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 current reduction in economic activity resulting from the COVID-19 pandemic has 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$30.45 per barrel inMarch 2020 . Prices sinceMarch 2020 have fallen further. Low oil prices are expected to persist until global economic activity resumes, supply from major oil producing countries decreases, and elevated inventory levels moderate. Lower oil prices will reduce our production revenues. In response to current low oil prices we have taken steps to reduce our capital investment plans, including releasing all but one drilling rig by mid-May and deferring completion activity. Further, as a result of evaluating the net operating income of our producing wells, we have curtailed and or shut in production in some areas. We expect to curtail approximately 20% of our oil volumes for the month of May due to weakness in anticipated realized oil prices, which will also impact associated gas and NGL production. Further curtailments in future months are expected if the weakness in anticipated realized oil prices persist. 30
--------------------------------------------------------------------------------
Table of Contents
As demonstrated in the table below, our company-wide average realized prices for the three months endedMarch 31, 2020 as compared to the same period in 2019 have declined for all products. In the case of oil sales, these decreases result from declining NYMEX prices, partially offset by improving differentials. In the case of gas sales, these decreases are driven by a combination of declining NYMEX prices and widening differentials on a company-wide basis. Three Months Ended March 31, 2020 2019 Variance Between 2020 / 2019 Average NYMEX price Oil - per barrel$ 46.17 $ 54.90 (16)% Gas - per Mcf$ 1.95 $ 3.15 (38)% Average realized price Oil - per barrel$ 44.18 $ 48.87 (10)% Gas - per Mcf$ 0.55 $ 1.91 (71)% NGL - per barrel$ 9.84 $ 16.44 (40)% Average price differential Oil - per barrel$ (1.99 ) $ (6.03 ) 67% Gas - per Mcf$ (1.40 ) $ (1.24 ) (13)%
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
First Fourth Third Second First
Quarter Year Quarter Quarter Quarter Quarter
Oil
Permian Basin $ (2.00 ) $ (4.48 ) $ (2.18 ) $ (3.76 ) $ (5.80 ) $ (6.90 )
Mid-Continent $ (2.02 ) $ (3.14 ) $ (2.05 ) $ (3.72 ) $ (4.39 ) $ (2.17 )
Total Company $ (1.99 ) $ (4.26 ) $ (2.16 ) $ (3.74 ) $ (5.58 ) $ (6.03 )
Gas
Permian Basin $ (1.85 ) $ (2.14 ) $ (1.67 ) $ (1.83 ) $ (3.10 ) $ (1.91 )
Mid-Continent $ (0.57 ) $ (0.68 ) $ (0.74 ) $ (0.66 ) $ (0.86 ) $ (0.46 )
Total Company $ (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.
31--------------------------------------------------------------------------------
Table of Contents
See RISK FACTORS in Item 1A of this Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 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 Three Months Ended
• Total production volumes increased 7% to 276.6 MBOE per day.
• Oil volumes increased 13% to 89.8 MBbls per day.
• Gas volumes increased 9% to 694.3 MMcf per day.
• NGL volumes decreased 3% to 71.1 MBbls per day.
• Total production revenue decreased
• Cash flow provided by operating activities increased 23% to
• Exploration and development expenditures decreased 32% to$248.7 million . • Net loss was$774.3 million , or$7.77 per diluted share, for the first
three months of 2020, as compared to net income of $26.3 million , or
$0.26 per diluted share, for the first three months of 2019.
RESULTS OF OPERATIONS
Three 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. Realized prices were lower for all products during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 , while production volumes for oil and gas were higher and production volumes for NGL were lower. Our acquisition of Resolute onMarch 1, 2019 and ongoing completion of new wells have increased our volumes. However, lower market prices, which are out of our control, have negatively impacted our realized prices and, therefore, our revenue. Our revenue decreased 19%, or$107.8 million , during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . The following table shows our production revenue for the periods indicated as well as the change in revenue due to changes in volumes and prices. Three Months Ended March 31, Price/Volume Variance Production Revenue Variance Between 2020 / (in thousands) 2020 2019 2019 Price Volume Total Oil sales$ 360,980 $ 349,306 $ 11,674 3%$ (38,322 ) $ 49,996 $ 11,674 Gas sales 34,830 109,976 (75,146 ) (68)% (85,929 ) 10,783 (75,146 ) NGL sales 63,651 107,939 (44,288 ) (41)% (42,702 ) (1,586 ) (44,288 )$ 459,461 $ 567,221 $ (107,760 ) (19)%$ (166,953 ) $ 59,193 $ (107,760 ) 32
--------------------------------------------------------------------------------
Table of Contents
The table below presents our production volumes by region.
Three Months Ended
March 31,
Production Volumes 2020 2019
Oil (Bbls per day)
Permian Basin 79,606 64,969
Mid-Continent 9,941 14,224
Other 244 222
89,791 79,415
Gas (MMcf per day)
Permian Basin 449.0 340.6
Mid-Continent 244.1 297.2
Other 1.2 1.3
694.3 639.1
NGL (Bbls per day)
Permian Basin 48,932 46,273
Mid-Continent 22,110 26,630
Other 57 53
71,099 72,956
Total (BOE per day)
Permian Basin 203,378 168,008
Mid-Continent 72,735 90,386
Other 498 488
276,611 258,882
33--------------------------------------------------------------------------------
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 three months endedMarch 31, 2020 , approximately 89% of our oil production was in thePermian Basin , up from approximately 82% during the three months endedMarch 31, 2019 . Our realized prices do not include settlements of commodity derivative contracts. Variance Three Months Ended Between March 31, 2020 / 2020 2019 2019 Oil Total volume - MBbls 8,171 7,147 14% Total volume - MBbls per day 89.8 79.4 13% Percentage of total production 32 % 31 % Average realized price - per barrel$ 44.18 $ 48.87 (10)% Average WTI Midland price - per barrel$ 47.05 $ 50.97 (8)% Average WTI Cushing price - per barrel$ 46.17 $ 54.90 (16)% Gas Total volume - MMcf 63,183 57,516 10% Total volume - MMcf per day 694.3 639.1 9% Percentage of total production 42 % 41 % Average realized price - per Mcf$ 0.55 $ 1.91 (71)% Average Henry Hub price - per Mcf$ 1.95 $ 3.15 (38)% NGL Total volume - MBbls 6,470 6,566 (1)% Total volume - MBbls per day 71.1 73.0 (3)% Percentage of total production 26 % 28 % Average realized price - per barrel$ 9.84 $ 16.44 (40)% Total Total production - MBOE 25,172 23,299 8% Total production - MBOE per day 276.6 258.9 7% Average realized price - per BOE$ 18.25 $ 24.34 (25)% 34
--------------------------------------------------------------------------------
Table of Contents
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 Variance
March 31, Between 2020 /
Gas Gathering and Marketing Revenues (in thousands) 2020 2019 2019
Gas gathering and other $ 13,583 $ 10,262 $ 3,321
Gas marketing $ (214 ) $ (526 ) $ 312
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 ended March 31, 2020
were higher by 137%, or $725.6 million , compared to the three months ended
March 31, 2019 . The primary reasons for the increase were: (i) the $714.4
million impairment of goodwill incurred during the three months ended March 31,
2020 and (ii) the $333.7 million ceiling test impairment incurred during the
three months ended March 31, 2020 , partially offset by (iii) the $342.4 million
increase in net gains on derivative instruments.
Three Months Ended
March 31, Per BOE
Operating Costs and Expenses Variance Between
(in thousands, except per BOE) 2020 2019 2020 / 2019 2020 2019
Impairment of oil and gas
properties $ 333,651 $ - $ 333,651 N/A N/A
Depreciation, depletion, and
amortization 215,086 190,417 24,669 $ 8.54 $ 8.17
Asset retirement obligation 4,724 2,049 2,675 $ 0.19 $ 0.09
Impairment of goodwill 714,447 - 714,447 N/A N/A
Production (1) 87,236 78,404 8,832 $ 3.47 $ 3.37
Transportation, processing, and
other operating (1) 54,922 59,575 (4,653 ) $ 2.18 $ 2.56
Gas gathering and other (1) 8,298 5,182 3,116 $ 0.33 $ 0.22
Taxes other than income 30,961 33,694 (2,733 ) $ 1.23 $ 1.45
General and administrative 25,509 29,084 (3,575 ) $ 1.01 $ 1.25
Stock compensation 6,394 6,713 (319 ) $ 0.25 $ 0.29
(Gain) loss on derivative
instruments, net (226,940 ) 115,452 (342,392 ) N/A N/A
Other operating expense, net 251 8,326 (8,075 ) N/A N/A
$ 1,254,539 $ 528,896 $ 725,643 ________________________________________
(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.
35--------------------------------------------------------------------------------
Table of Contents
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 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. AtMarch 31, 2020 , we recognized a ceiling test impairment of$333.7 million . The impairment 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. Due to declines in oil prices subsequent toMarch 31, 2020 , we expect to incur another ceiling test impairment atJune 30, 2020 , and may recognize additional ceiling test impairments in future quarters.
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 increased during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due to a decrease in our oil and gas reserves, as a result of the decrease in prices, and due to our increased production. Partially offsetting these increases is a decrease in depletion resulting from a lower depletable basis, primarily caused by a ceiling test impairment of$618.7 million recorded atDecember 31, 2019 and a decrease in our estimated future development costs. 36
--------------------------------------------------------------------------------
Table of Contents
Fixed assets consist primarily of gathering and plant facilities, vehicles, airplanes, office furniture, and computer equipment and software. These items are recorded at cost and are depreciated to depreciation expense on the straight-line method based on expected lives of the individual assets, which range from 3 to 30 years. Also included in our depreciation expense is the depreciation of our finance lease gathering system right-of-use asset. The increase in depreciation expense during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 is primarily due to increased depreciation on our gathering and plant facilities due to ongoing expenditures on this infrastructure. Depreciation, depletion, and amortization ("DD&A") consisted of the following for the periods indicated: Three Months Ended March 31, Variance Per BOE DD&A Expense (in thousands, except Between per BOE) 2020 2019 2020 / 2019 2020 2019 Depletion$ 198,126 $ 174,712 $ 23,414 $ 7.87 $ 7.50 Depreciation 16,960 15,705 1,255 0.67 0.67$ 215,086 $ 190,417 $ 24,669 $ 8.54 $ 8.17
Impairment of
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
March 31, Per BOE
Production Expense (in thousands, Variance Between
except per BOE) 2020 2019 2020 / 2019 2020 2019
Lease operating expense $ 74,469 $ 63,579 $ 10,890 $ 2.96 $ 2.74
Workover expense 12,767 14,825 (2,058 ) 0.51 0.63
$ 87,236 $ 78,404 $ 8,832 $ 3.47 $ 3.37
Lease operating expense in the first quarter of 2020 increased 17%, or $10.9
million , compared to the first quarter of 2019. The increase has primarily
stemmed from the Resolute acquisition and the addition of new wells as a result
of our ongoing exploration and development activities. Saltwater disposal and
electricity/fuel have been the primary drivers of increased expense in 2020 as
compared to 2019. These increases were partially offset by a decrease in
post-completion equipment rentals due to a decrease in drilling.
Workover expense in the first quarter of 2020 decreased 14%, or $2.1 million ,
compared to the first quarter of 2019. We had fewer workover projects during the
first quarter of 2020 as compared to the first quarter of 2019. In the first
quarter of 2020, routine well work, surface equipment maintenance and repair,
and saltwater disposal maintenance and repair expense were lower than during the
first quarter of 2019. Partially offsetting these decreases was an increase in
major well work expense.
37--------------------------------------------------------------------------------
Table of Contents
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 in the first quarter of 2020 were 8%, or$4.7 million , lower than the same costs in the first quarter of 2019. The decrease in expense in 2020 is primarily a result of decreased gas and NGL prices, which lowered fuel and processing costs.
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 endedMarch 31, 2020 was 60%, or$3.1 million , higher than gas gathering and other in the three months endedMarch 31, 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
March 31, Variance Between
Taxes Other than Income (in thousands) 2020 2019 2020 / 2019
Production $ 21,587 $ 27,091 $ (5,504 )
Ad valorem 9,219 6,441 2,778
Other 155 162 (7 )
$ 30,961 $ 33,694 $ (2,733 )
Taxes other than income as a percentage of
production revenue 6.7 % 5.9 %
Taxes other than income decreased $2.7 million , or 8%, in the first quarter of
2020 as compared to the first quarter of 2019. Production taxes make up the
majority of our taxes other than income and they decreased primarily due to
decreased revenues. This decrease was partially offset by a decrease in refunds,
which are generally for high-cost gas wells in Texas , in the first quarter of
2020 as compared to the first quarter of 2019. Ad valorem taxes increased during
the three months ended March 31, 2020 as compared to the three months ended
March 31, 2019 , with accruals being based on the most recent actual taxes paid
with adjustments made based on expected valuations. Estimates of ad valorem
taxes are adjusted as better information, including actual valuations, is
received. Other taxes other than income are comprised of franchise and consumer
use and sales taxes.
38--------------------------------------------------------------------------------
Table of Contents
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 40%
to 41% during the periods presented in the table below, which shows our G&A
costs.
Three Months Ended
March 31, Variance Between
General and Administrative Expense (in thousands) 2020 2019 2020 / 2019
Gross G&A $ 42,801 $ 49,236 $ (6,435 )
Less amounts capitalized to oil and gas properties (17,292 ) (20,152 ) 2,860
G&A expense $ 25,509 $ 29,084 $ (3,575 )
G&A expense for the first quarter of 2020 was 12%, or $3.6 million , lower than
G&A expense for the first quarter of 2019. G&A expense for the first quarter of
2020 was lower than that for the first quarter of 2019 primarily due to
decreased annual bonus accrual expense and profit sharing accrual expense as
annual bonuses and profit sharing are currently not anticipated to be paid for
2020. Additionally, salaries and wages expense decreased. These decreases were
partially offset by an increase in severance expense. In January and March 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 $11.0 million during the first
quarter of 2020. We expect to recognize a total of $17.0 million in severance
expense, including the $11.0 million already recognized, for this program, the
majority of which will be recognized during the first half of 2020, with all of
the expense being recognized by January 2021 . Partially offsetting this increase
in severance expense was a decrease of $2.5 million for severance expense
recognized in the first quarter of 2019 for Resolute employees.
In response to current low oil prices, we have taken steps to reduce our capital
investment plans, including releasing all but one drilling rig by mid-May and
deferring completion activity. As a result of expected decreases in acquisition,
exploration, and development activities, the percentage of gross G&A capitalized
in future quarters is expected to decrease.
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
March 31, Variance Between
Stock Compensation Expense (in thousands) 2020 2019 2020 / 2019
Restricted stock awards:
Performance stock awards $ 4,060 $ 5,394 $ (1,334 )
Service-based stock awards 7,377 7,231 146
11,437 12,625 (1,188 )
Stock option awards 498 622 (124 )
Total stock compensation cost 11,935 13,247 (1,312 )
Less amounts capitalized to oil and gas properties (5,541 ) (6,534 ) 993
Stock compensation expense $ 6,394 $ 6,713 $ (319 )
39--------------------------------------------------------------------------------
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.
(Gain) Loss on Derivative Instruments, Net
The following table presents the components of "(Gain) loss 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
March 31,
(Gain) Loss on Derivative Instruments, Net (in Variance Between
thousands) 2020 2019 2020 / 2019
Decrease (increase) in fair value of derivative
instruments, net:
Gas contracts $ 12,493 $ (9,846 ) $ 22,339
Oil contracts (196,319 ) 116,247 (312,566 )
(183,826 ) 106,401 (290,227 )
Cash (receipts) payments on derivative
instruments, net:
Gas contracts (11,719 ) 3,764 (15,483 )
Oil contracts (31,395 ) 5,287 (36,682 )
(43,114 ) 9,051 (52,165 )
(Gain) loss on derivative instruments, net $ (226,940 ) $ 115,452 $ (342,392 )
Other Operating Expense, Net
Other operating expense, net during the three months ended
Other Income and Expense
Three Months Ended
March 31, Variance Between
Other Income and Expense (in thousands) 2020 2019 2020 / 2019
Interest expense $ 23,181 $ 20,405 $ 2,776
Capitalized interest (13,182 ) (8,742 ) (4,440 )
Loss on early extinguishment of debt - 4,250 (4,250 )
Other, net (871 ) (2,241 ) 1,370
$ 9,128 $ 13,672 $ (4,544 )
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 increase in interest
expense during the three months ended March 31, 2020 as compared to the three
months ended March 31, 2019 is primarily due to the March 8, 2019 issuance of
$500 million aggregate principal amount of 4.375% senior unsecured notes due
March 15, 2029 at 99.862% of par to yield 4.392% per annum. Partially offsetting
this increase is a decrease in interest expense on borrowings on our Credit
Facility due to increased borrowings during the three months ended March 31,
2019 in connection with the Resolute acquisition. The $4.3 million loss on early
extinguishment of debt incurred during the three months ended March 31, 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 .
40--------------------------------------------------------------------------------
Table of Contents
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 higher for the three months endedMarch 31, 2020 than it was for the three months endedMarch 31, 2019 due to an increase in costs subject to interest capitalization primarily as a result of the non-producing leasehold acquired in the Resolute acquisition. These costs were subject to a full quarter of capitalization during the three months endedMarch 31, 2020 as compared to one month of capitalization during the three months endedMarch 31, 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
March 31, Variance Between
Income Tax (Benefit) Expense (in thousands) 2020 2019 2020 / 2019
Current tax benefit $ (198 ) $ - $ (198 )
Deferred tax (benefit) expense (16,357 ) 8,073 (24,430 )
$ (16,555 ) $
8,073
Combined federal and state effective income tax rate 2.1 % 23.5 %
Our combined federal and state effective income tax rates differ from theU.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 three months endedMarch 31, 2020 is impacted by the tax effects of the impairment of the non-deductible goodwill recorded as a discrete item during the quarter. 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. 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
41--------------------------------------------------------------------------------
Table of Contents
to respond quickly to industry volatility. In response to the commodity price
collapse, driven by demand loss resulting from the COVID-19 pandemic and rapidly
filling inventories, we have substantially reduced our expected 2020 exploration
and development ("E&D") investments. We expect an approximate 55-60% reduction
in our 2020 total capital investment program from the original projection of
$1.25-$1.35 billion . See Capital Expenditures below for information regarding
our E&D activities for the three months ended March 31, 2020 and 2019.
We periodically use derivative instruments to mitigate volatility in commodity
prices. At March 31, 2020 , we had derivative contracts covering a portion of our
2020 - 2021 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 March 31, 2020 were $88.7 million . At March 31,
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 March 31, 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.
Our debt to total capitalization ratio at March 31, 2020 was 43%, up from 37% at
December 31, 2019 . This ratio is calculated by dividing the sum of (i) the
principal amount of long-term debt and (ii) redeemable preferred stock by the
sum of (i) the principal amount of long-term debt, (ii) redeemable preferred
stock, and (iii) total stockholders' equity, with all numbers coming directly
from the Condensed Consolidated Balance Sheet. Management uses this ratio as one
indicator of our financial condition and believes professional research analysts
and rating agencies use this ratio for this purpose and to compare our financial
condition to other companies' financial conditions.
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.
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.
Three Months Ended
March 31,
(in thousands) 2020 2019
Net cash provided by operating activities
Net cash provided by operating activities for the three months endedMarch 31, 2020 was$308.8 million , up$58.7 million , or 23%, from$250.1 million for the three months endedMarch 31, 2019 . The$58.7 million increase resulted primarily from a decreased investment in working capital, primarily due to the repayments of liabilities assumed from Resolute made in the three months endedMarch 31, 2019 , and increased cash inflows for settlements of derivative instruments in the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . These increases in operating cash inflows were partially offset by a decrease in revenues in the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due to declines in prices outweighing increases in production. See RESULTS OF OPERATIONS above for more information regarding the changes in revenue. 42
--------------------------------------------------------------------------------
Table of Contents
Net cash used by investing activities for the three months endedMarch 31, 2020 and 2019 was$291.5 million and$629.8 million , respectively. The majority of our cash flows used by investing activities are for oil and gas capital expenditures, which totaled$266.1 million and$332.7 million for the three months endedMarch 31, 2020 and 2019, respectively. Net cash used by investing activities in the three months endedMarch 31, 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$23.3 million and$400.0 million during the three months endedMarch 31, 2020 and 2019, respectively. During the three months endedMarch 31, 2019 , we issued$500 million aggregate principal amount of 4.375% senior unsecured notes dueMarch 15, 2029 at 99.862% of par for proceeds of$499.3 million , paying$3.7 million in underwriting fees and financing costs. Additionally, we borrowed and repaid an aggregate of$683.0 million on our credit facility during the three months endedMarch 31, 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 three months endedMarch 31, 2019 , we amended our credit facility, paying$2.9 million in financing costs. We borrowed and repaid an aggregate of$101.0 million on our credit facility during the three months endedMarch 31, 2020 to meet cash requirements as needed. 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 three months endedMarch 31, 2020 , we paid one$0.20 per common share dividend and one$20.3125 per preferred share dividend, totaling$21.6 million . During the three months endedMarch 31, 2019 , we paid one$0.18 per common share dividend totaling$17.2 million . Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. Capital Expenditures The following table presents capitalized expenditures for oil and gas acquisition, exploration, and development activities. The table also presents the amounts, net of applicable purchase price adjustments, removed from our oil and gas properties balance due to property sales. Three Months Ended March 31, (in thousands) 2020 2019 Acquisitions: Proved$ 7,250 $ 692,600 Unproved - 1,050,782 7,250 1,743,382 Exploration and development: Land and seismic 13,924 9,527 Exploration and development 234,728 358,491 248,652 368,018 Property sales: Proved - 4,030 Unproved (830 ) (3,501 ) (830 ) 529$ 255,072 $ 2,111,929
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.
43--------------------------------------------------------------------------------
Table of Contents
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 ofMarch 31, 2019 was$692.6 million and$1.05 billion , respectively, as included in the table above. Our 2020 E&D capital investment was originally projected to range from$1.25-$1.35 billion , with the majority expected to be invested in thePermian Basin . In response to the commodity price collapse, driven by demand loss resulting from the COVID-19 pandemic and rapidly filling inventories, we have substantially reduced our expected 2020 E&D investments. We expect total 2020 capital investment to be from$500-$600 million , an approximate 55-60% reduction from our original 2020 projection. 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 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. The following table reflects wells completed by region during the periods indicated. Three Months Ended March 31, 2020 2019 Gross wells Permian Basin 35 12 Mid-Continent 19 26 54 38 Net wells Permian Basin 19.8 5.0 Mid-Continent 0.3 2.9 20.1 7.9 As ofMarch 31, 2020 , we had 8 gross (4.9 net) wells in the process of being drilled: 7 gross (4.9 net) in thePermian Basin and 1 gross (less than 1 net) in the Mid-Continent region. As ofMarch 31, 2020 , we had 98 gross (35.1 net) wells waiting on completion: 51 gross (33.0 net) in thePermian Basin and 47 gross (2.1 net) in the Mid-Continent region. As ofMarch 31, 2020 , we had 8 operated rigs running, all in thePermian Basin . Bymid-May 2020 , we expect to have released all but one rig and have delayed completion activities due to current economic conditions. 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 endedDecember 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. 44
--------------------------------------------------------------------------------
Table of Contents Long-term Debt Long-term debt atMarch 31, 2020 andDecember 31, 2019 consisted of the following: March 31, 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 $ (3,316 )$ 746,684 $ 750,000 $ (3,535 )$ 746,465 3.90% Notes due 2027 750,000 (6,105 ) 743,895 750,000 (6,289 ) 743,711 4.375% Notes due 2029 500,000 (4,821 ) 495,179 500,000 (4,930 ) 495,070$ 2,000,000 $ (14,242 )$ 1,985,758 $ 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. At
the unamortized debt issuance costs and discount related to the 3.90% Notes
due 2027 were
the unamortized debt issuance costs and discount related to the 4.375% Notes
due 2029 were
2019, the unamortized debt issuance costs and discount related to the 3.90%
Notes due 2027 were
to the 4.375% Notes due 2029 were $4.3 million and $0.6 million ,
respectively.
Bank Debt
On February 5, 2019 , we entered into an Amended and Restated Credit Agreement
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 on
February 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. As
of March 31, 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 months ended
March 31, 2020 , we borrowed and repaid an aggregate of $101.0 million 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-capital ratio of no greater than 65%. As of March 31, 2020 , we
were in compliance with all of the financial covenants. Due to the significant
declines in oil prices subsequent to March 31, 2020 , we expect to incur another
ceiling test impairment at June 30, 2020 , and may recognize additional ceiling
test impairments in the future, which will negatively impact our debt-to-capital
ratio. At our current debt levels we could incur additional net losses before
income taxes of up to approximately $2.1 billion and remain in compliance with
the 65% debt-to-capital ratio covenant.
45--------------------------------------------------------------------------------
Table of Contents
AtMarch 31, 2020 andDecember 31, 2019 , we had$3.9 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. 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
AtMarch 31, 2020 , we had a working capital surplus of$51.5 million , an increase of$188.6 million or 138% from a working capital deficit of$137.1 million atDecember 31, 2019 . Our working capital increased primarily as a result of the increase of$192.5 million in our net current asset derivative position resulting primarily from declines in oil price futures. In addition to the increase in our net current asset derivative instrument position, other significant changes to working capital consisted primarily of the following:
• Operations-related accounts payable and accrued liabilities decreased
by $110.5 million , primarily due to a decrease in revenue payable due
to declines in prices 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.
• Accounts receivable decreased by $118.6 million , primarily due todeclines in prices lowering our oil and gas sales receivable, partially
offset by an increase in trade receivables.
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
46--------------------------------------------------------------------------------
Table of Contents
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. InFebruary 2020 , our Board of Directors declared a cash dividend of$0.22 per common share, totaling$22.5 million , which is payable on or beforeJune 1, 2020 to stockholders of record onMay 15, 2020 . Also inFebruary 2020 , our Board of Directors declared a cash dividend of$20.3125 per preferred share, totaling$1.3 million . The dividend was paid in April to preferred stockholders of record onApril 1, 2020 . InMay 2020 , our Board of Directors declared a cash dividend of$0.22 per common share, which is payable on or beforeSeptember 1, 2020 to stockholders of record onAugust 14, 2020 . Also inMay 2020 , our Board of Directors declared a cash dividend of$20.3125 per preferred share, which is payable onJuly 15, 2020 to stockholders of record onJuly 1, 2020 . Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors. Off-Balance Sheet Arrangements We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As ofMarch 31, 2020 , our material off-balance sheet arrangements consisted of operating lease agreements with lease terms at commencement of 12 months or less. As an accounting policy, we have elected not to apply the recognition requirements of Topic 842 to these leases. As such, we have not recorded any lease liabilities associated with these leases. Contractual Obligations and Material Commitments AtMarch 31, 2020 , we had the following contractual obligations and material commitments: Payments Due by Period Contractual obligations (in 4/1/20 - 4/1/21 - 4/1/23 - 4/1/25 and thousands) Total 3/31/21 3/31/23 3/31/25 Thereafter Long-term debt-principal (1)$ 2,000,000 $ - $ -$ 750,000 $ 1,250,000 Long-term debt-interest (1) 563,968 81,868 167,875 151,469 162,756 Operating leases (2) 95,786 22,621 26,799 24,292 22,074 Unconditional purchase obligations (3) 69,090 11,089 16,085 18,359 23,557 Derivative liabilities 23,007 6,772 16,235 - - Asset retirement obligation (4) 180,234 22,841 - (4) - (4) - (4) Other long-term liabilities (5) 40,527 3,529 7,463 3,204 26,331$ 2,972,612 $ 148,720 $ 234,457 $ 947,324 $ 1,484,718
________________________________________
(1) The interest payments presented above include the accrued interest payable on
our long-term debt as of
using the long-term debt's fixed rates, stated maturity dates, and principal
amounts outstanding as of
Consolidated Financial Statements for additional information regarding our
debt.
(2) Operating leases include the estimated remaining contractual payments under
lease agreements as of
comprised of leases for commercial real estate, which consists primarily of
office space, and compressor equipment.
(3) Of the total unconditional purchase obligations,
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.
47--------------------------------------------------------------------------------
Table of Contents
(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.
AtMarch 31, 2020 , we had estimated commitments of approximately: (i)$239.2 million to finish drilling, completing, or performing other work on wells and various other infrastructure projects in progress and (ii)$14.4 million to finish gathering system and water facilities construction in progress. AtMarch 31, 2020 , we had firm sales contracts to deliver approximately 558.5 Bcf of gas over the next 11.3 years. If we do not deliver this gas, our estimated financial commitment, calculated usingApril 2020 index prices, would be approximately$519.6 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 8.8 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 ofMarch 31, 2020 , would be approximately$691.1 million . With the current commodity price environment we have curtailed production and may continue to curtail production and further reduce drilling activity; 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 ofMarch 31, 2020 , would be approximately$111.4 million . Of this total, we have accrued a liability of$4.4 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 have curtailed production and may continue to curtail production and further reduce drilling activity; 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 . 48
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
