion expense. Conversely, lower prices generally have the effect of decreasing reserves, which increases depletion expense. The cost of replacing production also impacts our depletion expense. In addition, changes in estimates of reserve quantities, estimates of operating and future development costs, reclassifications of properties from unproved to proved, and impairments of oil and gas properties will also impact depletion expense. Our depletion expense decreased during the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 primarily due to a decrease in our depletable basis mostly due to ceiling test impairments recognized atDecember 31, 2019 andMarch 31, 2020 and secondarily due to a decrease in our production as a result of strategic curtailments and shut ins in the three months endedJune 30, 2020 stemming from the demand destruction and inventory buildups caused by the COVID-19 pandemic. These causes for decreased depletion were partially offset by a decrease in our reserves primarily due to a decrease in the trailing twelve month prices used to calculate reserves. Depletion expense increased slightly during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . This is primarily due to the decrease in our reserves as a result of a decrease in the trailing twelve month prices, mostly offset by a decreased depletable basis, primarily as a result of ceiling test impairments recognized atDecember 31, 2019 andMarch 31, 2020 . Fixed assets consist primarily of gathering and plant facilities, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated to depreciation expense on the straight-line method based on the expected lives of the individual assets, which range from 3 to 30 years. Also included in our depreciation expense is the depreciation of our finance lease gathering system right-of-use asset. The increase in depreciation expense during the three and six months endedJune 30, 2020 as compared to the three and six months endedJune 30, 2019 is primarily due to increased depreciation on our gathering and plant facilities due to ongoing expenditures on this infrastructure. Depreciation, depletion, and amortization ("DD&A") consisted of the following for the periods indicated: Three Months Ended June 30, Variance Per BOE DD&A Expense (in thousands, except per Between BOE) 2020 2019 2020 / 2019 2020 2019 Depletion$ 177,136 $ 196,899 $ (19,763) $ 7.64 $ 7.87 Depreciation 17,818 16,428 1,390 0.77 0.66$ 194,954 $ 213,327 $ (18,373) $ 8.41 $ 8.53 39
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Six Months Ended
June 30, Variance Per BOE
DD&A Expense (in thousands, except per Between
BOE) 2020 2019 2020 / 2019 2020 2019
Depletion $ 375,262 $ 371,611 $ 3,651 $ 7.76 $ 7.69
Depreciation 34,778 32,133 2,645 0.72 0.67
$ 410,040 $ 403,744 $ 6,296 $ 8.48 $ 8.36
Impairment of Goodwill We concluded that goodwill was impaired at
Production
Production expense generally consists of costs for labor, equipment,
maintenance, saltwater disposal, compression, power, treating, and miscellaneous
other costs (lease operating expense). Production expense also includes well
workover activity necessary to maintain production from existing wells.
Production expense consisted of lease operating expense and workover expense as
follows:
Three Months Ended
June 30, Variance Per BOE
Production Expense (in thousands, Between
except per BOE) 2020 2019 2020 / 2019 2020 2019
Lease operating expense $ 58,427 $ 73,047 $ (14,620) $ 2.52 $ 2.92
Workover expense 5,910 15,948 (10,038) 0.26 0.64
$ 64,337 $ 88,995 $ (24,658) $ 2.78 $ 3.56
Six Months Ended
June 30, Variance Per BOE
Production Expense (in thousands, Between
except per BOE) 2020 2019 2020 / 2019 2020 2019
Lease operating expense $ 132,896 $ 136,626 $ (3,730) $ 2.75 $ 2.83
Workover expense 18,677 30,773 (12,096) 0.39 0.64
$ 151,573 $ 167,399 $ (15,826) $ 3.14 $ 3.47
Lease operating expense for the second quarter of 2020 decreased 20%, or $14.6
million , compared to the second quarter of 2019. Lease operating expense for the
six months ended June 30, 2020 decreased 3%, or $3.7 million , compared to the
six months ended June 30, 2019 . The decreases in the 2020 periods as compared to
the 2019 periods are primarily related to the reduction in activity, which has
reduced: (i) saltwater disposal costs due to the reduction in production as a
result of shut ins and decreased drilling and completion, (ii) labor costs, due
to releasing contract workers as well as employees volunteering for an early
retirement incentive program, (iii) rental equipment costs due to decreased
drilling and completion, and (iv) repair and maintenance costs as non-essential
work has been delayed.
Workover expense for the second quarter of 2020 decreased 63%, or $10.0 million ,
compared to the second quarter of 2019. Workover expense for the six months
ended June 30, 2020 decreased 39%, or $12.1 million , compared to the six months
ended June 30, 2019 . We had fewer workover projects during the 2020 periods as
compared to the 2019 periods as a result of a concerted effort to reduce
activity and delay non-essential work. We expect workover expense to increase
from the second quarter of 2020 levels going forward in 2020.
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Transportation, Processing, and Other Operating
Transportation, processing, and other operating costs principally consist of
expenditures to prepare and transport production from the wellhead, including
gathering, fuel, compression, and processing costs. Costs vary by region and
will fluctuate with increases or decreases in production volumes, contractual
fees, changes in fuel and compression costs, and the structure of sales
contracts. If the sales contract transfers control of the product at the
wellhead, transportation and processing costs are included as a reduction in the
revenue we record and are not included in transportation, processing, and other
operating costs. Transportation, processing, and other operating costs for the
second quarter of 2020 were 2%, or $0.8 million , lower than the same costs in
the second quarter of 2019. Transportation, processing, and other operating
costs for the six months ended June 30, 2020 were 5%, or $5.5 million , lower
than the same costs in the six months ended June 30, 2019 .
Gas Gathering and Other
Gas gathering and other includes costs associated with operating our gas gathering and processing infrastructure, including product costs and operating and maintenance expenses. A portion of these costs are reclassified to "Transportation, processing, and other operating" expense and "Production" expense in order to reflect an allocation of the costs incurred to operate our gas gathering facilities as a cost of transporting our equity share of gas produced and operating our wells. Gas gathering and other in the three months endedJune 30, 2020 was 46%, or$3.0 million , lower than gas gathering and other in the three months endedJune 30, 2019 resulting primarily from decreases in compression and other third-party costs. Gas gathering and other in the six months endedJune 30, 2020 was consistent with gas gathering and other in the six months endedJune 30, 2019 .
Taxes Other than Income
Taxes other than income consist of production (or severance) taxes, ad valorem
taxes, and other taxes. State and local taxing authorities assess these taxes,
with production taxes being based on the volume or value of production and ad
valorem taxes being based on the value of properties.
Three Months Ended Six Months Ended
June 30, June 30, Variance
Taxes Other than Income (in
Variance Between Between
thousands) 2020 2019 2020 / 2019 2020 2019 2020 / 2019
Production $ 6,868 $ 29,648 $ (22,780) $ 28,455 $ 56,739 $ (28,284)
Ad valorem 9,232 11,093 (1,861) 18,451 17,534 917
Other 386 292 94 541 454 87
$ 16,486 $ 41,033 $ (24,547) $ 47,447 $ 74,727 $ (27,280)
Taxes other than income as a
percentage of production
revenue 6.9 % 7.6 % 6.8 % 6.8 %
Taxes other than income decreased $24.5 million , or 60%, in the second quarter
of 2020 as compared to the second quarter of 2019 and decreased $27.3 million ,
or 37%, in the six months ended June 30, 2020 as compared to the six months
ended June 30, 2019 . Production taxes typically make up the majority of our
taxes other than income and they decreased significantly primarily due to
decreased revenues as a result of decreased prices and volumes. Ad valorem tax
accruals are based on the most recent actual taxes paid with adjustments made
based on expected valuations and as better information, including actual
valuations, is received. Other taxes other than income are comprised of
franchise and consumer use and sales taxes.
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General and Administrative
General and administrative ("G&A") expense consists primarily of salaries and
related benefits, office rent, legal and consulting fees, systems costs, and
other administrative costs incurred. Our G&A expense is reported net of amounts
reimbursed to us by working interest owners of the oil and gas properties we
operate and net of amounts capitalized pursuant to the full cost method of
accounting. The amount of expense capitalized varies and depends on whether the
cost incurred can be directly identified with acquisition, exploration, and
development activities. The percentage of gross G&A capitalized ranged from 35%
to 47% during the periods presented in the table below, which shows our G&A
costs.
Three Months Ended Six Months Ended
June 30, June 30, Variance
General and Administrative Variance Between Between
Expense (in thousands) 2020 2019 2020 / 2019 2020 2019 2020 /2019 Gross G&A$ 40,466 $ 46,930 $ (6,464) $ 83,267 $ 96,166 $ (12,899) Less amounts capitalized to oil and gas properties (14,240) (22,019) 7,779 (31,532) (42,171) 10,639 G&A expense$ 26,226 $ 24,911 $ 1,315 $ 51,735 $ 53,995 $ (2,260) G&A expense for the second quarter of 2020 was 5%, or$1.3 million , higher than G&A expense for the second quarter of 2019. G&A expense for the six months endedJune 30, 2020 was 4%, or$2.3 million , lower than G&A expense for the six months endedJune 30, 2019 . Salaries and wages, annual bonus accrual expense, and profit sharing accrual expense are lower in the 2020 periods as compared to the 2019 periods. In January andMarch 2020 , we offered employees who met certain eligibility criteria the opportunity to participate in a voluntary early retirement incentive program. As a result of this program, we recognized severance expense of$3.6 million and$14.5 million in G&A expense during the three and six months endedJune 30, 2020 , respectively. We expect to recognize a total of$17.0 million in severance expense for this program. In response to current low oil prices, we have reduced our acquisition, exploration, and development activities, and, therefore, the percentage of gross G&A capitalized has decreased from prior periods and we expect this trend to continue in future quarters until activity increases.
Stock Compensation
Stock compensation expense consists of non-cash charges resulting from the
amortization of the cost of restricted stock and stock option awards, net of
amounts capitalized to oil and gas properties. We have recognized stock-based
compensation cost as follows:
Three Months Ended Six Months Ended
June 30, June 30, Variance
Stock Compensation Expense Variance Between Between
(in thousands) 2020 2019 2020 / 2019 2020 2019 2020 / 2019 Restricted stock awards: Performance stock awards$ 4,059 $ 5,535 $ (1,476) $ 8,119 $ 10,929 $ (2,810) Service-based stock awards 6,585 5,993 592 13,962 13,224 738 10,644 11,528 (884) 22,081 24,153 (2,072) Stock option awards 416 396 20 914 1,018 (104) Total stock compensation cost 11,060 11,924 (864) 22,995 25,171 (2,176) Less amounts capitalized to oil and gas properties (4,313) (5,430) 1,117 (9,854) (11,964) 2,110 Stock compensation expense$ 6,747 $ 6,494 $ 253 $ 13,141 $ 13,207 $ (66) 42
-------------------------------------------------------------------------------- Table of Contents Periodic stock compensation expense will fluctuate based on the grant-date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards.
Loss (Gain) on Derivative Instruments, Net
The following table presents the components of "Loss (gain) on derivative
instruments, net" for the periods indicated. See Note 3 to the Condensed
Consolidated Financial Statements for additional information regarding our
derivative instruments.
Three Months Ended Six Months Ended
June 30, June 30, Variance
Loss (Gain) on Derivative Variance Between Between
Instruments, Net (in thousands) 2020 2019 2020 / 2019 2020 2019 2020 / 2019 Decrease (increase) in fair value of derivative instruments, net: Gas contracts$ 19,826 $ (6,370) $ 26,196 $ 32,319 $ (16,216) $ 48,535 Oil contracts 168,000 (28,161) 196,161 (28,319) 88,086 (116,405) 187,826 (34,531) 222,357 4,000 71,870 (67,870) Cash (receipts) payments on derivative instruments, net: Gas contracts (5,870) (21,176) 15,306 (17,589) (17,412) (177) Oil contracts (58,071) 14,939 (73,010) (89,466) 20,226 (109,692) (63,941) (6,237) (57,704) (107,055) 2,814 (109,869) Loss (gain) on derivative instruments, net$ 123,885 $ (40,768) $ 164,653 $ (103,055) $ 74,684 $ (177,739) Other Operating Expense, Net
Other operating expense, net during the six months ended
Other Income and Expense
Three Months Ended Six Months Ended
June 30, June 30, Variance
Other Income and Expense (in Variance Between Between
thousands) 2020 2019 2020 / 2019 2020 2019 2020 / 2019
Interest expense $ 23,047 $ 24,674 $ (1,627) $ 46,228 $ 45,079 $ 1,149
Capitalized interest (12,939) (16,805) 3,866 (26,121) (25,547) (574)
Loss on early extinguishment
of debt - - - - 4,250 (4,250)
Other, net 3,496 (2,167) 5,663 2,625 (4,408) 7,033
$ 13,604 $ 5,702 $ 7,902 $ 22,732 $ 19,374 $ 3,358
The majority of our interest expense relates to interest on our senior unsecured
notes. Also included in interest expense is interest expense on our Credit
Facility borrowings, the amortization of debt issuance costs and discounts, and
miscellaneous interest expense. See LIQUIDITY AND CAPITAL RESOURCES Long-term
Debt below for further information regarding our debt. The $4.3 million loss on
early extinguishment of debt incurred during the six months ended June 30, 2019
was associated with the $600 million of 8.5% senior notes we acquired with
Resolute and elected to immediately repay. The maturity date of the Resolute
notes was May 1, 2020 .
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We capitalize interest on non-producing leasehold costs, the in-progress costs
of drilling and completing wells, and constructing midstream and water facility
assets. Capitalized interest will fluctuate based primarily on the amount of
costs subject to interest capitalization and based on the rates applicable to
borrowings outstanding during the period. The amount of interest capitalized was
lower for the three months ended June 30, 2020 than it was for the three months
ended June 30, 2019 due to a decrease in costs subject to interest
capitalization primarily as a result of a decrease in the balance of
non-producing leasehold acquired in the Resolute acquisition. Since the March 1,
2019 acquisition, the balance of these assets has declined due to purchase price
adjustments and transfers to proved properties. The amount of interest
capitalized was slightly higher for the six months ended June 30, 2020 than it
was for the six months ended June 30, 2019 due to an increase in costs subject
to interest capitalization primarily as a result of the balance of non-producing
leasehold acquired in the Resolute acquisition being subject to capitalization
for the entirety of the six months ended June 30, 2020 as compared to four
months of the six months ended June 30, 2019 . This increase in costs subject to
capitalization was partially offset by reduced in-progress costs of drilling and
completing wells during 2020 as compared to 2019.
Components of "Other, net" consist of miscellaneous income and expense items
that vary from period to period, including interest income, gain or loss related
to the sale or value of oil and gas well equipment and supplies, gain or loss on
miscellaneous asset sales, and income and expense associated with other
non-operating activities.
Income Tax (Benefit) Expense
The components of our provision for income taxes and our combined federal and state effective income tax rates were as follows:
Three Months Ended Six Months Ended
June 30, June 30, Variance
Income Tax (Benefit) Expense (in Variance Between Between
thousands) 2020 2019 2020 / 2019 2020 2019 2020 / 2019 Current tax expense (benefit)$ 37 $ -$ 37 $ (161) $ - $
(161)
Deferred tax (benefit) expense (271,543) 34,046 (305,589) (287,900) 42,119 (330,019)
$ (271,506) $ 34,046 $ (305,552) $ (288,061) $ 42,119 $ (330,180)
Combined federal and state
effective income tax rate 22.7 % 23.7 % 14.5 % 23.7 %
Our combined federal and state effective income tax rates differ from the U.S.
federal statutory rate of 21% primarily due to state income taxes and
non-deductible expenses. The combined federal and state effective income tax
rate for the six months ended June 30, 2020 is impacted by the tax effects of
the impairment of the non-deductible goodwill recorded as a discrete item during
the first quarter 2020. As such, we believe our effective tax rate will be
higher in subsequent periods. In addition, if future ceiling test impairments
cause our deferred tax balance to change from a net deferred tax liability to a
net deferred tax asset, we may be required to establish a valuation allowance
against the net deferred tax asset at that time. See Note 9 to the Condensed
Consolidated Financial Statements for additional information regarding our
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We strive to maintain an adequate liquidity level to address volatility and
risk. Sources of liquidity include our cash flow from operations, cash on hand,
available borrowing capacity under our revolving credit facility, proceeds from
sales of non-strategic assets, and, from time to time, public financings based
on our monitoring of capital markets and our balance sheet.
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Our liquidity is highly dependent on prices we receive for the oil, gas, and
NGLs we produce. Prices we receive are determined by prevailing market
conditions and greatly influence our revenue, cash flow, profitability, access
to capital, and future rate of growth. See RESULTS OF OPERATIONS Revenues above
for further information regarding the impact realized prices have had on our
earnings. Low oil prices will lead to lower production revenues and could lead
to payment being required where we fail to deliver oil, gas, and NGLs to meet
minimum volume commitments.
We address volatility in commodity prices primarily by maintaining flexibility
in our capital investment program. We have a balanced and abundant drilling
inventory and limited long-term commitments, which enables us to respond quickly
to industry volatility. In response to the decline in oil prices in the second
quarter 2020, we took immediate steps to reduce our capital investment,
including releasing all but one drilling rig by mid-May and deferring completion
activity. However, with the subsequent improvement in oil prices we have added
two drilling rigs and expect to add one additional rig over the remainder of the
year, exiting 2020 with four rigs. We also expect to begin completing wells
starting in September with two completion crews. As a result, total capital
expenditures for 2020 are expected to be approximately $600 million . See Capital
Expenditures below for information regarding our E&D activities for the three
and six months ended June 30, 2020 and 2019 and our plans to fund 2020 capital
expenditures.
We periodically use derivative instruments to mitigate volatility in commodity
prices. At June 30, 2020 , we had derivative contracts covering a portion of our
2020 - 2022 production. Depending on changes in oil and gas futures markets and
management's view of underlying supply and demand trends, we may increase or
decrease our derivative positions from current levels. See Note 3 to the
Condensed Consolidated Financial Statements for information regarding our
derivative instruments.
Cash and cash equivalents at June 30, 2020 were $43.8 million . At June 30, 2020 ,
our long-term debt consisted of $2.0 billion of senior unsecured notes, with
$750 million 4.375% notes due in 2024, $750 million 3.90% notes due in 2027, and
$500 million 4.375% notes due in 2029. At June 30, 2020 , we had no borrowings
and $2.5 million in letters of credit outstanding under our credit facility,
leaving an unused borrowing availability of $1.248 billion . See Long-term Debt
below for more information regarding our debt.
We may, from time to time, seek to repurchase our outstanding preferred stock
through cash repurchases and/or exchanges for equity securities, privately
negotiated transactions, or otherwise. Such activities, if any, will depend on
prevailing market conditions, our liquidity requirements, contractual
restrictions, and other factors.
We expect our operating cash flow and other capital resources to be adequate to
meet our needs for planned capital expenditures, working capital, debt service,
and dividends declared for the next twelve months.
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Analysis of Cash Flow Changes
The following table presents the totals of the major cash flow classification categories from our Condensed Consolidated Statements of Cash Flows for the periods indicated.
Six Months Ended
June 30,
(in thousands) 2020 2019
Net cash provided by operating activities $ 453,497 $ 664,083
Net cash used by investing activities $ (454,614) $ (1,022,672)
Net cash used by financing activities $ (49,763) $ (422,663)
Net cash provided by operating activities for the six months ended June 30, 2020
was $453.5 million , down $210.6 million , or 32%, from $664.1 million for the six
months ended June 30, 2019 . The $210.6 million decrease resulted primarily from
a decrease in revenues in the six months ended June 30, 2020 as compared to the
six months ended June 30, 2019 due to the price collapses and demand destruction
seen in 2020 as a result of the COVID-19 pandemic and actions of the
Organization of Petroleum Exporting Countries ("OPEC") and other countries in
the first quarter of 2020. This decrease was partially offset by increased cash
inflows for settlements of derivative instruments, decreased operating expenses,
and a decreased investment in working capital during the six months ended June
30, 2020 as compared to the six months ended June 30, 2019 . See RESULTS OF
OPERATIONS above for more information regarding the changes in revenues and
expenses.
Net cash used by investing activities for the six months ended June 30, 2020 and
2019 was $454.6 million and $1.023 billion , respectively. The majority of our
cash flows used by investing activities are for oil and gas capital
expenditures, which totaled $418.6 million and $711.8 million for the six months
ended June 30, 2020 and 2019, respectively. Net cash used by investing
activities in the six months ended June 30, 2019 included the $325.7 million
cash portion of the consideration paid for the Resolute acquisition, net of the
$41.2 million in cash acquired with Resolute. The remaining investing cash
outflows are primarily for midstream asset expenditures. Included in net cash
used by investing activities are the proceeds of miscellaneous asset sales,
including non-strategic oil and gas properties.
Net cash used by financing activities was $49.8 million and $422.7 million
during the six months ended June 30, 2020 and 2019, respectively. During the six
months ended June 30, 2020 , we borrowed and repaid an aggregate of $161.0
million on our credit facility to meet cash requirements as needed. During the
six months ended June 30, 2020 , we amended our credit facility, paying $1.5
million in financing costs. During the six months ended June 30, 2019 , we issued
$500 million aggregate principal amount of 4.375% senior unsecured notes due
March 15, 2029 at 99.862% of par for proceeds of $499.3 million , paying $4.6
million in underwriting fees and financing costs. Additionally, we borrowed and
repaid an aggregate of $1.211 billion on our credit facility during the six
months ended June 30, 2019 to assist in funding the Resolute acquisition. In
connection with the acquisition of Resolute, we assumed $870.0 million in
principal amount of long-term debt that we immediately repaid, incurring a
redemption fee of $4.3 million . During the six months ended June 30, 2019 , we
amended our credit facility, paying $3.0 million in financing costs. Net cash
used by financing activities during both periods included: (i) the payment of
dividends, (ii) the payment of income tax withholdings made on behalf of our
employees upon the net settlement of employee stock awards, and (iii) finance
lease payments. During the six months ended June 30, 2020 , we paid one $0.20 per
share dividend and one $0.22 per share dividend on our common stock and two
$20.3125 per share dividends on our preferred stock, totaling $45.2 million .
During the six months ended June 30, 2019 , we paid one $0.18 per share dividend
and one $0.20 per share dividend on our common stock and one $20.3125 per share
dividend on our preferred stock, totaling $38.6 million . Future dividend
payments will depend on our level of earnings, financial requirements, and other
factors considered relevant by our Board of Directors.
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Capital Expenditures
The following table presents capitalized expenditures for oil and gas
acquisition, exploration, and development activities. The table also presents
the amounts, net of applicable purchase price adjustments, removed from our oil
and gas properties balance due to property sales.
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2019 2020 2019
Acquisitions:
Proved $ - $ 1,200 $ 7,250 $ 693,800
Unproved - 1,000 - 1,051,782
- 2,200 7,250 1,745,582
Exploration and development:
Land and seismic 12,116 14,552 26,040 24,079
Exploration and development 71,666 310,428 306,394 668,919
83,782 324,980 332,434 692,998
Property sales:
Proved - (22,058) - (18,028)
Unproved - (6,253) (830) (9,754)
- (28,311) (830) (27,782)
$ 83,782 $ 298,869 $ 338,854 $ 2,410,798 Amounts in the table above are presented on an accrual basis. The Condensed Consolidated Statements of Cash Flows reflect activities on a cash basis, when payments are made and proceeds received.
OnMarch 1, 2019 , we completed the acquisition ofResolute Energy Corporation , an independent oil and gas company focused on the acquisition and development of unconventional oil and gas properties in theDelaware Basin area of thePermian Basin of westTexas . The fair value of the proved and unproved properties recorded in the preliminary purchase price allocation for this acquisition as ofJune 30, 2019 was$692.6 million and$1.05 billion , respectively, as included in the table above. Our 2020 total capital expenditures were originally projected to range from$1.25-$1.35 billion , with the majority expected to be invested in thePermian Basin . In response to the decline in oil prices in the second quarter 2020, we took immediate steps to reduce our capital investment, including releasing all but one drilling rig by mid-May and deferring completion activity. However, with the subsequent improvement in oil prices we have added two drilling rigs and expect to add one additional rig over the remainder of the year, exiting 2020 with four rigs. We also expect to begin completing wells starting in September with two completion crews. As a result, total capital expenditures for 2020 are expected to be approximately$600 million . As has been our historical practice, we regularly review our capital expenditures throughout the year and will adjust our investments based on increases or decreases in commodity prices, service costs, and drilling success. We have the flexibility to adjust our capital expenditures based upon market conditions. We intend to continue to fund our 2020 capital investment program with cash flow from our operating activities, cash on hand, and periodic borrowings under our credit facility. Sales of non-strategic assets and possible capital markets transactions may also be used to supplement funding of capital expenditures and acquisitions. The timing of capital expenditures and the receipt of cash flows do not necessarily match, which may cause us to borrow and repay funds under our credit facility from time to time. See Long-term Debt-Bank Debt below for further information regarding our credit facility. 47
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The following table reflects wells completed by region during the periods
indicated.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Gross wells
Permian Basin 17 44 52 56
Mid-Continent 20 66 39 92
37 110 91 148
Net wells
Permian Basin 11.1 31.9 30.9 36.9
Mid-Continent 1.4 7.8 1.7 10.7
12.5 39.7 32.6 47.6
As of June 30, 2020 , we had 1 gross (0.9 net) well in the process of being
drilled. This well is in the Permian Basin . As of June 30, 2020 , we had 73 gross
(31.1 net) wells waiting on completion: 47 gross (31.1 net) in the Permian Basin
and 26 gross (less than 1 net) in the Mid-Continent region. By mid-May 2020 , we
had released all but one rig and placed completion activities on hold due to
economic conditions at the time. Since that time, we have added two drilling
rigs and expect to add one additional rig over the remainder of the year,
exiting 2020 with four rigs. We also expect to begin completing wells starting
in September with two completion crews. We maintain flexibility to adjust our
activity as conditions change.
We have made, and will continue to make, expenditures to comply with
environmental and safety regulations and requirements. These costs are
considered a normal recurring cost of our ongoing operations. While we expect
current pending legislation or regulations to increase the cost of business, we
do not anticipate that we will be required to expend amounts that will have a
material adverse effect on our financial position or operations, nor are we
aware of any pending regulatory changes that would have a material impact, based
on current laws and regulations. However, compliance with new legislation or
regulations could increase our costs or adversely affect demand for oil or gas
and result in a material adverse effect on our financial position or operations.
See our Form 10-K for the year ended December 31, 2019 , Item 1A Risk Factors,
and Part II, Item 1A, Risk Factors, of this Form 10-Q for a description of risks
related to current and potential future environmental and safety regulations and
requirements that could adversely affect our operations and financial condition.
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Long-term Debt
Long-term debt at June 30, 2020 and December 31, 2019 consisted of the
following:
June 30, 2020 December 31, 2019
Unamortized Debt Unamortized Debt
Issuance Costs Long-term Issuance Costs Long-term
(in thousands) Principal and Discounts (1) Debt, net Principal and Discounts (1) Debt, net
4.375% Notes due 2024 $ 750,000 $ (3,099) $ 746,901 $ 750,000 $ (3,535) $ 746,465
3.90% Notes
due 2027 750,000 (5,919) 744,081 750,000 (6,289) 743,711
4.375% Notes due 2029 500,000 (4,711) 495,289 500,000 (4,930) 495,070
$ 2,000,000 $ (13,729) $ 1,986,271 $ 2,000,000 $ (14,754) $ 1,985,246 ________________________________________
(1)The 4.375% Notes due 2024 were issued at par, therefore, the amounts shown in the table are for unamortized debt issuance costs only. AtJune 30, 2020 , the unamortized debt issuance costs and discount related to the 3.90% Notes due 2027 were$4.6 million and$1.4 million , respectively. AtJune 30, 2020 , the unamortized debt issuance costs and discount related to the 4.375% Notes due 2029 were$4.1 million and$0.6 million , respectively. AtDecember 31, 2019 , the unamortized debt issuance costs and discount related to the 3.90% Notes due 2027 were$4.8 million and$1.5 million , respectively. AtDecember 31, 2019 , the unamortized debt issuance costs and discount related to the 4.375% Notes due 2029 were$4.3 million and$0.6 million , respectively.
Bank Debt
OnJune 3, 2020 , we entered into the First Amendment to Amended and Restated Credit Agreement (the "First Amendment") dated as ofFebruary 5, 2019 for our senior unsecured revolving credit facility ("Credit Facility"). The Credit Facility has aggregate commitments of$1.25 billion with an option for us to increase the aggregate commitments to$1.5 billion , and matures onFebruary 5, 2024 . There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. The First Amendment, among other things: (i) allows up to$3.5 billion of non-cash impairment charge add-backs to Shareholders' Equity for covenant calculation purposes, (ii) institutes traditional anti-cash hoarding provisions at a consolidated cash threshold of$175.0 million , (iii) reduces the priority lien debt basket from 15% of Consolidated Net Tangible Assets (as defined in the credit agreement) to a$50.0 million cap, and (iv) adds an acknowledgement and consent toEuropean Union bail-in legislation. As ofJune 30, 2020 , we had no bank borrowings outstanding under the Credit Facility, but did have letters of credit of$2.5 million outstanding, leaving an unused borrowing availability of$1.248 billion . During the three and six months endedJune 30, 2020 , we borrowed and repaid an aggregate of$60.0 million and$161.0 million , respectively, on the Credit Facility to meet cash requirements as needed. At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR (or an alternate rate determined by the administrative agent for the Credit Facility in accordance with the Credit Facility when LIBOR is no longer available) plus 1.125 - 2.0% based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.125 - 1.0%, based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.125 - 0.35%, based on the credit rating for our senior unsecured long-term debt. The Credit Facility contains representations, warranties, covenants, and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capitalization ratio of no greater than 65%. As ofJune 30, 2020 , we were in compliance with all of the financial covenants. 49 -------------------------------------------------------------------------------- Table of Contents AtJune 30, 2020 andDecember 31, 2019 , we had$5.0 million and$4.0 million , respectively, of unamortized debt issuance costs associated with our Credit Facility, which were recorded as assets and included in "Other assets" on our Condensed Consolidated Balance Sheets. We incurred$1.5 million in fees paid to the creditor and third-party costs for the First Amendment. These costs are being amortized to interest expense ratably over the life of the Credit Facility.
Senior Notes
OnMarch 8, 2019 , we issued$500 million aggregate principal amount of 4.375% senior unsecured notes dueMarch 15, 2029 at 99.862% of par to yield 4.392% per annum. We received$494.7 million in net cash proceeds, after deducting underwriters' fees, discount, and debt issuance costs. The notes bear an annual interest rate of 4.375% and interest is payable semiannually onMarch 15 andSeptember 15 , with the first payment made onSeptember 15, 2019 . We used the net proceeds to repay borrowings outstanding under our Credit Facility that were used to help fund the Resolute acquisition onMarch 1, 2019 . The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.50%. InApril 2017 , we issued$750 million aggregate principal amount of 3.90% senior unsecured notes at 99.748% of par to yield 3.93% per annum. These notes are dueMay 15, 2027 and interest is payable semiannually onMay 15 andNovember 15 . The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.01%. InJune 2014 , we issued$750 million aggregate principal amount of 4.375% senior unsecured notes at par. These notes are dueJune 1, 2024 and interest is payable semiannually onJune 1 andDecember 1 . The effective interest rate on these notes, including the amortization of debt issuance costs, is 4.50%.
Our senior unsecured notes are governed by indentures containing certain
covenants, events of default, and other restrictive provisions with which we
were in compliance as of
Working Capital Analysis
AtJune 30, 2020 , we had a working capital deficit of$80.7 million , a decrease of$56.5 million or 41% from a working capital deficit of$137.1 million atDecember 31, 2019 . Our working capital deficit decreased primarily as a result of the following: Working Capital Increases •Operations-related accounts payable and accrued liabilities decreased by$192.4 million , primarily due to a decrease in revenue payable due to declines in prices, a decrease in trade accounts payable due to decreased activity, and a decrease in taxes other than income due to ad valorem tax payments made at the beginning of the year and due to declines in prices lowering our production taxes payable; •A decrease in our exploration and development and midstream capital accruals of$86.3 million as a result of our decision to reduce our capital investment in response to the decline in oil prices in the second quarter 2020;
•An increase of
•A
Working Capital Decreases
•Accounts receivable decreased by
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•A $50.9 million decrease in our cash and cash equivalents. See Analysis of Cash
Flow Changes above for further information on the change in our cash balance.
Accounts receivable are a major component of our working capital and include
amounts due from a diverse group of companies comprised of major energy
companies, pipeline companies, local distribution companies, and other
end-users. We conduct credit analyses prior to making any sales to new customers
or increasing credit for existing customers and may require parent company
guarantees, letters of credit, or prepayments when deemed necessary. Pursuant to
the operating agreements we have with the co-owners of our operated properties,
we have the right to realize amounts due to us from the co-owners by netting the
co-owners' production revenues from those properties. We routinely assess the
recoverability of all material accounts receivable and accrue a reserve to the
allowance for doubtful accounts based on our estimation of expected losses over
the life of the receivables. Historically, losses associated with uncollectible
receivables have not been significant. However, most of our accounts receivable
balances are uncollateralized and result from transactions with other companies
in the oil and gas industry. Concentration of customers may impact our overall
credit risk because our customers may be similarly affected by changes in
economic or other conditions within the industry, such as those currently
impacting the industry as a result of the COVID-19 pandemic and low commodity
prices.
Dividends
A quarterly cash dividend has been paid on our common stock every quarter since
the first quarter of 2006. In May 2020 , our Board of Directors declared a cash
dividend of $0.22 per common share, totaling $22.6 million , which is payable on
or before September 1, 2020 to stockholders of record on August 14, 2020 . Also
in May 2020 , our Board of Directors declared a cash dividend of $20.3125 per
preferred share, totaling $1.3 million . The dividend was paid in July to
preferred stockholders of record on July 1, 2020 . Future dividend payments will
depend on our level of earnings, financial requirements, and other factors
considered relevant by our Board of Directors.
Off-Balance Sheet Arrangements
We may enter into off-balance sheet arrangements and transactions that can give
rise to material off-balance sheet obligations. As of June 30, 2020 , our
material off-balance sheet arrangements consisted of operating lease agreements
with lease terms at commencement of 12 months or less. As an accounting policy,
we have elected not to apply the recognition requirements of Topic 842 to these
leases. As such, we have not recorded any lease liabilities associated with
these leases.
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Contractual Obligations and Material Commitments
At
Payments Due by Period
Contractual obligations (in 07/01/20 - 07/01/21 - 07/01/23 - 07/01/25 and
thousands) Total 06/30/21 06/30/23 06/30/25 Thereafter
Long-term debt-principal (1) $ 2,000,000 $ - $ - $ 750,000 $ 1,250,000
Long-term debt-interest (1) 532,937 81,868 167,875 135,063 148,131
Operating leases (2) 80,319 20,443 24,875 22,641 12,360
Unconditional purchase obligations
(3) 23,408 10,711 6,273 6,167 257
Derivative liabilities 74,766 51,556 23,210 - -
Asset retirement obligation (4) 168,618 18,244 - (4) - (4) - (4)
Other long-term liabilities (5) 45,249 3,695 9,124 3,500 28,930
$ 2,925,297 $ 186,517 $ 231,357 $ 917,371 $ 1,439,678 ________________________________________
(1)The interest payments presented above include the accrued interest payable on our long-term debt as ofJune 30, 2020 as well as future payments calculated using the long-term debt's fixed rates, stated maturity dates, and principal amounts outstanding as ofJune 30, 2020 . See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding our debt. (2)Operating leases include the estimated remaining contractual payments under lease agreements as ofJune 30, 2020 . These lease agreements are primarily comprised of leases for commercial real estate, which consists primarily of office space, and compressor equipment. (3)Of the total unconditional purchase obligations,$20.9 million represents obligations for firm transportation agreements for gas and oil pipeline capacity. (4)We have excluded the presentation of the timing of the cash flows associated with our long-term asset retirement obligations because we cannot make a reasonably reliable estimate of the future period of cash settlement. The long-term asset retirement obligation is included in the total asset retirement obligation presented. (5)Other long-term liabilities include contractual obligations associated with our employee supplemental savings plan, gas balancing liabilities, and other miscellaneous liabilities. All of these liabilities are accrued on our Condensed Consolidated Balance Sheet. The current portion associated with these long-term liabilities is also presented in the table above.
The following discusses various commercial commitments that we have made that may include potential future cash payments if we fail to meet various performance obligations. These are not reflected in the table above, unless otherwise noted.
At
AtJune 30, 2020 , we had firm sales contracts to deliver approximately 522.5 Bcf of gas over the next 11.0 years. If we do not deliver this gas, our estimated financial commitment, calculated usingJuly 2020 index prices, would be approximately$499.3 million . The value of this commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our current proved reserves and production levels and our ability to make market purchases to fulfill these volumetric obligations. In connection with gas gathering and processing agreements, we have volume commitments over the next 8.5 years. If we do not deliver the committed gas or NGLs, as the case may be, the estimated maximum amount that would be payable under these commitments, calculated as ofJune 30, 2020 , would be approximately$676.6 million . 52 -------------------------------------------------------------------------------- Table of Contents With the current commodity price environment we curtailed some production and reduced drilling activity during the second quarter 2020 and may again curtail production and further reduce drilling activity in the future; however, at this time we do not believe any financial commitment resulting from potential future volume commitment shortfalls will be material. We have minimum volume delivery commitments associated with agreements to reimburse connection costs to various pipelines. If we do not deliver this gas, or oil, as the case may be, the estimated maximum amount that would be payable under these commitments, calculated as ofJune 30, 2020 , would be approximately$106.6 million . Of this total, we have accrued a liability of$4.3 million representing the estimated amount we will have to pay due to insufficient forecasted volumes at particular connection points. This accrual is reflected in the table above in Other long-term liabilities. With the current commodity price environment we curtailed some production and reduced drilling activity during the second quarter 2020 and may again curtail production and further reduce drilling activity in the future; however, at this time we do not believe any financial commitment resulting from potential future minimum volume delivery commitment shortfalls will be material.
All of the noted commitments were routine and made in the ordinary course of our business.
Taking into account current commodity prices and anticipated levels of production, we believe that our net cash flow generated from operations and our other capital resources will be adequate to meet future obligations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We consider accounting policies and estimates related to oil and gas reserves, full cost accounting, and income taxes to be critical accounting policies and estimates. These are summarized in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 53
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