Item 1A. Risk Factors
Our business and operations are subject to a number of risks and uncertainties as described below; however, the risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become important factors that harm our business, financial condition, results of operations and cash flows in the future. If any of the following risks actually occur, our business, financial condition, results of operations and cash flows could suffer and the trading price of our common stock could decline.
Risks Related to the Business:
Oil and natural gas prices are volatile, and a substantial or extended decline in oil and natural gas prices would adversely affect our financial results, reduce liquidity and impede our growth.
Oil and natural gas prices historically have been volatile and are likely to continue to be volatile in the future. Prices for oil and natural gas fluctuate widely in response to relatively minor changes in the supply and demand for oil and natural gas, market uncertainty and a variety of additional factors beyond our control, such as:
•domestic and foreign supplies of oil and natural gas;
•price and quantity of foreign imports of oil and natural gas;
•actions of the Organization of Petroleum Exporting Countries (“OPEC”) and other state-controlled oil companies (together, “OPEC+”) relating to oil and natural gas price and production controls;
•level of consumer product demand, including as a result of competition from alternative energy sources;
•level of global oil and natural gas exploration and production activity;
•domestic and foreign governmental regulations;
•stockholder activism or activities by non-governmental organizations to limit certain sources of funding for the energy sector or restrict the exploration, development and production of oil and natural gas;
•political conditions in or affecting other oil-producing and natural gas-producing countries, including in the Middle East, South America, Africa and Russia;
•weather conditions, natural disasters and global health events, including pandemics;
•technological advances affecting oil and natural gas production and consumption;
•overall U.S. and global economic conditions; and
•price and availability of alternative fuels.
Our financial condition, revenues, profitability and the carrying value of our properties depend upon the prevailing prices and demand for oil and natural gas. Any sustained periods of low prices for oil and natural gas are likely to materially and adversely affect our financial position and reduce our liquidity. This would impact the quantities of oil and natural gas reserves that we can economically produce, our cash flow available for capital expenditures and continued development of our operations, making it increasingly difficult to operate our business. Additionally, any extended period of low commodity prices would impact our ability to access funds through the capital markets, if they are available at all. For example, the COVID-19 pandemic has caused volatility in the market price for crude oil due to the disruption of global supply and demand. Though declining U.S. production and production cuts agreed to by certain members of OPEC+ have helped mitigate the supply and demand imbalance experienced during 2020, we expect that oil prices in the near term will continue to be influenced by the duration and severity of the COVID-19 pandemic and its resulting impact on oil and natural gas demand.
The COVID-19 pandemic has adversely affected our business, and the ultimate effect on our business, financial position, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be fully predicted.
In response to the COVID-19 pandemic, governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions and stay-at-home orders, which have caused and may continue to cause a significant decrease in the demand for natural gas and oil. The imbalance between the supply of and demand for these products, as well as the uncertainty around the extent and timing of an economic recovery, has caused extreme market volatility and a substantial adverse effect on commodity prices and may continue to cause market volatility and adverse effects on commodity prices. Also as a result of this imbalance, the industry has experienced storage capacity constraints with respect to certain natural gas products and oil. In response to these conditions, we released our sole drilling rig in April 2020, temporarily curtailed a portion of our estimated production, and deferred the completion and placement on production of eight wells until the second half of 2020. Although, we have since restarted drilling and completions activity and returned to sales all previously curtailed oil and natural gas volumes in the third and fourth quarters of 2020, in the future, we could temporarily curtail a portion of our
estimated production or shut in a portion of our production or delay or discontinue drilling plans and commercial production following a discovery of hydrocarbons. While our production is more heavily weighted to natural gas, the lack of a market, due to low commodity prices or a future decrease in commodity prices, or available storage for any one natural gas product or oil could result in us temporarily curtailing or shutting in such production as we may be unable to curtail the production of individual products in a meaningful way without reducing the production of other products. Any such shut-in or curtailment, or any inability to obtain favorable terms for delivery of the natural gas and oil we produce, could adversely affect our financial condition and results of operations. Any excess supply could also lead to potential curtailments by our purchasers. Additionally, while we believe that any potential shutting-in of such production will not impact the productivity of such wells when reopened, there is no assurance we will not have a degradation in well performance upon returning those wells to production. The storing or shutting in of a portion of our production could potentially also result in increased costs under our midstream and other contracts. Any of the foregoing could result in an adverse impact on our revenues, financial position and cash flows.
The extent of the impact of the COVID-19 pandemic on our business and operational plans is uncertain and depends on various factors, including how the pandemic and measures taken in response to it impact demand for oil and natural gas, the availability of personnel, equipment and services critical to our ability to operate our properties and the impact of potential governmental restrictions on travel, transports and operations.
Additionally, the direct and indirect effects of the COVID-19 pandemic or any future outbreak of an infectious disease may give rise to risks that are currently unknown or have the effect of heightening many of the other risks set forth in these “Item 1A. Risk Factors” in this Annual Report.
Insufficient capital could lead to declines in our cash flow or in our oil and natural gas reserves, or a loss of properties.
The oil and natural gas industry is capital intensive. Our 2021 capital plan, including expenditures for leasehold acquisitions, drilling and infrastructure and fulfillment of abandonment obligations, is expected to be between $100-$110 million. We had approximately $95 million of capital expenditures in 2020. Cash flow from operations is a principal source of our financing of our future capital expenditures. Insufficient cash flow from operations and inability to access capital could lead to the loss of leases that require us to drill new wells in order to maintain the lease. Lower liquidity and other capital constraints may make it difficult to drill those wells prior to the lease expiration dates, which could result in our losing reserves and production. Additionally, a decline in cash flow from operations may require us to revise our capital program or alter or increase our capitalization substantially through the incurrence of indebtedness or the issuance of debt or equity securities.
Further, developing and exploring properties for oil and natural gas not only requires significant capital expenditures, but involves a high degree of financial risk, including the risk that no commercially productive oil or natural gas reservoirs will be encountered. Budgeted costs of drilling, completing, and operating wells are often exceeded and can increase significantly when drilling costs rise, impacting the Company’s budgeted capital expenditures. Drilling may also be unsuccessful for many reasons, including title problems, weather, cost overruns, equipment shortages, and mechanical difficulties, which could impact the Company’s cash flow from operations.
Most of our undeveloped leasehold acreage is subject to leases that will expire over the next several years unless production is established on units containing the acreage.
We own leasehold interests in areas not currently held by production. Unless production in paying quantities is established or we exercise an extension option on units containing certain of these leases during their terms, the leases will expire. If our leases expire, we will lose our right to develop the related properties. We have leases on 60,735 net acres that could potentially expire during fiscal year 2021, representing approximately 39% of our net undeveloped acreage.
Our drilling plans for areas not currently held by production are subject to change based upon various factors. Many of these factors are beyond our control, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. On our acreage that we do not operate, we have less control over the timing of drilling; therefore, there is additional risk of expirations occurring in those sections.
Estimates of proved reserves are uncertain, and revenues from production may vary significantly from expectations.
The quantities and values of our proved reserves included in our year-end 2020 estimates of proved reserves are only estimates and subject to numerous uncertainties. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation. These estimates depend on assumptions regarding quantities and
production rates of recoverable oil and natural gas reserves, future prices for oil and natural gas, timing and amounts of development expenditures and operating expenses, all of which will vary from those assumed in our estimates. If the variances in these assumptions are significant, many of which are based upon extrinsic events we cannot control, they could significantly affect these estimates and could result in the actual amounts of oil and natural gas ultimately recovered and future net cash flows being materially different from the estimates in our reserves reports. These estimates may not accurately predict the present value of future net cash flows from our oil and natural gas reserves.
Our oil and natural gas exploration and production business involves high risks and we may suffer uninsured losses, which may be subject to substantial liability claims.
Losses and liabilities arising from uninsured and underinsured events could materially and adversely affect our business, financial condition or results of operations. Our oil and natural gas exploration and production activities are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including the possibility of:
•hurricanes, tropical storms or other natural disasters;
•environmental hazards, such as natural gas leaks, oil and produced water spills, pipeline or tank ruptures, encountering naturally occurring radioactive materials, blowouts, explosions and unauthorized discharges of brine, well stimulation and completion fluids, toxic gases or other pollutants into the surface and subsurface environment;
•abnormally pressured formations;
•mechanical difficulties, such as stuck oil field drilling and service tools and casing collapse;
•fires and explosions; and
•personal injuries and death.
Any of these risks could adversely affect our ability to conduct operations or result in substantial losses to the Company due to injury or loss of life, damage to or destruction of wells, production facilities, other property or natural resources, clean-up responsibilities, regulatory investigations and penalties and suspension of operations. Although the Company currently maintains insurance coverage that it considers reasonable and that is similar to that maintained by comparable companies in the oil and natural gas industry, it is not fully insured against certain of these risks, such as business interruption, either because such insurance is not available or because of the high premium costs and deductibles associated with obtaining and carrying such insurance. Further, we may also elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by insurance, it could adversely affect our financial condition.
The unavailability or high cost of drilling rigs, equipment, supplies, personnel, water disposal and oilfield services could adversely affect our ability to execute on a timely basis our exploration and development plans within our budget and operate profitably.
Shortages or the high cost of drilling rigs, equipment, supplies or personnel, including shortages or unavailability of personnel, supplies and equipment arising from the COVID-19 pandemic could delay or adversely affect our development and exploration operations. If the price of oil and natural gas increases, the demand for production equipment and personnel will likely also increase, potentially resulting in shortages of equipment and personnel. In addition, larger producers may be more likely to secure access to such equipment by offering drilling companies more lucrative terms. If we are unable to acquire access to such resources, or can obtain access only at higher prices, this would potentially delay our ability to convert our reserves into cash flow and could also significantly increase the cost of producing those reserves, thereby negatively impacting anticipated net income.
Our ability to produce crude oil and natural gas economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our drilling operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner.
Our operations include the need of water for use in oil and natural gas exploration and production activities. The Company’s access to water may be limited due to reasons such as prolonged drought, private third party competition for water in localized areas, or the Company’s inability to acquire or maintain water sourcing permits or other rights. In addition, some state and local governmental authorities have begun to monitor or restrict the use of water subject to their jurisdiction for hydraulic fracturing to ensure adequate local water supply. Any such decrease in the availability of water could adversely affect the Company’s business and financial condition and operations. Moreover, any inability by the Company to locate or contractually acquire and sustain the receipt of sufficient amounts of water could adversely impact the Company’s exploration and production operations and have a corresponding adverse effect on the Company’s business and financial condition.
A cyber incident could result in information theft, data corruption, operational disruption, and/or financial loss.
Our business has become increasingly dependent on digital technologies to conduct day-to-day operations, including certain of our exploration, development and production activities. We depend on digital technology to estimate quantities of oil and natural gas reserves, process and record financial and operating data, analyze seismic and drilling information and in many other activities related to our business. Our technologies, systems and networks may become the target of cyber attacks or information security breaches that could result in the disruption of our business operations, damage to our properties and/or injuries. For example, unauthorized access to our seismic data, reserves information or other proprietary information could lead to data corruption, communication interruption, or other operational disruptions in our drilling or production operations.
To date we are not aware of any material losses relating to cyber attacks, however there can be no assurance that we will not suffer such losses in the future. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any cyber vulnerabilities.
Macroeconomic and Financial Risks:
Our Debt Facilities, as defined below, contain operating and financial restrictions that may restrict our business and financing activities.
Our Credit Facility and Second Lien (collectively “Debt Facilities”) contain a number of restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things:
•sell assets, including equity interests in our subsidiary;
•redeem our debt;
•make investments;
•incur or guarantee additional indebtedness;
•create or incur certain liens;
•make certain acquisitions and investments;
•redeem or prepay other debt;
•enter into agreements that restrict distributions or other payments from our restricted subsidiary to us;
•consolidate, divide, merge or transfer all or substantially all of our assets;
•engage in transactions with affiliates;
•create unrestricted subsidiaries;
•enter into swap agreements beyond certain maximum thresholds;
•enter into sale and leaseback transactions; and
•engage in certain business activities.
As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.
Our ability to comply with some of the covenants and restrictions contained in our Debt Facilities may be affected by events beyond our control. If market or other economic conditions deteriorate or if oil and natural gas prices decline further from their current level or remain volatile for an extended period of time, our ability to comply with these covenants may be impaired. A failure to comply with the covenants, ratios or tests in our Debt Facilities or any future indebtedness could result in an event of default under our Debt Facilities or our future indebtedness, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations.
If an event of default under either of our Debt Facilities occurs and remains uncured, the lenders or holders under the applicable Credit Facility:
•would not be required to lend any additional amounts to us;
•could elect to declare all borrowings or notes outstanding, together with accrued and unpaid interest and fees, to be due and payable;
•may have the ability to require us to apply all of our available cash to repay these borrowings or notes; or
•may prevent us from making debt service payments under our other agreements.
The borrowing base under our Credit Facility is redetermined at least semi-annually, based in part on assumptions of the administrative agent with respect to, among other things, crude oil and natural gas prices. A negative adjustment to the borrowing base could occur if crude oil and natural gas prices used by the lenders are significantly lower than those used in the
last redetermination, including as result of a decline in commodity prices or an expectation that reduced prices will continue. For example, our borrowing base was decreased from $330 million to $310 million as part of our regularly scheduled redetermination in November 2020. The next redetermination of our borrowing base in scheduled to occur in spring of 2021. As of February 26, 2021, we had $230 million outstanding under our Credit Facility. In the event that the amount outstanding under our Credit Facility exceeds the redetermined borrowing base, we could be forced to repay a portion of our borrowings. In addition, the portion of our borrowing base made available to us for borrowing is subject to the terms and covenants of our Credit Facility, including compliance with the ratios and other financial covenants of such facility.
Our obligations under the Debt Facilities are collateralized by first and second priority liens and security interests on substantially all of our assets, including mortgage liens on oil and natural gas properties having at least 85% of the PV-9 (determined using commodity price assumptions by the administrative agent of the Credit Facility) of the borrowing base properties (with respect to the Credit Facility) or the oil and gas properties constituting proved reserves as set forth in the most recent reserve report (with respect to the Second Lien). If we are unable to repay our indebtedness under the Debt Facilities, (including any amount of borrowings in excess of the borrowing base resulting from a redetermination of our Credit Facility), the lenders could seek to foreclose on substantially all our assets.
We have written down the carrying values on our oil and natural gas properties in the past and could incur additional write-downs in the future.
The SEC accounting rules require that on a quarterly basis we review the carrying value of our oil and natural gas properties for possible write-down or impairment (the "ceiling test"). Any capital costs in excess of the ceiling amount must be permanently written down. If oil and natural gas prices remain low for an extended period of time, we could be required to record additional non-cash write-downs of our oil and gas properties. For example, due to the effects of pricing and timing of projects we reported a non-cash impairment write-down, on a pre-tax basis, of $355.9 million for the year ended December 31, 2020. If future capital expenditures outpace future discounted net cash flows in our reserve calculations, if we have significant declines in our oil and natural gas reserves volumes (which also reduces our estimate of discounted future net cash flows from proved oil and natural gas reserves) or if oil or natural gas prices decline, it is possible that non-cash write-downs of our oil and natural gas properties will occur again in the future. We cannot control and cannot predict what future prices for oil and natural gas will be; therefore, we cannot estimate the amount of any potential future non-cash write-down of our oil and natural gas properties due to decreases in oil or natural gas prices. However, it is reasonably possible that we will record additional ceiling test write-downs in future periods. Refer to Note 1 of the consolidated financial statements in this Form 10-K for further discussion of the ceiling test calculation.
A worldwide financial downturn or negative credit market conditions may have lasting effects on our liquidity, business and financial condition that we cannot control or predict.
Global economic conditions, such as those attributable to the COVID-19 pandemic, may adversely affect the financial viability of and increase the credit risk associated with our purchasers, suppliers, insurers, and commodity derivative counterparties to perform under the terms of contracts or financial arrangements we have with them. Although we have heightened our level of scrutiny of our contractual counterparties, our assessment of the risk of non-performance by various parties is subject to sudden swings in the financial and credit markets. This same crisis may adversely impact insurers and their ability to pay current and future insurance claims that we may have.
Our future access to capital could be limited due to tightening credit markets, particularly with respect to the oil and gas industry, that could affect our ability to fund our future capital projects. In addition, long-term restriction upon or freezing of the capital markets and legislation related to financial and banking reform may affect short-term or long-term liquidity.
Our hedging program may limit potential gains from increases in commodity prices, result in losses, or be inadequate to protect us against continuing and prolonged declines in commodity prices.
We enter into arrangements to hedge a portion of our production from time to time to reduce our exposure to fluctuations in oil, natural gas and natural gas liquids prices and to achieve more predictable cash flow. Our hedges at December 31, 2020 are in the form of collars, swaps, put and call options, basis swaps, and other structures placed with the commodity trading branches of certain national banking institutions and with certain other commodity trading groups. These hedging arrangements may limit the benefit we could receive from increases in the market or spot prices for oil, natural gas and natural gas liquids. We cannot be certain that the hedging transactions we have entered into, or will enter into, will adequately protect us from continuing volatility or prolonged declines in oil and natural gas prices. To the extent that oil and natural gas prices remain
volatile or decline further, we would not be able to hedge future production at the same pricing level as our current hedges and our results of operations and financial condition may be negatively impacted.
In addition, our hedging transactions expose us to risk of financial loss if a counterparty fails to perform under a derivative contract, particularly during periods of falling commodity prices. Disruptions in the financial markets or other factors outside our control could lead to sudden decreases in a counterparty’s liquidity, which could make them unable to perform under the terms of the derivative contract. We are unable to predict sudden changes in a counterparty’s creditworthiness or ability to perform, and even if we do accurately predict sudden changes, our ability to negate the risk may be limited depending on market conditions at the time. If the creditworthiness of any of our counterparties deteriorates and results in their nonperformance, we could incur a significant loss.
Legal and Regulatory Risks:
Pollution and property contamination arising from the Company’s operations and the nearby operations of other oil and natural gas operators could expose the Company to significant costs and liabilities.
The performance of the Company’s operations may result in significant environmental costs and liabilities as a result of handling of petroleum hydrocarbons and wastes, because of air emissions and wastewater or other fluid discharges related to operations, and due to historical industry operations and waste disposal practices. Spills or other unauthorized releases of regulated substances by or resulting from the Company’s operations, or the nearby operations of other oil and natural gas operators, could expose the Company to material losses, expenditures and liabilities under environmental laws and regulations. Certain of the properties upon which the Company conducts operations were acquired from third parties, whose actions with respect to the management and disposal or release of hydrocarbons, hazardous substances or wastes at or from such properties were not under the Company’s control. Moreover, certain of these laws may impose strict liability, which means that in some situations the Company could be exposed to liability as a result of the Company’s conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Neighboring landowners and other third parties may file claims against the Company for personal injury or property damage allegedly caused by the release of pollutants into the environment. New laws and regulations, amendment of existing laws and regulations, reinterpretation of legal requirements or increased governmental enforcement relating to environmental requirements may occur, resulting in the occurrence of restrictions, delays or cancellations in the permitting or performance of new or expanded projects, or more stringent or costly well drilling, construction, completion or water management activities or waste handling, storage, transport, disposal or cleanup requirements. Any of these developments could require the Company to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on the oil and natural gas exploration and production industry in general in addition to the Company’s own results of operations, competitive position or financial condition. The Company may not be able to recover some or any of its costs with respect to such developments from insurance.
Government regulation of the Company’s activities could adversely affect the Company and its operations.
The oil and natural gas business is subject to extensive governmental regulation under which, among other things, rates of production from oil and natural gas wells may be regulated. Governmental regulation also may affect the market for the Company’s production and operations. Costs of compliance with governmental regulation are significant, and the cost of compliance with new and emerging laws and regulations and the incurrence of associated liabilities could adversely affect the results of the Company. Numerous executive, legislative and regulatory proposals affecting the oil and natural gas industry have been introduced, are anticipated to be introduced, or are otherwise under consideration, by the President, Congress, state legislatures and various federal and state agencies. We cannot predict the timing or impact of new or changed laws, regulations, or permit requirements or changes in the ways that such laws, regulations, or permit requirements are enforced, interpreted or administered. For example, various governmental agencies, including the EPA and analogous state agencies, the federal Bureau of Land Management (“BLM”), and the Federal Energy Regulatory Commission can enact or change, begin to force compliance with, or otherwise modify their enforcement, interpretation or administration of, certain regulations that could adversely affect the Company. Additionally, President Biden's administration may increase the likelihood of potential changes in these laws and regulations and the enforcement of any existing legislation or directives by government authorities. The trend toward stricter standards, increased oversight and regulation and more extensive permit requirements, along with any future laws and regulations, could result in increased costs or additional operating restrictions which could have an effect on the Company, its operations, the demand for oil and natural gas, or the prices at which it can be sold. However, until such legislation or regulations are enacted or adopted into law and thereafter implemented, it is not possible to gauge their impact on our future operations or our results of operations and financial condition.
The Company’s operations are subject to environmental and worker safety and health laws and regulations that may expose the Company to significant costs and liabilities and could delay the pace or restrict the scope of the Company’s operations.
The Company’s oil and natural gas exploration, production and development operations are subject to stringent federal, state and local laws and regulations governing worker safety and health, the release or disposal of materials into the environment or otherwise relating to environmental protection. Numerous governmental entities, including the EPA, OSHA and analogous state agencies, have the power to enforce compliance with these laws and regulations, which may require the Company to take actions resulting in costly capital and operating expenditures at its wells and properties. These laws and regulations may restrict or affect the Company’s business in many ways, including applying specific health and safety criteria addressing worker protection, requiring the acquisition of a permit before drilling or other regulated activities commence, restricting the types, quantities and concentration of substances that can be released into the environment, limiting or prohibiting construction or drilling activities on certain lands lying within wilderness, wetlands and other protected areas, and imposing substantial liabilities for pollution resulting from the Company’s operations. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil and criminal penalties, the imposition of investigative, remedial or corrective action obligations, the occurrence of restrictions, delays or cancellations in the permitting, development or expansion of projects, and the issuance of orders enjoining performance of some or all of the Company’s operations in a particular area. We could be exposed to liabilities for cleanup costs, natural resource damages, and other damages under these laws and regulations, with certain of these legal requirements imposing strict liability for such damages and costs, even though the conduct in pursuing the Company’s operations was lawful at the time it occurred or the conduct resulting in such damage and costs were caused by prior operators or other third-parties
Over time, environmental laws and regulations in the United States protecting the environment generally have become more stringent and are expected to continue to do so in the future. If existing environmental regulatory requirements or enforcement policies change or new regulatory or enforcement initiatives are developed and implemented in the future, the Company may be required to make significant, unanticipated capital and operating expenditures with respect to its continued operations. Moreover, these risks are likely to be enhanced with President Biden taking office and Democrats gaining control of Congress. Examples of recent environmental regulations include the following:
•Ground-Level Ozone Standards. In 2015, the EPA issued a final rule under the CAA, lowering the National Ambient Air Quality Standard (“NAAQS”) for ground-level ozone from 75 parts per billion to 70 parts per billion under both the primary and secondary standards to provide requisite protection of public health and welfare, respectively. Since that time, the EPA has issued area designations with respect to ground-level ozone and final requirements that apply to state, local, and tribal air agencies for implementing the 2015 NAAQS for ground-level ozone. State implementation of the revised NAAQS could, among other things, require installation of new emission controls on some of the Company’s equipment, result in longer permitting timelines, and significantly increase the Company's capital expenditures and operating costs arising from the program’s operations.
• EPA Review of Drilling Waste Classification. Drilling, fluids, produced water and most of the other wastes associated with the exploration, development and production of oil or natural gas, if properly handled, are currently exempt from regulation as hazardous waste under the RCRA and instead, are regulated under RCRA’s less stringent non-hazardous waste provisions. However, it is possible that certain oil and natural gas drilling and production wastes now classified as non-hazardous could be classified as hazardous wastes in the future. Any future loss of the RCRA exclusion for drilling fluids, produced waters and related wastes could result in an increase in the Company’s costs to manage and dispose of generated wastes, which could have a material adverse effect on the industry as well as on the Company’s business.
• Federal Jurisdiction over Waters of the United States. In 2015, the EPA and U.S. Army Corps of Engineers (“Corps”) under the Obama Administration released a final rule outlining federal jurisdictional reach under the Clean Water Act, over waters of the United States, including wetlands. However, the EPA rescinded this rule in 2019 and promulgated the Navigable Waters Protection Rule in 2020. The Navigable Waters Protection Rule defined what waters qualify as navigable waters of the United States and are under Clean Water Act jurisdiction. This new rule has generally been viewed as narrowing the scope of waters of the United States as compared to the 2015 rule, but litigation in multiple federal district courts is currently challenging the rescission of the 2015 rule and the promulgation of the Navigable Waters Protection Rule. To the extent that any challenge to the Navigable Waters Protection Rule is successful and the 2015 rule or a revised rule expands the scope of the Clean Water Act’s jurisdiction in areas where the Company conducts operations, the Company could incur increased costs and restrictions, delays or cancellations in permitting or projects, which developments could expose it to significant costs and liabilities.
Additionally, the federal Occupational Safety and Health Act and analogous state occupational safety and health laws require the program manager to organize information about materials, some of which may be hazardous or toxic, that are used, released or produced in the Company’s operations. Moreover, the OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require that information be maintained concerning hazardous materials used or produced in the Company’s operations and that this information be provided to employees, state and local government authorities and citizens.
Compliance of the Company with these regulations or other laws, regulations and regulatory initiatives, or any other new environmental and occupational health and safety legal requirements could, among other things, require the Company to install new or modified emission controls on equipment or processes, incur longer permitting timelines, and incur significantly increased capital or operating expenditures, which costs may be significant. Moreover, any failure of the Company’s operations to comply with applicable environmental laws and regulations may result in governmental authorities taking actions against the Company that could adversely impact its operations and financial condition.
The ESA and other restrictions intended to protect certain species of wildlife govern our oil and natural gas operations, which constraints could have an adverse impact on our ability to expand some of our existing operations or limit our ability to explore for and develop new oil and natural gas wells.
The ESA and comparable state laws and other regulatory initiatives restrict activities that may affect endangered or threatened species or their habitats. Similar protections are offered to migrating birds under the federal Migratory Bird Treaty Act and the Bald and Golden Eagle Protection Act. Some of the Company’s operations may be located in or near areas that are designated as habitat for endangered or threatened species and, in these areas, the Company may be obligated to develop and implement plans to avoid potential adverse effects to protected species and their habitats, and the Company may be prohibited from conducting operations in certain locations or during certain seasons, such as breeding and nesting seasons, when its operations could have an adverse effect on the species. It is also possible that a federal or state agency could order a complete halt to the Company’s drilling activities in certain locations if it is determined that such activities may have a serious adverse effect on a protected species. Moreover, the U.S. Fish and Wildlife Service, may make determinations on the listing of species as endangered or threatened under the ESA pursuant to specific timelines. The identification or designation of previously unprotected species as threatened or endangered or the redesignation of lesser protected species in areas where underlying property operations are conducted could cause the Company to incur increased costs arising from species protection measures, time delays or limitations or cancellations on its exploration and production activities, which costs, delays, limitations or cancellations could have an adverse impact on the Company’s ability to develop and produce reserves. If the Company were to have a portion of its leases designated as critical or suitable habitat, it could adversely impact the value of its leases.
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays in the completion of oil and natural gas wells and adversely affect the Company’s production.
Hydraulic fracturing is an important and common practice that is used to stimulate production of gas and/or oil from dense subsurface rock formations. The hydraulic fracturing process involves the injection of water, sand or other proppant and chemical additives under pressure into targeted subsurface formations to fracture the surrounding rock and stimulate production. The Company uses hydraulic fracturing techniques in certain of its operations. Hydraulic fracturing typically is regulated by state oil and gas commissions or similar state agencies, but several federal agencies have conducted studies or asserted regulatory authority over certain aspects of the process. For example, in late 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under some circumstances. Additionally, the EPA has asserted regulatory authority pursuant to the SDWA Underground Injection Control (“UIC”) program over hydraulic fracturing activities involving the use of diesel and issued guidance covering such activities as well as published an Advance Notice of Proposed Rulemaking regarding Toxic Substances Control Act reporting of the chemical substances and mixtures used in hydraulic fracturing. The EPA also issued final regulations in 2012 and in 2016 under the CAA that govern performance standards, including standards for the capture of methane and volatile organic compound (“VOC”) air emissions released during oil and natural gas hydraulic fracturing. However, in August 2020, the EPA rescinded methane and volatile organic compound emissions standards for new and modified oil and gas transmission and storage infrastructure, as well as methane limits for new and modified oil and gas production and processing equipment. The EPA also relaxed requirements for oil and gas operators to monitor emissions leaks. Moreover, the EPA has published an effluent limit guideline final rule prohibiting the discharge of wastewater from onshore unconventional oil and natural gas extraction facilities to publicly owned wastewater treatment plants. Also, the BLM published a final rule in 2015 that established new or more stringent standards relating to hydraulic fracturing on federal and American Indian lands but the BLM rescinded the 2015 rule in late 2017; however, litigation challenging the BLM’s decision to rescind the 2015 rule remains pending in the U.S. Court of Appeals for the Ninth Circuit.
From time to time, legislation has been considered, but not adopted, in the U.S. Congress to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the hydraulic fracturing process. Moreover, these risks are likely to be enhanced with President Biden taking office and Democrats gaining control of Congress. Additionally, a bill was introduced in the Senate on January 28, 2020 that, if enacted as proposed, would ban hydraulic fracturing nationwide by 2025.
In addition, certain states, including Texas where we conduct operations, have adopted, and other states are considering adopting legal requirements that could impose new or more stringent permitting, public disclosure, or well construction requirements on hydraulic fracturing activities. States could elect to place certain prohibitions on hydraulic fracturing, following the approach taken by the States of Maryland, New York and Vermont. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular. If new or more stringent federal, state, or local laws, regulations, presidential executive orders or other legal restrictions relating to the hydraulic fracturing process are adopted in areas where the Company operates, the Company could incur potentially significant added costs to comply with such requirements, experience restrictions, delays or cancellation in the pursuit of exploration, development or production activities, and perhaps even be precluded from drilling wells.
Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition to, and litigation concerning, oil and natural gas production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to added restrictions, delays or cancellations with respect to our operations or increased operating costs in our production of oil and natural gas. The adoption of any federal, state or local laws or the implementation of regulations restricting or banning some or all of hydraulic fracturing could result in delays, eliminate certain drilling and injection activities and prohibit or make more difficult or costly the performance of hydraulic fracturing. These developments could adversely affect demand for our production and have a material adverse effect on our business or results of operations.
Federal or state legislative and regulatory initiatives related to induced seismicity could result in operating restrictions or delays that could adversely affect the Company’s production of oil and natural gas.
Operations associated with our production and development activities generate drilling muds, produced waters and other waste streams, some of which may be disposed of by means of injection into underground wells situated in non-producing subsurface formations. These disposal wells are regulated pursuant to the UIC program established under the SDWA and analogous state laws. The UIC program requires permits from the EPA or an analogous state agency for construction and operation of such disposal wells, establishes minimum standards for disposal well operations, and restricts the types and quantities of fluids that may be disposed. While these permits are issued pursuant to existing laws and regulations, these legal requirements are subject to change based on concerns of the public or governmental authorities regarding such disposal activities. One such concern relates to seismic events near underground disposal wells used for the disposal by injection of produced water or certain other oilfield fluids resulting from oil and natural gas activities. Developing research suggests that the link between seismic activity and produced water disposal may vary by region, and that only a very small fraction of the tens of thousands of injection wells have been suspected to be, or may have been, the likely cause of induced seismicity. In 2016, the United States Geological Survey identified Texas, where the Company conducts operations, as one of six states with more significant rates of induced seismicity. Since that time, the United States Geological Survey indicates that this rate has decreased in Texas, although concern continues to exist over earthquakes arising from induced seismic activities.
In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for produced water disposal wells that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, is developing and implementing plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In Texas, the Railroad Commission of Texas has adopted similar rules for the permitting of produced water disposal wells. Another consequence of seismic events may be lawsuits alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. These developments could result in additional regulation and restrictions on the use of injection wells in connection with Company activities to dispose of produced water and certain other oilfield fluids. Increased regulation and attention given to induced seismicity also could lead to greater opposition, including litigation, to oil and natural gas activities utilizing injection wells for waste disposal. Any one or more of these developments may result in the Company having to limit disposal well volumes, disposal rates or locations, or require third party disposal well operators the Company may engage to dispose of produced water generated by Company activities to shut down disposal wells, which development could adversely affect the Company’s production or result in the Company incurring increased costs and delays with respect to Company operations.
The Company’s operations are subject to a number of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduced demand for the oil and natural gas the Company produces
Climate change continues to attract considerable public, governmental and scientific attention. As a result, numerous proposals have been made and are likely to continue to be made at the international, national, regional and state levels of government to monitor and limit emissions of GHGs as well as to restrict or eliminate such future emissions. As a result, our operations as well as the operations of our oil and natural gas exploration and production customers are subject to a series of regulatory, political, litigation, and financial risks associated with the production and processing of fossil fuels and emission of GHGs.
At the federal level, no comprehensive climate change legislation has been implemented to date. However, the EPA has determined that emissions of GHGs present an endangerment to public health and the environment and has adopted regulations under existing provisions of the CAA that, among other things, establish Prevention of Significant Deterioration construction and Title V operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources, implement CAA emission standards directing the reduction of methane from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the U.S. Department of Transportation, implement GHG emissions limits on vehicles manufactured for operation in the United States. Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, there exists the United Nations-sponsored “Paris Agreement,” which is a non-binding agreement for nations to limit their GHG emissions through individually-determined reduction goals every five years after 2020. Although the Trump administration had withdrawn the United States from the Paris Agreement in November 2020, the Biden Administration officially reentered the United States into the agreement in February 2021.
President Biden and the Democratic Party, which now controls Congress, have identified climate change as a priority, and it is likely that new executive orders, regulatory action, and/or legislation targeting greenhouse gas emissions, or prohibiting, delaying or restricting oil and gas development activities in certain areas, will be proposed and/or promulgated during the Biden Administration. For example, the acting Secretary of the Department of the Interior recently issued an order preventing staff from producing any new fossil fuel leases or permits without sign-off from a top political appointee, and President Biden recently announced a moratorium on new oil and gas leasing on federal lands and offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. President Biden’s order also established climate change as a primary foreign policy and national security consideration, affirms that achieving net-zero greenhouse gas emissions by or before midcentury is a critical priority, affirms the Biden Administration’s desire to establish the United States as a leader in addressing climate change, generally further integrates climate change and environmental justice considerations into government agencies’ decision-making, and eliminates fossil fuel subsidies, among other measures. Litigation risks are also increasing, as a number of cities, local governments, and other plaintiffs have sought to bring suit against the largest oil and natural gas exploration and production companies in state or federal court, alleging, among other things, that such companies created public nuisances by producing fuels that contributed to global warming effects, such as rising sea levels, and therefore are responsible for roadway and infrastructure damages as a result, or alleging that the companies have been aware of the adverse effects of climate change for some time but defrauded their investors by failing to adequately disclose those impacts.
There are also increasing financial risks for fossil fuel producers, as stockholders and bondholders currently invested in fossil fuel energy companies concerned about the potential effects of climate change may elect in the future to shift some or all of their investments into non-fossil fuel energy related investments. Institutional investors who provide capital to fossil fuel energy companies also have become more attentive to sustainability issues, and some of them may elect not to provide funding for fossil fuel energy companies. Additionally, the lending and investment practices of institutional lenders have been the subject of intensive lobbying efforts in recent years, oftentimes public in nature, by environmental activists, proponents of the international Paris Agreement, and foreign citizenry concerned about climate change not to provide funding for fossil fuel producers. Limitation of investments in and financings for fossil fuel energy could restrict the availability of capital, resulting in the restriction, delay, or cancellation of development and production activities.
The adoption and implementation of any international, federal or state laws or regulations that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could require the Company to incur increased operating costs or costs of compliance and thereby reduce demand for the oil and natural gas produced by the Company. Additionally, political, litigation,
and financial risks may result in the Company restricting or cancelling development or production activities, incurring liability for infrastructure damages as a result of climate changes, or impairing its ability to continue to operate in an economic manner, which also could reduce demand for or lower the value of, the oil and natural gas the Company produces. One or more of these developments could have a material adverse effect on the Company’s business, financial condition and results of operations.
Finally, it should be noted that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events. If any such effects were to occur, they could have an adverse effect on the Company’s operations. At this time, the Company has not developed a comprehensive plan to address the legal, economic, social, or physical impacts of climate change on the Company’s operations.
Changes to the U.S. federal tax laws could adversely affect our financial position, results of operations and cash flows.
Legislation enacted in Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act, made significant changes to U.S. tax laws. The Tax Cuts and Jobs Act (i) eliminated the deduction for certain domestic production activities, (ii) imposed new limitations on the utilization of net operating losses, (iii) eliminated the exception under Section 162(m) for qualified performance-based compensation and (iv) provided for more general changes to the taxation of corporations, including changes to cost recovery rules and to the deductibility of interest expense, which may impact the taxation of oil and natural gas companies. In recent years, lawmakers and the U.S. Department of the Treasury have proposed certain significant changes to U.S. tax laws applicable to oil and gas companies. These changes include, but are not limited to; (i) the repeal of the percentage depletion allowance for oil and gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, and (iii) an extension of the amortization period for certain geological and geophysical expenditures. No accurate prediction can be made as to whether any such legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. This legislation or any future similar changes in U.S. federal income tax laws, as well as any similar changes in state law, could eliminate or postpone certain tax deductions that currently are available with respect to natural gas and oil exploration and production, which could negatively affect our results of operations and financial condition. Additionally, the change in the Presidential administration and changes in Congress increase the uncertainty with regard to potential changes in the U.S. federal tax laws and the interpretation or enforcement of legislation or directives by tax authorities.
We may not be able to utilize a portion of our net operating loss carryforwards (“NOLs”) to offset future taxable income for U.S. federal income tax purposes, which could adversely affect our net income and cash flows.
As of December 31, 2020, we had federal net operating loss (“NOL”) carryforwards of approximately $444 million, approximately $274 million of which will expire in varying amounts beginning in 2034 through 2037. Utilization of these NOLs depends on many factors, including our future taxable income, which cannot be assured. In addition, Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), generally imposes an annual limitation on the amount of an NOL that may be used to offset taxable income when a corporation has undergone an “ownership change” (as determined under Section 382 of the Code). An ownership change generally occurs if one or more shareholders (or groups of shareholders) who are each deemed to own at least 5 percent of the corporation’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. In the event that an ownership change occurs with respect to a corporation following its recognition of an NOL, utilization of such NOL is subject to an annual limitation, generally determined by multiplying the value of the corporation’s stock at the time of the ownership change by the applicable long-term tax-exempt rate. However, this annual limitation would be increased under certain circumstances by recognized built-in gains of the corporation existing at the time of the ownership change. In the case of an NOL that arose in a taxable year beginning before January 1, 2018, any unused annual limitation with respect to an NOL generally may be carried over to later years, subject to the expiration of such NOL 20 years after it arose. Future changes in our stock ownership or future regulatory changes could also limit our ability to utilize our NOLs. To the extent we are not able to offset future taxable income with our NOLs, our net income and cash flows may be adversely affected.
Legal proceedings could result in liability affecting our results of operations.
We are involved in various legal proceedings, such as title, royalty, environmental or contractual disputes, in the ordinary course of business. We defend ourselves vigorously in all such matters, if appropriate.
Because we maintain a portfolio of assets in the various areas in which we operate, the complexity and types of legal proceedings with which we may become involved may vary, and we could incur significant legal and support expenses in different jurisdictions. If we are not able to successfully defend ourselves, there could be a delay or even halt in our exploration, development or production activities or other business plans, resulting in a reduction in reserves, loss of production and reduced
cash flows. Legal proceedings could result in a substantial liability. In addition, legal proceedings distract management and other personnel from their primary responsibilities.
Risks Related to Ownership of Our Common Stock:
For as long as we are a smaller reporting company, we will not be required to comply with certain disclosure requirements that apply to other public companies.
We are currently a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act. “Smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings, and have certain other scaled disclosure obligations in their SEC filings, including, among other things, being required to provide only two years of audited financial statements in annual reports. The scaled disclosures we provide in our SEC filings due to our status as a “smaller reporting company” may make it harder for investors to analyze our results of operations and financial prospects. If some investors find our common stock to be less attractive as a result of the scaled disclosures, there also may be a less active trading market for our common stock and our trading price may be more volatile.
There may be circumstances in which the interests of our significant stockholders could be in conflict with the interests of our other stockholders.
Funds associated with Strategic Value Partners LLC (“SVP”) and DW Partners, LP (“DW”) currently own approximately 37.5% and 15.5%, respectively, of our outstanding common stock. SVP currently has a right to nominate two of our directors under our director nominating agreement described below. DW, together with other former noteholders who received our common stock pursuant to our plan of reorganization, collectively hold the current right to nominate two additional directors. Our current board is limited to seven directors under the terms of the director nomination agreement. Circumstances may arise in which these stockholders may have an interest in pursuing or preventing acquisitions, divestitures or other transactions, including the issuance of additional shares or debt, that, in their judgment, could enhance their investment in us or another company in which they invest. Such transactions might adversely affect us or other holders of our common stock. Furthermore, we have entered into a director nomination agreement with each of SVP, DW and other former holders of our senior notes that provides for certain continuing nomination rights subject to conditions on share ownership. In addition, our significant concentration of share ownership may adversely affect the trading price of our common shares because investors may perceive disadvantages in owning shares in companies with significant stockholders.
A small number of institutional investors controls a significant percentage of our voting power and possess negative control or veto rights with respect to certain proposed Company transactions.
A small group of institutional investors, who are parties to our director nomination agreement currently, beneficially own a majority of our issued and outstanding common stock. Consequently, such investors are able to strongly influence all matters that require approval by our stockholders, including the election and removal of directors, changes to our organizational documents and approval of acquisition offers and other significant corporate transactions. This concentration of ownership limits our other stockholders’ ability to influence corporate matters. In addition, the institutional holders that are parties to the director nomination agreement possess negative control or veto rights under the Company’s First Amended and Restated Certificate of Incorporation (“Charter”) with respect to certain transactions the Company may propose to undertake for so long as such parties collectively hold 50% or more of the Company’s issued and outstanding shares of common stock. Such parties are entitled to notice of certain proposed transactions which may be vetoed if such parties who collectively hold at least 50% of the issued and outstanding shares of common stock object to such action. These veto rights of the parties to the director nomination agreement apply to the following transactions:
•the sale or other disposition of assets of the Company or its subsidiary, in any single transaction or series of related transactions, with a fair market value in the aggregate in excess of $75 million, other than certain intercompany ordinary course transactions;
•any sale, recapitalization, liquidation, dissolution, winding up, bankruptcy event, reorganization, consolidation, or merger of the Company or its subsidiary;
•issuing or repurchasing any shares of our common stock or other equity securities (or securities convertible into or exercisable for equity securities) in an amount that is in the aggregate in excess of $5 million, other than pursuant to employee benefit and incentive plans (including certain repurchases of capital stock to satisfy withholding or similar taxes in connection with any exercise of equity rights) and the issuance of shares of common stock upon exercise of our outstanding warrants;
•incurring any indebtedness for borrowed money (including through capital leases, the issuance of debt securities or the guarantee of indebtedness of another person or entity), in any single transaction or series of related transactions, that is in the aggregate in excess of $75 million other than indebtedness incurred to refinance indebtedness issued for less than $75 million, intercompany indebtedness, and certain other obligations incurred in the ordinary course of business;
•entering into any proposed transaction or series of related transactions involving a Change of Control of the Company (for purposes of this provision, “Change of Control” shall mean any transaction resulting in any person or group (as such terms are defined in Sections 13(d) and 14(d) of the Exchange Act) acquiring “beneficial ownership” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 50% of the total outstanding equity interests of the Company (measured by voting power rather than number of shares));
•entering into or consummating any material acquisition of businesses, companies or assets (whether through sales or leases) or joint ventures, in any single transaction or series of related transactions, in the aggregate in excess of $75 million;
•increasing or decreasing the size of the Board;
•amending the Charter or the First Amended and Restated Bylaws of the Company (“Bylaws”); or
•entering into any arrangements or transactions with affiliates of the Company.
Certain provisions of our Charter and our Bylaws may make it difficult for stockholders to change the composition of our Board and may discourage, delay or prevent a merger or acquisition that some stockholders may consider beneficial.
Certain provisions of our Charter and our Bylaws and our existing director nomination agreement may have the effect of delaying or preventing changes in control if our Board determines that such changes in control are not in the best interests of the Company and our stockholders. The provisions in our Charter and Bylaws and our existing director nomination agreement include, among other things, those that:
•provide for a classified board of directors;
•authorize our Board to issue preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;
•establish advance notice procedures for nominating directors or presenting matters at stockholder meetings;
•provide SVP and certain other institutional stockholders the right to nominate up to four of our directors;
•limit the persons who may call special meetings of stockholders; and
•provide veto rights to certain stockholders as detailed in our Charter, including any transaction that may constitute a change of control, as defined in the Charter.
While these provisions have the effect of encouraging persons seeking to acquire control of the Company to negotiate with our Board, they could enable the Board to hinder or frustrate a transaction that some, or a majority, of the stockholders may believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board, which is responsible for appointing the members of our management. Furthermore, we have entered into a director nomination agreement with each of SVP, DW and other former holders of our senior notes that provides for certain continuing nomination rights subject to conditions on share ownership.
Our Charter designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.
Our Charter provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our Charter or our Bylaws, or (iv) any action asserting a claim against us or any director or officer or other employee of ours governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein.
The exclusive forum provision would not apply to suits brought to enforce any liability or duty created by the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal
and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation or similar governing documents has been challenged in legal proceedings, and it is possible that a court could find the choice of forum provisions contained in our Charter to be inapplicable or unenforceable, including with respect to claims arising under the U.S. federal securities laws.
Any person or entity purchasing or otherwise holding any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our Charter described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our Charter inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Glossary of Abbreviations and Terms
The following abbreviations and terms have the indicated meanings when used in this report:
ASC - Accounting Standards Codification.
Bbl - Barrel or barrels of oil.
Bcf - Billion cubic feet of natural gas.
Bcfe - Billion cubic feet of natural gas equivalent (see Mcfe).
Boe - Barrels of oil equivalent.
Completion - Preparation of a well bore and installation of permanent equipment for production of oil, natural gas or NGLs or, in the case of a dry well, reporting to the appropriate authority that the well has been abandoned.
Condensate - Liquid hydrocarbons that are found in natural gas wells and condense when brought to the well surface. Condensate is used synonymously with oil.
Differential - An adjustment to the price of oil or natural gas from an established spot market price to reflect differences in the quality and/or location of oil or natural gas.
Developed Oil and Gas Reserves - Oil and natural gas reserves of any category that can be expected to be recovered through existing wells with existing equipment and operating methods.
Development Well - A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
Dry Well - An exploratory or development well that is not a producing well.
DUC - A well that has been drilled and has not yet been completed
Exploratory Well - A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir.
FASB - The Financial Accounting Standards Board.
Field - An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.
Gross Acre - An acre in which a working interest is owned. The number of gross acres is the total number of acres in which a working interest is owned.
Gross Well - A well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned.
MBbl - Thousand barrels of oil.
MBoe - Thousand barrels of oil equivalent.
Mcf - Thousand cubic feet of natural gas.
Mcfe - Thousand cubic feet of natural gas equivalent, which is determined using the ratio of one barrel of oil, condensate, or natural gas liquids to 6 Mcf of natural gas.
MMBbl - Million barrels of oil.
MMBtu - Million British thermal units, which is a heating equivalent measure for natural gas and is an alternate measure of natural gas reserves, as opposed to Mcf, which is strictly a measure of natural gas volumes. Typically, prices quoted for natural gas are designated as price per MMBtu, the same basis on which natural gas is contracted for sale.
MMcf - Million cubic feet of natural gas.
MMcfe - Million cubic feet of natural gas equivalent (see Mcfe).
Net Acre - A net acre is deemed to exist when the sum of fractional working interests owned in gross acres equals one. The number of net acres is the sum of fractional working interests owned in gross acres expressed as whole numbers and fractions thereof.
Net Well - A net well is deemed to exist when the sum of fractional working interests owned in gross wells equals one. The number of net wells is the sum of fractional working interests owned in gross wells expressed as whole numbers and fractions thereof.
NGL - Natural gas liquid.
NYMEX - The New York Mercantile Exchange.
Producing Well - An exploratory or development well found to be capable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well.
Proved Oil and Gas Reserves - Those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. For reserves calculations economic
conditions include prices based on either the preceding 12-months' average price based on closing prices on the first day of each month, or prices defined by existing contractual arrangements.
Proved Undeveloped (PUD) Locations - A location containing proved undeveloped reserves.
PV-10 Value - The estimated future net revenues to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%. These amounts are calculated net of estimated production costs and future development costs, using prices based on either the preceding 12-months' average price based on closing prices on the first day of each month, or prices defined by existing contractual arrangements, without escalation and without giving effect to non-property related expenses, such as general and administrative ("G&A") expenses, debt service, future income tax expense, or depreciation, depletion, and amortization. PV-10 Value is a non-GAAP measure and its use is explained under “Item 1& 2. Business and Properties - Oil and Natural Gas Reserves” above in this Form 10-K.
Reserves - Estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations.
Reservoir - A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
Spot Market Price - The cash market price without reduction for expected quality, transportation and demand adjustments.
Standardized Measure - The present value, discounted at 10% per year, of estimated future net revenues from the production of proved reserves, computed by applying sales prices and deducting the estimated future costs to be incurred in developing, producing and abandoning the proved reserves (computed based on current costs and assuming continuation of existing economic conditions). Future income taxes are calculated by applying the statutory federal and state income tax rate to pre-tax future net cash flows, net of the tax basis of the properties involved and utilization of available tax carryforwards related to oil and natural gas operations. Sales prices were prepared using average hydrocarbon prices equal to the unweighted arithmetic average of hydrocarbon prices on the first day of each month within the 12-month period preceding the reporting date (except for consideration of price changes to the extent provided by contractual arrangements).
Undeveloped Oil and Gas Reserves - Oil and natural gas reserves of any category that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
WTI - West Texas Intermediate.
Item 3.
Item 3. Legal Proceedings
In the ordinary course of business, we are party to various legal actions, which arise primarily from our activities as operator of oil and natural gas wells. In our opinion, the outcome of any such currently pending legal actions will not have a material adverse effect on our financial position or results of operations.
Item 4.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our common stock is traded on the New York Stock Exchange under the symbol “SBOW.” Since inception, no cash dividends have been declared on our common stock. Cash dividends are restricted under the terms of our credit agreements, and we presently intend to continue a policy of using retained earnings for expansion of our business.
We had approximately 94 stockholders of record as of December 31, 2020.
Stock Repurchase
There were no repurchases of our common stock during the fourth quarter of 2020.
Item 6.
Item 6. Selected Financial Data
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with the Company's financial information and its audited consolidated financial statements and accompanying notes for the years ended December 31, 2020 and 2019, included in this Form 10-K. The following information contains forward-looking statements; see “Forward-Looking Statements” on page 47 of this report.
Company Overview
SilverBow Resources is an independent oil and gas company headquartered in Houston, Texas. The Company's strategy is focused on acquiring and developing assets in the Eagle Ford Shale located in South Texas where it has assembled approximately 155,000 net acres across five operating areas. SilverBow Resources' acreage position in each of its operating areas is highly contiguous and designed for optimal and efficient horizontal well development. The Company believes it has built a balanced portfolio of properties with a significant base of current production and reserves coupled with low-risk development drilling opportunities and meaningful upside from newer operating areas.
SilverBow Resources produced an average 178 MMcfe per day during the fourth quarter of 2020 and as of December 31, 2020 had proved reserves of 1,106 Bcfe (86% natural gas) with a Standardized Measure of $513 million and a PV-10 of $526 million. PV-10 Value is a non-GAAP measure, see the section titled “Oil and Natural Gas Reserves” of this Form 10-K for a reconciliation of this non-GAAP measure to the Standardized Measure of discounted future net cash flows, the most directly comparable GAAP measure.
Being a committed and long-term operator in South Texas, the Company possesses a significant understanding of the reservoir characteristics, geology, landowners and competitive landscape in the region. SilverBow Resources leverages this in-depth knowledge to continue to assemble high quality drilling inventory while continuously enhancing its operations to maximize returns on capital invested.
Recent Events, Actions Taken and Strategy
In March 2020, the spot price of WTI crude oil declined over 50% in response to reductions in global demand due to the COVID-19 pandemic and announcements by Saudi Arabia and Russia of plans to increase crude oil production. Following this unprecedented collapse in crude oil prices, the spot price of Brent and WTI crude oil closed at approximately $15 and $21 per barrel, respectively, on March 31, 2020. Crude oil prices fell further in April but partially recovered during the second quarter of 2020 with Brent and WTI crude oil closing at approximately $41 and $39 per barrel, respectively on June 30, 2020. Crude oil prices traded slightly higher in the third and fourth quarter of 2020 with Brent and WTI crude closing at approximately $42 and $40 per barrel, on September 30, 2020, and $52 and $49 per barrel, on December 31, 2020.
The ultimate magnitude and duration of the COVID-19 pandemic, resulting governmental restrictions placing limitations on the mobility and ability to work of significant portions of the worldwide population, and the related impact on crude oil prices and the U.S. and global economy and capital markets is uncertain. While it is difficult to assess or predict with precision the broad future effect of this pandemic on the global economy, the energy industry or SilverBow Resources, the pandemic had a direct impact on the Company's results of operations, cash flows and financial condition during 2020 as a result of lower commodity prices and varied production levels.
In response to market conditions, including the COVID-19 pandemic and the rapid decline in commodity prices and economic outlook, SilverBow Resources reduced its original 2020 capital budget of $175-$195 million. The Company released its sole drilling rig in April 2020, and deferred the completion and placement on production of eight wells until the second half of 2020. In the third quarter of 2020, SilverBow Resources restarted completions activity and returned to sales all previously curtailed oil volumes and a substantial portion of natural gas volumes. In the fourth quarter of 2020, the Company returned to sales the remaining curtailed natural gas volumes coinciding with favorable fundamentals and strong pricing. SilverBow Resources also recommenced its D&C program in the fourth quarter, drilling eight net wells, completing two net wells and bringing two net wells online.
Overall, the Company's strategy of procuring cost savings on drilling and completion activities allows SilverBow Resources to add activity and stay within its capital range. The Company plans to continue pursuing a single-basin operating model, focused on its low-cost structure and optionality across multiple commodity phase windows of the Eagle Ford. As a returns-focused operator, SilverBow Resources employs a risk mitigation strategy by hedging forecasted production volumes and protecting cash flow.
As a result of the COVID-19 pandemic, the Company continues to operate under a "work from home" policy applicable to all employees other than essential personnel whose physical presence is required either in the office or in the field. SilverBow Resources has not experienced any material interruption to its ordinary course business processes as a result of COVID-19. The Company will continue to monitor the COVID-19 situation and follow the advice of government and health leaders.
Operational Results
SilverBow Resources continues to optimize completion techniques in order to enhance well performance across its portfolio. The following table and discussion highlights the Company's drilling and completion schedule for 2020:
(1) Other includes non-core properties.
During the fourth quarter of 2020, SilverBow Resources drilled eight net wells, completed two net wells and brought two net wells online. For the full year, the Company drilled 19 net wells, completed 15 net wells and brought 15 net wells online. SilverBow Resources' D&C activity through the first quarter of 2020 was primarily focused on its AWP McMullen Oil assets. At the end of the first quarter, the Company temporarily ceased D&C activity and strategically curtailed production in order to maximize cash flows. These curtailments had the greatest impact on second quarter production, but extended to varying degrees through October. For the full year 2020, curtailments were estimated to average 11 MMcf/d of net gas production and 340 Bbls/d of net oil production, or approximately 8% and 8% of net 2020 production, respectively.
In response to fluctuations in commodity prices, SilverBow Resources refocused its capital budget through the end of the year towards the drilling of high rate of return dry-gas assets. Of the 11 net wells drilled in the first quarter of 2020, eight wells were deferred to the third quarter to turn to sales. All eight of the deferred wells were located in the Company's AWP McMullen Oil area. In the fourth quarter, SilverBow Resources commenced the drilling of a nine well program in its Webb County Gas area. In addition to resuming capital activity, all curtailed production volumes were returned to production over the second half of 2020.
In the McMullen Oil area, the Company brought 10 net wells online in 2020. SilverBow Resources maintained focus on efficient asset development, completing four wells with over 10,000 feet of completed lateral length. Two of these four wells averaged nine days from spud to rig release, highlighting the drilling team's execution excellence. Two wells were brought online during the first quarter of 2020 while the remaining eight wells, as part of SilverBow's drilled but uncompleted program, were brought online during the third quarter of 2020. All ten wells continue to perform in-line with expectations.
In the La Salle Condensate area, the Company brought three net wells online in 2020. These three wells were developed on a recently acquired land tract adjacent to existing SilverBow Resources acreage. They provided for an opportunistic add-on to that position. The wells continue to perform well and are expected to achieve some of the strongest per well recoveries in the area.
In the Webb County Gas area, the Company brought two net wells online in 2020. Eight net wells were drilled during the fourth quarter as part of SilverBow Resources' focus on its dry gas assets. The drilling program consisted of two Fasken Upper Eagle Ford net wells and six La Mesa net wells. The Fasken wells were drilled, on average, in 9.4 days per well and achieved drilling rates of 1,900 feet per day. The Fasken wells were completed with 2,600 pounds of proppant per foot, achieving an industry leading number of 18 stages per day. These wells were turned to sales in late December and are performing in-line with expectations. The La Mesa wells were drilled, on average, in 9.6 days per well and achieved 2,200 feet per day. The Company completed and brought online the La Mesa wells during the first quarter of 2021.
SilverBow Resources continued to set new Company records in efficiency and safety while also enacting real-time changes to field schedules and capital activity in response to fluctuating commodity prices and the COVID-19 pandemic. SilverBow Resources' La Mesa project is a recent example of specific drilling efficiency improvements. During the fourth quarter of 2020, the Company drilled its second six-well pad. Compared to the first six-well pad drilled in the fourth quarter of 2020, the three Lower Eagle Ford wells were drilled 26% faster with a 32% reduction in per foot drilling cost and the three Upper Eagle Ford wells were drilled 30% faster with a 26% reduction in per foot drilling cost. These gains were the result of a focus on all aspects of drilling cycle-time variables, engineering designs, quality controls on vendors and active wellsite management.
Across all of its operating areas in 2020, SilverBow Resources drilled 44% more lateral footage per day while lowering the per lateral foot costs by 32% as compared to 2019. The Company completed 8% more stages per day and reduced completion costs per well by 13% as compared to 2019. SilverBow Resources' demonstrated success in reducing costs is a direct result of its operational and supply teams working with vendors to negotiate prices and logistical considerations for the materials used in its operations.
Cost reduction initiatives: SilverBow Resources continues to focus on cost reduction measures in the areas that it can control. These initiatives include the use of regional sand in completions, improved utilization of existing facilities, elimination of redundant equipment and replacement of rental equipment with Company-owned equipment. As previously mentioned, the Company continues to improve its process for drilling, completing and equipping wells. SilverBow Resources' procurement team takes a process-oriented approach to managing the total delivered costs of purchased services by examining costs at their most granular level. Services are routinely sourced directly from the suppliers. The Company's lease operating expenses were $21.4 million or $0.32 per Mcfe for the year ended December 31, 2020, as compared to $21.4 million or $0.25 per Mcfe for the year ended December 31, 2019. The increase on a per Mcfe basis is due to the lower production volumes.
SilverBow Resources' net G&A expenses were $22.6 million or $0.34 per Mcfe for the year ended December 31, 2020. After deducting $4.6 million of share-based compensation, cash G&A expenses (a non-GAAP financial measure) were $18.1 million or $0.27 per Mcfe for the year ended December 31, 2020. This compares to net G&A expenses of $24.9 million or $0.29 per Mcfe for the same period in 2019. After deducting $6.1 million of share-based compensation, cash G&A expenses (a non-GAAP financial measure) were $18.7 million or $0.22 per Mcfe for the same period in 2019.
In the third quarter of 2020, the Company implemented corporate cost reduction initiatives representing annualized savings of $2.5 million starting in 2021. SilverBow Resources has continued to maintain a safe working environment while implementing these cost-reduction efforts. The Company's corporate total recordable incident rate was 0 incidents per 1.1 million work hours in 2020.
SilverBow Resources reports cash G&A because it believes this measure is commonly used by management, analysts and investors as an indicator of cost management and operating efficiency on a comparable basis from period to period. In addition, the Company believes cash G&A expenses are used by analysts and others in valuation, comparison and investment recommendations of companies in the oil and gas industry to allow for analysis of G&A spend without regard to stock-based compensation programs which can vary substantially from company to company. Cash G&A expenses should not be considered as an alternative to, or more meaningful than, total G&A expenses.
Summary of 2020 Financial Results
•Revenues and net income (loss): The Company's oil and gas revenues were $177.4 million and $288.6 million for the years ended December 31, 2020 and 2019, respectively. Revenues were lower due to overall decreased production and lower commodity pricing. The Company had a net loss of $309.4 million and net income of $114.7 million for the years ended December 31, 2020 and 2019, respectively. The decrease was primarily due to the non-cash impairment write-down on our oil and natural gas properties during the year.
•Capital expenditures: The Company's capital expenditures on an accrual basis were $95.2 million and $259.0 million for the years ended December 31, 2020 and 2019, respectively. The expenditures for the years ended December 31, 2020 and 2019, were primarily driven by continued legacy development and Southern Eagle Ford gas window delineation. These expenditures were funded by cash flows from operations and borrowings under our Credit Facility.
•Working capital: The Company had a working capital deficit of $23.1 million at December 31, 2020.
•Cash Flows: For the year ended December 31, 2020, the Company generated cash from operating activities of $165.2 million, of which $7.1 million was attributable to changes in working capital. Cash used for property additions was $114.7 million. This included $19.4 million attributable to a net decrease of capital related payables and accrued costs. Additionally, $0.8 million was paid during the year for property sale obligations related to the sale of our former Bay De Chene field. The Company’s net repayments under its revolving Credit Facility were $49.0 million for the year ended December 31, 2020.
For the year ended December 31, 2019, the Company generated cash from operating activities of $203.2 million, of which $4.9 million was attributable to changes in working capital. Cash used for property additions was $282.7 million. This included $21.6 million attributable to a net decrease of capital related to payables and accrued costs. Additionally, $5.1 million was paid during the year for property sale obligations related to the sale of our former Bay De Chene field. The Company's net borrowings under its Credit Facility were $84.0 million for the year ended December 31, 2019.
Liquidity and Capital Resources
SilverBow Resources' primary use of cash has been to fund capital expenditures to develop its oil and gas properties. As of December 31, 2020, the Company’s liquidity consisted of approximately $2.1 million of cash-on-hand and $80.0 million in available borrowings on its Credit Facility, which had a $310.0 million borrowing base. Our 2021 capital budget, which is expected to be in the range of $100-$110 million, provides for drilling 17 gross (15 net) horizontal wells and is expected to be funded primarily from operating cash flow. Management believes SilverBow Resources has sufficient liquidity to meet its obligations through at least the first quarter of 2022 and execute its long-term development plans. See Note 4 to the Company's consolidated financial statements for more information on its Debt Facilities.
Contractual Commitments and Obligations
Our contractual commitments for the next five years and thereafter are shown below as of December 31, 2020 (in thousands):
(1) Amounts shown represent fees for the minimum delivery obligations. Any amount of transportation utilized in excess of the minimum will reduce future year obligations. The Company's production and reserves are currently sufficient to fulfill the current minimum delivery obligations.
(2) Interest on our Credit Facility is estimated using the weighted average interest rate of 3.7% for the quarter ended December 31, 2020, while interest on our Second Lien is estimated using LIBOR plus 7.5%. See Note 4 of these consolidated financial statements in this Form 10-K for more information. Actual interest rate is variable over the term of the facility.
(3) Amount shown primarily for obligation under Bay De Chene sales contract.
Off-Balance Sheet Arrangements
As of December 31, 2020, we had no off-balance sheet arrangements requiring disclosure pursuant to article 303(a) of Regulation S-K.
Proved Oil and Gas Reserves
During 2020, our reserves decreased by approximately 314.0 Bcfe due to decreases in our natural gas reserves primarily from our AWP field. As of December 31, 2020, 46% of our total proved reserves were proved developed, compared with 41% at year-end for both 2019 and 2018.
At December 31, 2020, our proved reserves were 1,106.4 Bcfe with a Standardized Measure of $513 million, which is a decrease of approximately $355 million, or 41%, from the prior year-end levels. In 2020, our proved natural gas reserves decreased 210.3 Bcf, or 18%, while our proved oil reserves decreased 4.5 MMBbl, or 27%, and our NGL reserves decreased 12.8 MMBbl, or 48%, for a total equivalent decrease of 314.0 Bcfe, or 22%.
We have added proved reserves primarily through our drilling activities, including 31.7 Bcfe added in 2020. We obtained reasonable certainty regarding these reserve additions by applying the same methodologies that have been used historically in this area.
We use the preceding 12-month's average price based on closing prices on the first business day of each month, adjusted for price differentials, in calculating our average prices used in the Standardized Measure calculation. Our average natural gas price used in the Standardized Measure calculation for 2020 was $2.13 per Mcf. This average price decreased from the average price of $2.62 per Mcf used for 2019. Our average oil price used in the calculation for 2020 was $37.83 per Bbl. This average price decreased from the average price of $58.37 per Bbl used in the calculation for 2019. Our average NGL price used in the calculation for 2020 was $11.66 per Bbl. This average price decreased from the average price of $16.83 per Bbl used in the calculation for 2019.
Results of Operations
Revenues - Years Ended December 31, 2020 and 2019
2020 - Our oil and gas sales in 2020 decreased by 39% compared to revenues in 2019, primarily due to overall decreased commodity pricing and decreased production. Average oil prices we received were 34% lower than those received during 2019, while natural gas prices were 22% lower and NGL prices were 11% lower.
Crude oil production was 14% and 12% of our production volumes for the years ended December 31, 2020 and 2019, respectively, while crude oil sales revenues were 33% and 32% of oil and gas sales revenue for the years ended December 31, 2020 and 2019, respectively.
Natural gas production was 76% of our production volumes for both of the years ended December 31, 2020 and 2019, while natural gas sales revenues were 59% of oil and gas sales for both of the years ended December 31, 2020 and 2019.
NGL production was 10% and 12% of our production volumes for the years ended December 31, 2020 and 2019, respectively, while NGL sales were 8% and 9% of oil and gas sales for the years ended December 31, 2020 and 2019, respectively.
The following tables provide information regarding the changes in the sources of our oil and gas sales and volumes for the years ended December 31, 2020 and 2019:
(1) Includes our Oro Grande and Uno Mas fields.
Our sales volume decrease from 2019 to 2020 was primarily due to lower production as a result of decreased drilling and completion activity and production curtailments.
In 2020, our $111.2 million, or 39%, decrease in oil, NGL, and natural gas sales resulted from:
•Volume variances that had a $49.2 million unfavorable impact on sales, with a $4.8 million decrease due to the 0.1 million Bbl decrease in oil production volumes, a $35.5 million decrease due to the 13.4 Bcf decrease in natural gas production volumes and a $8.9 million decrease due to the 0.6 million Bbl decrease in NGL production volumes.
•Price variances that had a $62.0 million unfavorable impact on sales, with a decrease of $29.8 million due to the 22% decrease in natural gas prices received, a decrease of $30.3 million due to the 34% decrease in oil prices received and a decrease of $1.9 million due to the 11% decrease in NGL prices received.
The following table provides additional information regarding our oil and gas sales, by commodity type, as well as the effects of our hedging activities for derivative contracts held to settlement for the years ended December 31, 2020 and 2019 (in thousands, except per-dollar amounts):
(1) Oil and natural gas liquids are converted at the rate of one barrel to six Mcfe.
(2) Excludes the impact of the $38.3 million for derivative contracts monetized in the first quarter of 2020.
For the years ended December 31, 2020 and 2019 we recorded net gains of $61.3 million and $24.2 million, respectively, related to our derivative activities. Included in our gain during the year ended December 31, 2020 was $38.3 million for monetized derivative contracts received in the first quarter of 2020. The change was driven primarily by changes in commodity pricing. This activity is recorded in “Net gain (loss) on commodity derivatives” on the accompanying consolidated statements of operations in this Form 10-K.
Costs and Expenses
The following table provides additional information regarding our expenses for the years ended December 31, 2020 and 2019:
Our costs and expenses during 2020 versus 2019 were as follows:
General and Administrative Expenses, Net. These expenses on a per Mcfe basis were $0.34 and $0.29 for the years ended December 31, 2020 and 2019, respectively. The increase per Mcfe was due to lower production while the decrease in costs was primarily due to lower salaries and burdens, lower share-based compensation and lower temporary labor expenses. Included in general and administrative expenses is $4.6 million and $6.1 million in share-based compensation for the years ended December 31, 2020 and 2019, respectively.
Depreciation, Depletion and Amortization (“DD&A”). These expenses on a per Mcfe basis were $0.97 and $1.14 for the years ended December 31, 2020 and 2019, respectively. The decrease on a per Mcfe basis was driven by reductions to our depletable base due to non-cash impairment write-downs during the year.
Lease Operating Expenses. These expenses on a per Mcfe basis were $0.32 and $0.25 for the years ended December 31, 2020 and 2019, respectively. The increase per Mcfe was primarily due to lower production. The increase in costs is due to higher labor and compression costs, partially offset by lower salt water disposal costs.
Transportation and gas processing. These expenses all related to natural gas and NGL sales. These expenses on a per Mcfe basis were $0.31 and $0.32 for the years ended December 31, 2020 and 2019, respectively.
Severance and Other Taxes. These expenses on a per Mcfe basis were $0.16 for both of the years ended December 31, 2020 and 2019. Severance and other taxes, as a percentage of oil and gas sales, were approximately 5.9% and 4.8% for the years ended December 31, 2020 and 2019, respectively.
Interest Expense. Our gross interest expense was $31.2 million and $36.8 million for the years ended December 31, 2020 and 2019, respectively. The decrease in gross interest from 2019 was primarily due to decreased borrowings and lower interest rates. There was no capitalized interest costs and $0.2 million of capitalized interest for the years ended December 31, 2020 and 2019, respectively.
Write-down of oil and gas properties. Due to the effects of pricing and timing of projects, for the year ended December 31, 2020, we reported a non-cash impairment write-down, on a pre-tax basis, of $355.9 million on our oil and natural gas properties. These impairments occurred in the first half of 2020. There was no impairment for the year ended December 31, 2019.
Income Taxes. In March and April 2020, the COVID-19 pandemic caused volatility in the market price for crude oil due to the disruption of global supply and demand. In response to these market conditions and given the decline in oil prices and economic outlook for the Company, during the quarter ended June 30, 2020, management determined that it was not more likely than not that the Company would realize future cash benefits from its remaining federal carryover items and other deferred tax assets and, accordingly, recorded a full valuation allowance in the second quarter to offset its net deferred tax assets in excess of deferred tax liabilities. This resulted in tax expense of $21.2 million in the second quarter of 2020. Our
income tax provision of $20.9 million for the year ended December 31, 2020 is inclusive of state income tax benefit of $1.8 million.
During the second quarter of 2019, the Company was able to complete several operational initiatives that resulted in increased production, lower development costs and expanded inventory of development prospects. The results of these initiatives led management to determine, after weighing both positive and negative evidence, that the Company will more likely than not be able to realize the benefits of its deferred tax assets. Accordingly, the Company released the valuation allowance resulting in a net deferred income tax benefit of $21.6 million, which is net of $1.1 million of state income tax expense, for the year ended December 31, 2019.
Critical Accounting Policies and New Accounting Pronouncements
Property and Equipment. We follow the “full-cost” method of accounting for oil and natural gas property and equipment costs. Under this method of accounting, all productive and nonproductive costs incurred in the exploration, development, and acquisition of oil and natural gas reserves are capitalized including internal costs incurred that are directly related to these activities and which are not related to production, general corporate overhead, or similar activities. Future development costs are estimated on a property-by-property basis based on current economic conditions and are amortized to expense as our capitalized oil and natural gas property costs are amortized. We compute the provision for DD&A of oil and natural gas properties using the unit-of-production method.
The costs of unproved properties not being amortized are assessed quarterly, on a property-by-property basis, to determine whether such properties have been impaired. In determining whether such costs should be impaired, we evaluate current drilling results, lease expiration dates, current oil and gas industry conditions, international economic conditions, capital availability, and available geological and geophysical information. As these factors may change from period to period, our evaluation of these factors will change. Any impairment assessed is added to the cost of proved properties being amortized.
The calculation of the provision for DD&A requires us to use estimates related to quantities of proved oil and natural gas reserves and estimates of the impairment of unproved properties. The estimation process for both reserves and the impairment of unproved properties is subjective, and results may change over time based on current information and industry conditions. We believe our estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates.
Full-Cost Ceiling Test. At the end of each quarterly reporting period, the unamortized cost of oil and natural gas properties (including natural gas processing facilities, capitalized asset retirement obligations and deferred income taxes, and excluding the recognized asset retirement obligation liability) is limited to the sum of the estimated future net revenues from proved properties (excluding cash outflows from recognized asset retirement obligations, including future development and abandonment costs of wells to be drilled, using the preceding 12-months’ average price based on closing prices on the first day of each month, adjusted for price differentials, discounted at 10%, and the lower of cost or fair value of unproved properties) adjusted for related income tax effects.
We believe our estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates.
If future capital expenditures outpace future discounted net cash flows in our reserve calculations, if we have significant declines in our oil and natural gas reserves volumes (which also reduces our estimate of discounted future net cash flows from proved oil and natural gas reserves) or if oil or natural gas prices remain depressed or continue to decline, it is possible that non-cash write-downs of our oil and natural gas properties will occur in the future. We cannot control and cannot predict what future prices for oil and natural gas will be, thus we cannot estimate the amount or timing of any potential future non-cash write-down of our oil and natural gas properties due to decreases in oil or natural gas prices.
New Accounting Pronouncements. In March 2020, the FASB issued ASU No. 2020-03. ASU 2020-03 improves and clarifies various financial instruments topics, including the current expected credit loss standard (“CECL”). ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. This guidance is effective beginning on January 1, 2023 for smaller reporting companies. We are still assessing the requirements to determine the impact of this guidance on our consolidated financial statements.
Forward-Looking Statements
This report includes forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based on current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact included in this report, including those regarding our strategy, future operations, financial position, estimated production levels, expected oil and natural gas pricing, estimated oil and natural gas reserves or the present value thereof, reserve increases, capital expenditures, budget, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “budgeted,” “guidance,” “expect,” “may,” “continue,” “predict,” “potential,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following risks and uncertainties:
•the severity and duration of world health events, including the COVID-19 pandemic, related economic repercussions and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which is negatively impacting our business;
•the current significant surplus in the supply of oil and actions by the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, “OPEC+”) with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations;
•operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions;
•shut-in and curtailment of production due to decreases in available storage capacity or other factors;
•volatility in natural gas, oil and NGL prices;
•future cash flows and their adequacy to maintain our ongoing operations;
•liquidity, including our ability to satisfy our short- or long-term liquidity needs;
•our borrowing capacity, future covenant compliance, cash flows and liquidity;
•operating results;
•the amount, nature and timing of capital expenditures, including future development costs;
•timing, cost and amount of future production of oil and natural gas;
•availability of drilling and production equipment or availability of oil field labor;
•availability, cost and terms of capital;
•timing and successful drilling and completion of wells;
•availability and cost for transportation of oil and natural gas;
•costs of exploiting and developing our properties and conducting other operations;
•competition in the oil and natural gas industry;
•general economic conditions;
•opportunities to monetize assets;
•effectiveness of our risk management activities including hedging strategy;
•environmental liabilities;
•counterparty credit risk;
•governmental regulation and taxation of the oil and natural gas industry;
•developments in world oil and natural gas markets and in oil and natural gas-producing countries;
•uncertainty regarding our future operating results; and
•other risks and uncertainties described in Item 1A. “Risk Factors,” in this annual report on Form 10-K for the year ended December 31, 2020.
Many of the foregoing risks and uncertainties, as well as risks and uncertainties that are currently unknown to us, are, and will be, exacerbated by the COVID-19 pandemic and any consequent worsening of the global business and economic environment. New factors emerge from time to time, and it is not possible for us to predict all such factors. Should one or more of the risks or uncertainties described in this annual report occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements speak only as of the date they are made. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under "Risk Factors" in Item 1A of this annual report on Form 10-K for the year ended December 31, 2020. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Commodity Risk. Our major market risk exposure is the commodity pricing applicable to our oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas. This commodity pricing volatility has continued with unpredictable price swings in recent periods.
Our price-risk management policy permits the utilization of agreements and financial instruments (such as futures, forward contracts, swaps and options contracts) to mitigate price risk associated with fluctuations in oil and natural gas prices. We do not utilize these agreements and financial instruments for trading and only enter into derivative agreements with banks in our Credit Facility. For additional discussion related to our price-risk management policy, refer to Note 5 of the consolidated financial statements in this Form 10-K.
Customer Credit Risk. We are exposed to the risk of financial non-performance by customers. Our ability to collect on sales to our customers is dependent on the liquidity of our customer base. Continued volatility in both credit and commodity markets may reduce the liquidity of our customer base. To manage customer credit risk, we monitor credit ratings of customers and from certain customers we also obtain letters of credit, parent company guarantees if applicable, and other collateral as considered necessary to reduce risk of loss. Due to availability of other purchasers, we do not believe the loss of any single oil or natural gas customer would have a material adverse effect on our results of operations.
Concentration of Sales Risk. For the year ended December 31, 2020, approximately 19%, 17%, 17% and 13% of our oil and gas receipts were accounted for by Kinder Morgan, Inc. (“Kinder Morgan”), Plains Marketing, LP (“Plains Marketing”), Twin Eagle Resource Management LLC (“Twin Eagle”) and Trafigura US, Inc (“Trafigura”). There were no other purchasers who individually accounted for 10% or more of our oil and gas receipts. We expect to continue these relationships in the future. We believe that the risk of these unsecured receivables is mitigated by the size, reputation and nature of the businesses and the availability of other purchasers in the areas where we operate.
Interest Rate Risk. At December 31, 2020, we had a combined $430.0 million drawn under our Credit Facility and our Second Lien Notes, which bear a floating rate of interest depending on the level of the borrowing base and the borrowing base loans outstanding and therefore is susceptible to interest rate fluctuations. These variable interest rate borrowings are impacted by changes in short-term interest rates. A hypothetical one-percentage point increase in interest rates on our borrowings outstanding under our Credit Facility and Second Lien Notes at December 31, 2020 would increase our annual interest expense by $4.3 million.
Item 8.
Item 8. Financial Statements and Supplementary DataPage
Management's Report on Internal Control Over Financial Reporting50
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements52
Consolidated Balance Sheets54
Consolidated Statements of Operations55
Consolidated Statements of Stockholders' Equity56
Consolidated Statements of Cash Flows57
Notes to Consolidated Financial Statements58
Supplementary Information78
Management's Report on Internal Control Over Financial Reporting
Management of SilverBow Resources is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is a process designed by, or under the supervision of, the Company's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with U. S. generally accepted accounting principles.
Management of the Company assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria) (2013 framework) in Internal Control-Integrated Framework. Based on our assessment and those criteria, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2020.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
SilverBow Resources, Inc.
Houston, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of SilverBow Resources, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Proved Oil and Natural Gas Reserves Estimation and Impact on Depreciation, Depletion and Amortization Expense (“DD&A”) and Impairment Expense Related to Proved Oil and Natural Gas Properties
As described in Note 1 to the consolidated financial statements, proved oil and natural gas reserves volumes and associated future net cash flows directly impact the calculation of DD&A expense and the full-cost ceiling test impairment calculation. There are numerous uncertainties inherent in estimating proved oil and natural gas reserves volumes and associated future net cash flows including, among others, estimated future production volumes and timing of such production, pricing differentials, lease operating expenses, and amounts and timing of capital expenditures. The accuracy of these estimates is dependent on the quality of available data and on engineering and geological interpretation and judgment. The estimation of oil and natural gas reserve quantities and associated future net cash flows requires management’s use of internal petroleum engineers and independent petroleum engineers and geologists (referred to as “management’s specialists”).
We have identified the estimation of future production volumes, pricing differentials, lease operating expenses, and amounts and timing of future capital expenditures used to estimate oil and natural gas reserves, and the associated impact on DD&A expense and impairment expense related to proved oil and natural gas properties as a critical audit matter. Minor changes in
these inputs and assumptions, which all require a high degree of subjectivity, could have a material impact on the overall estimate of proved oil and natural gas reserve volumes and associated future cash flows and the related measurement of DD&A expense or impairment expense. Auditing management’s judgment with respect to these inputs involved a high degree of auditor judgment in the design of our audit procedures and the evaluation of the audit evidence obtained.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the professional qualifications of management’s specialists and their relationship to the Company and making inquiries of management’s specialists regarding the process followed and judgments used to assist in estimating the Company’s oil and natural gas reserves.
•Comparing estimated production volumes and production decline analyses against results of actual production and actual production decline analyses to determine the appropriateness of management’s estimates.
•Comparing the estimated pricing differentials used in the reserve estimates to realized prices for revenue transactions recorded in the current year and examining contractual support for the pricing differentials.
•Evaluating the estimates of lease operating expenses used in the reserve estimates compared to historical lease operating expenses.
•Comparing the estimates of future capital expenditures used in the reserve estimates to amounts expended for recently drilled and completed wells in similar locations.
•Evaluating the Company’s evidence to support the amount of proved undeveloped properties reflected in the reserve estimates by examining historical conversion rates and support for the Company’s intent to develop the proved undeveloped properties.
•Evaluating management’s estimates of oil and natural gas reserve volumes, pricing differentials, lease operating expenses and future capital expenditures against evidence obtained in other areas of the audit for consistency and reasonableness.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2016.
Houston, Texas
March 4, 2021
Consolidated Balance Sheets
SilverBow Resources, Inc. (in thousands, except share amounts)
Consolidated Statements of Operations
SilverBow Resources, Inc. (in thousands, except per-share amounts)
Consolidated Statements of Stockholders’ Equity
SilverBow Resources, Inc. (in thousands, except share amounts)
Consolidated Statements of Cash Flows
SilverBow Resources, Inc. (in thousands)
Notes to Consolidated Financial Statements
SilverBow Resources, Inc. and Subsidiary
1. Summary of Significant Accounting Policies
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of SilverBow Resources and its wholly owned subsidiary, SilverBow Resources Operating LLC, which are engaged in the exploration, development, acquisition, and operation of oil and gas properties, with a focus on oil and natural gas reserves in the Eagle Ford trend in Texas. Our undivided interests in oil and gas properties are accounted for using the proportionate consolidation method, whereby our proportionate share of the assets, liabilities, revenues, and expenses are included in the appropriate classifications in the accompanying consolidated financial statements. Intercompany balances and transactions have been eliminated in preparing the accompanying consolidated financial statements.
COVID-19. In March and April 2020, the COVID-19 pandemic caused volatility in the market price for crude oil due to the disruption of global supply and demand. In March, the spot price of West Texas Intermediate (“WTI”) crude oil declined over 50% in response to reductions in global demand due to the COVID-19 pandemic and announcements by Saudi Arabia and Russia of plans to increase crude oil production. Following this unprecedented collapse in crude oil prices, the spot price of Brent and WTI crude oil closed at approximately $15 and $21 per barrel, respectively, on March 31, 2020.
In April 2020, WTI oil prices declined further to approximately $10 per barrel for May 2020 delivery. Crude oil prices fell further in April but partially recovered during the second quarter of 2020 with Brent and WTI crude oil closing at approximately $41 and $39 per barrel, respectively, on June 30, 2020. Crude oil prices traded slightly higher in the third quarter of 2020 with Brent and WTI crude closing at approximately $42 and $40 per barrel, on September 30, 2020. Crude oil prices continued to improve in the fourth quarter of 2020 with Brent and WTI crude closing at approximately $52 and $49 per barrel, respectively, on December 31, 2020.
In response to these market conditions, including the COVID-19 pandemic and the decline in oil prices and economic outlook, the Company released its sole drilling rig in April 2020, and deferred the completion and placement on production of eight wells until the second half of 2020. In the third quarter of 2020, the Company restarted completions activity and returned to sales all previously curtailed oil volumes and a substantial portion of natural gas volumes. Approximately 20 million cubic feet per day (“MMcf/d”) of net gas production remained shut-in at quarter-end. The Company began returning these volumes to production in late October 2020 to align with favorable natural gas prices, with all previously shut-in volumes returned to production as of December 31, 2020.
The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. As such, the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations is uncertain. Management is actively monitoring the impact of the COVID-19 pandemic on the Company's financial condition, liquidity, operations, suppliers, industry and workforce.
In addition, if the depressed pricing environment continues for an extended period, it may in the future lead to (i) a further reduction in oil and natural gas reserves, including the possible further removal of proved undeveloped reserves (ii) further impairment of proved and/or unproved oil and natural gas properties and a potential increase in depletion expense and (iii) reductions in the borrowing base under the Credit Agreement as discussed in Note 4.
If the COVID-19 pandemic and volatile oil price environment continues, it may have a material adverse effect on the Company’s operating cash flows, liquidity, and future development plans.
Subsequent Events. We have evaluated subsequent events requiring potential accrual or disclosure in our condensed consolidated financial statements. On February 5, 2021, and in the ordinary course of business, the Company entered into a new five-year lease agreement for office space in Houston, Texas. The operating lease begins on May 18, 2021.
Through February 26, 2021, the Company entered into additional derivative contracts. The following tables summarize the weighted-average prices as well as future production volumes for our future derivative contracts entered into after December 31, 2020:
(1) Bbl refers to one barrel of oil.
(2) Transaction for a swap purchase to reduce overall hedge position.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the reported amounts of certain revenues and expenses during each reporting period. Such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates. Significant estimates and assumptions underlying these financial statements include:
•the estimated quantities of proved oil and natural gas reserves used to compute depletion of oil and natural gas properties, the related present value of estimated future net cash flows therefrom, and the Ceiling Test impairment calculation,
•estimates related to the collectability of accounts receivable and the credit worthiness of our customers,
•estimates of the counterparty bank risk related to letters of credit that our customers may have issued on our behalf,
•estimates of future costs to develop and produce reserves,
•accruals related to oil and gas sales, capital expenditures and lease operating expenses,
•estimates in the calculation of share-based compensation expense,
•estimates of our ownership in properties prior to final division of interest determination,
•the estimated future cost and timing of asset retirement obligations,
•estimates made in our income tax calculations,
•estimates in the calculation of the fair value of commodity derivative assets and liabilities,
•estimates in the assessment of current litigation claims against the Company,
•estimates in amounts due with respect to open state regulatory audits, and
•estimates on future lease obligations.
While we are not currently aware of any material revisions to any of our estimates, there may be future revisions to our estimates resulting from matters such as new accounting pronouncements, changes in ownership interests, payouts, joint venture audits, reallocations by purchasers or pipelines, or other corrections and adjustments common in the oil and gas industry, many of which relate to prior periods. These types of adjustments cannot be currently estimated and are expected to be recorded in the period during which the adjustments are known.
We are subject to legal proceedings, claims, liabilities and environmental matters that arise in the ordinary course of business. We accrue for losses when such losses are considered probable and the amounts can be reasonably estimated.
Property and Equipment. We follow the “full-cost” method of accounting for oil and natural gas property and equipment costs. Under this method of accounting, all productive and nonproductive costs incurred in the exploration, development, and acquisition of oil and natural gas reserves are capitalized. Such costs may be incurred both prior to and after the acquisition of a property and include lease acquisitions, geological and geophysical services, drilling, completion, and equipment. Internal costs incurred that are directly identified with exploration, development, and acquisition activities undertaken by us for our own account, and which are not related to production, general corporate overhead, or similar activities, are also capitalized. For the years ended December 31, 2020 and 2019, such internal costs when capitalized totaled $3.5 million and $5.3 million, respectively. Interest costs are also capitalized to unproved oil and natural gas properties (refer to Note 4 of these Notes to Consolidated Financial Statements for further discussion on capitalized interest costs).
The “Property and Equipment” balances on the accompanying consolidated balance sheets are summarized for presentation purposes. The following is a detailed breakout of our “Property and Equipment” balances (in thousands):
No gains or losses are recognized upon the sale or disposition of oil and natural gas properties, except in transactions involving a significant amount of reserves or where the proceeds from the sale of oil and natural gas properties would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a cost center. Internal costs associated with selling properties are expensed as incurred.
We compute the provision for depreciation, depletion and amortization (“DD&A”) of oil and natural gas properties using the unit-of-production method. Under this method, we compute the provision by multiplying the total unamortized costs of oil and gas properties-including future development costs, gas processing facilities, and both capitalized asset retirement obligations and undiscounted abandonment costs of wells to be drilled, net of salvage values, but excluding costs of unproved properties-by an overall rate determined by dividing the physical units of oil and natural gas produced (which excludes natural gas consumed in operations) during the period by the total estimated units of proved oil and natural gas reserves (which excludes natural gas consumed in operations) at the beginning of the period. Future development costs are estimated on a property-by-property basis based on current economic conditions. The period over which we will amortize these properties is dependent on our production from these properties in future years. Furniture, fixtures, and other equipment are recorded at cost and are depreciated by the straight-line method at rates based on the estimated useful lives of the property, which range between two and 20 years. Repairs and maintenance are charged to expense as incurred.
Geological and geophysical (“G&G”) costs incurred on developed properties are recorded in “Proved oil and gas properties” and therefore subject to amortization. G&G costs incurred that are associated with unproved properties are capitalized in “Unproved oil and gas properties” and evaluated as part of the total capitalized costs associated with a prospect. The cost of unproved properties not being amortized is assessed quarterly, on a property-by-property basis, to determine whether such properties have been impaired. In determining whether such costs should be impaired, we evaluate current drilling results, lease expiration dates, current oil and gas industry conditions, economic conditions, capital availability, and available geological and geophysical information. Any impairment assessed is added to the cost of proved properties being amortized.
Full-Cost Ceiling Test. At the end of each quarterly reporting period, the unamortized cost of oil and natural gas properties (including natural gas processing facilities, capitalized asset retirement obligations, net of related salvage values and deferred income taxes) is limited to the sum of the estimated future net revenues from proved properties (excluding cash outflows from recognized asset retirement obligations, including future development and abandonment costs of wells to be drilled, using the preceding 12-months’ average price based on closing prices on the first day of each month, adjusted for price differentials, discounted at 10%, and the lower of cost or fair value of unproved properties) adjusted for related income tax effects (“Ceiling Test”).
The calculations of the Ceiling Test and provision for DD&A are based on estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production, timing, and plan of development. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing, and production subsequent to the date of the estimate may justify revision of such estimates. Accordingly, reserves estimates are often different from the quantities of oil and natural gas that are ultimately recovered. There was a $355.9 million ceiling test write-down for the year ended December 31, 2020. There was no write-down for the year ended December 31, 2019.
If future capital expenditures outpace future discounted net cash flows in our reserve calculations, if we have significant declines in our oil and natural gas reserves volumes (which also reduces our estimate of discounted future net cash flows from proved oil and natural gas reserves) or if oil or natural gas prices remain depressed or continue to decline, it is possible that non-cash write-downs of our oil and natural gas properties will occur in the future. We cannot control and cannot predict what future
prices for oil and natural gas will be; therefore we cannot estimate the amount of any potential future non-cash write-down of our oil and natural gas properties due to decreases in oil or natural gas prices.
Revenue Recognition. Our reported oil and gas sales are comprised of revenues from oil, natural gas and natural gas liquids (“NGLs”) sales. Revenues from each product stream are recognized at the point when control of the product is transferred to the customer and collectability is reasonably assured. Prices for our products are either negotiated on a monthly basis or tied to market indices. The Company has determined that these contracts represent performance obligations which are satisfied when control of the commodity transfers to the customer, typically through the delivery of the specified commodity to a designated delivery point. Natural gas revenues are recognized based on the actual volume of natural gas sold to the purchasers.
The following table provides information regarding our oil and gas sales, by product, reported on the Consolidated Statements of Operations for years ended December 31, 2020 and 2019 (in thousands):
Accounts Receivable, Net. We assess the collectability of accounts receivable, and based on our judgment, we accrue a reserve when we believe a receivable may not be collected. At both December 31, 2020 and 2019, we had an allowance for doubtful accounts of less than $0.1 million. The allowance for doubtful accounts has been deducted from the total “Accounts receivable, net” balance on the accompanying consolidated balance sheets.
At December 31, 2020, our “Accounts receivable, net” balance included $18.8 million for oil and gas sales, $4.0 million due from joint interest owners, $2.4 million for severance tax credit receivables and $0.7 million for other receivables. At December 31, 2019, our “Accounts receivable, net” balance included $24.6 million for oil and gas sales, $3.7 million for joint interest owners, $5.4 million for severance tax credit receivables and $3.3 million for other receivables.
Supervision Fees. Consistent with industry practice, we charge a supervision fee to the wells we operate including our wells in which we own up to a 100% working interest. Supervision fees are recorded as a reduction to “General and administrative, net”, on the accompanying consolidated statements of operations. The amount of supervision fees charged for each of the years ended December 31, 2020 and 2019 did not exceed our actual costs incurred. The total amount of supervision fees charged to the wells we operated was $4.4 million and $4.9 million for the years ended December 31, 2020 and 2019, respectively.
Income Taxes. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, given the provisions of the enacted tax laws. Tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Our policy is to record interest and penalties relating to uncertain tax positions in income tax expense. At December 31, 2020, we did not have any accrued liability for uncertain tax positions.
In March and April 2020, the COVID-19 pandemic caused volatility in the market price for crude oil due to the disruption of global supply and demand. In response to these market conditions and given the decline in oil prices and economic outlook for our Company, during the quarter ended June 30, 2020, management determined that it was not more likely than not that the Company would realize future cash benefits from its remaining federal carryover items and other deferred tax assets and, accordingly, recorded a full valuation allowance in the second quarter to offset its net deferred tax assets in excess of deferred tax liabilities. This resulted in tax expense of $21.2 million through the second quarter of 2020. Our income tax provision of $20.9 million for the year ended December 31, 2020 is inclusive of a state income tax benefit of $1.8 million. During the second quarter of 2019, the Company was able to complete several operational initiatives that resulted in increased production, lower development costs and expanded inventory of development prospects. The results of these initiatives led management to determine, after weighing both positive and negative evidence, that the Company would more likely than not be able to realize the benefits of its deferred tax assets. Accordingly, the Company released the valuation allowance resulting in a net deferred
income tax benefit of $21.6 million, which is net of $1.1 million of state income tax expense, for the year ended December 31, 2019
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side Social Security payments, net operating loss carryback periods, alternative minimum tax credit refunds and modifications to the net interest deduction limitation. On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the “Appropriations Act”). The Appropriations Act funds the federal government to the end of the fiscal year and provides further COVID-19 economic relief, including expansion of the employee retention credit. The Company continues to examine the impact that the CARES Act and the Appropriations Act may have on its business but does not currently expect either to have a material effect on its financial condition, results of operation, or liquidity.
Accounts Payable and Accrued Liabilities. The “Accounts payable and accrued liabilities” balances on the accompanying consolidated balance sheets are summarized below (in thousands):
Cash and Cash Equivalents. We consider all highly liquid instruments with an initial maturity of three months or less to be cash equivalents. These amounts do not include cash balances that are contractually restricted.
Credit Risk Due to Certain Concentrations. We extend credit, primarily in the form of uncollateralized oil and gas sales and joint interest owners' receivables, to various companies in the oil and gas industry, which results in a concentration of credit risk. The concentration of credit risk may be affected by changes in economic or other conditions within our industry and may accordingly impact our overall credit risk. However, we believe that the risk of these unsecured receivables is mitigated by the size, reputation, and nature of the companies to which we extend credit. From certain customers we also obtain letters of credit or parent company guarantees, if applicable, to reduce risk of loss.
For the years ended December 31, 2020 and 2019, parties that accounted for 10% or more of our total oil and gas receipts were as follows:
*Oil and gas receipts less than 10%
Treasury Stock. Our treasury stock repurchases are reported at cost and are included in “Treasury stock held, at cost” on the accompanying consolidated balance sheets. For the years ended December 31, 2020 and 2019, we purchased 28,731 and 22,482 treasury shares to satisfy withholding tax obligations arising upon the vesting of restricted shares.
New Accounting Pronouncements. In March 2020, the FASB issued ASU No. 2020-03. ASU 2020-03 improves and clarifies various financial instruments topics, including the current expected credit loss standard (“CECL”). ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make
the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. This guidance is effective beginning on January 1, 2023 for smaller reporting companies. We are still assessing the requirements to determine the impact of this guidance on our consolidated financial statements.
Leases. In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which requires lessees to record most leases on the balance sheet. Under the new guidance, lease classification as either a finance lease or an operating lease will determine how lease-related revenue and expense are recognized. The guidance was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this standard on January 1, 2019 using the modified retrospective transition approach with an effective date of January 1, 2019.
2. Earnings Per Share
Basic earnings per share (“Basic EPS”) has been computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share ("Diluted EPS") assumes, as of the beginning of the period, exercise of stock options and restricted stock grants using the treasury stock method. Diluted EPS also assumes conversion of performance-based restricted stock units to common shares based on the number of shares (if any) that would be issuable, according to predetermined performance and market goals, if the end of the reporting period was the end of the performance period.
The following is a reconciliation of the numerators and denominators used in the calculation of Basic EPS and Diluted EPS for the periods indicated below (in thousands, except per share amounts):
Approximately 0.3 million and 0.5 million stock options to purchase shares were not included in the computation of Diluted EPS for the years ended December 31, 2020 and 2019 respectively, because these stock options were antidilutive.
Approximately 0.2 million and 0.3 million shares of restricted stock units that could be converted to common shares were not included in the computation of Diluted EPS for the years ended December 31, 2020 and 2019, respectively, because they were antidilutive.
Approximately 0.1 million performance-based restricted stock units were not included in the computation of Diluted EPS for each of the years ended December 31, 2020 and 2019 because they were antidilutive.
Approximately 2.1 million warrants to purchase common stock were not included in the computation of Diluted EPS for the year ended December 31, 2019 because these warrants were antidilutive. There were no warrants to purchase common stock for the year ended December 31, 2020 as the warrants expired.
3. Provision (Benefit) for Income Taxes
Income (Loss) before taxes is as follows (in thousands):
The following is an analysis of the consolidated income tax provision (benefit) (in thousands):
Reconciliations of income taxes computed using the U.S. Federal statutory rate of (21%) to the effective income tax rate are as follows:
The tax effects of temporary differences representing the net deferred tax asset (liability) at December 31, 2020 and 2019 were as follows (in thousands):
The Company’s valuation allowance balance was $82.6 million and $0 million at December 31, 2020 and 2019, respectively. The Company recorded a net deferred tax liability for state income tax purposes at December 31, 2020 and 2019.
The Company’s NOL carryforward asset is attributable to Federal tax losses of $115 million generated from 2013 through 2015, $160 million generated in 2017 and $170 million generated from 2018 through 2020. The losses generated between 2013 and 2015 are subject to an annual utilization limit under Sec. 382. These losses will expire between 2034 and 2035 if not utilized. The 2017 loss will expire in 2037 if not utilized. The 2018, 2019 and 2020 losses will not expire under the current tax code, but their usage will be limited to 80% of taxable income.
Our U.S. federal and most state income tax returns from 2017 forward are subject to examination. For years prior to 2017 our U.S. federal returns are subject to examination to the extent of our net operating loss (NOL) carryforwards. Our Texas tax returns from 2016 forward are subject to examination. There are no material unresolved items related to periods previously audited by the taxing authorities.
4. Long-Term Debt
The Company's long-term debt consisted of the following (in thousands):
(1) Unamortized debt issuance costs on our Credit Facility borrowings are included in “Other Long-Term Assets” in our consolidated balance sheet. As of December 31, 2020 and 2019, we had $1.4 million and $3.1 million, respectively, in unamortized debt issuance costs on our Credit Facility borrowings.
Revolving Credit Facility. Amounts outstanding under our Credit Facility (defined below) were $230.0 million and $279.0 million as of December 31, 2020 and 2019, respectively. The Company is a party to a First Amended and Restated Senior Secured Revolving Credit Agreement with JPMorgan Chase Bank, National Association, as administrative agent, and certain lenders party thereto, as amended (such agreement, the “Credit Agreement” and the borrowing facility provided thereby, the “Credit Facility”). The Company entered into the Sixth Amendment to the Credit Facility, effective November 2, 2020 (the “Sixth Amendment”), which among other things, (i) decreased the borrowing base under the Credit Facility to $310 million (from $330 million) as part of the regularly scheduled semi-annual redetermination and (ii) decreased the ratio of total debt to EBITDA (defined below) to not exceed 3.5 to 1.0.
The Credit Facility matures April 19, 2022 and provides for a maximum credit amount of $600 million and a current borrowing base of $310 million as of December 31, 2020. The borrowing base is regularly redetermined on or about May and November of each calendar year and is subject to additional adjustments from time to time, including for asset sales, elimination or reduction of hedge positions and incurrence of other debt. Additionally, each of the Company and the administrative agent may request an unscheduled redetermination of the borrowing base between scheduled redeterminations. The amount of the borrowing base is determined by the lenders in their discretion in accordance with their oil and gas lending criteria at the time of the relevant redetermination. The Company may also request the issuance of letters of credit under the Credit Agreement in an aggregate amount up to $25 million, which reduces the amount of available borrowings under the borrowing base in the amount of such issued and outstanding letters of credit. There were no outstanding letters of credit as of December 31, 2020 and 2019.
Interest under the Credit Facility accrues at the Company’s option either at an Alternative Base Rate plus the applicable margin (“ABR Loans”) or the LIBOR Rate plus the applicable margin (“Eurodollar Loans”). Since May 12, 2020, the applicable margin ranged from 1.75% to 2.75% for ABR Loans and 2.75% to 3.75% for Eurodollar Loans. The Alternate Base Rate and LIBOR Rate are defined, and the applicable margins are set forth, in the Credit Agreement. Undrawn amounts under the Credit Facility are subject to a 0.50% commitment fee. To the extent that a payment default exists and is continuing, all amounts outstanding under the Credit Facility will bear interest at 2.00% per annum above the rate and margin otherwise applicable thereto. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. At the present time, the Credit Facility is subject to LIBOR rates but has a term that extends beyond the end of 2021 when LIBOR will be phased out. The Sixth Amendment includes technical updates to address this matter, and we are currently evaluating the potential impact of eventual replacement of the LIBOR interest rate.
The obligations under the Credit Agreement are secured, subject to certain exceptions, by a first priority lien on substantially all assets of the Company and its subsidiary, including a first priority lien on properties attributed with at least 85% of estimated proved reserves of the Company and its subsidiary.
The Credit Agreement contains the following financial covenants:
•a ratio of total debt to earnings before interest, tax, depreciation and amortization ("EBITDA"), as defined in the Credit Agreement, for the most recently completed four fiscal quarters, not to exceed 4.0 to 1.0 as of the last day of each fiscal quarter for any fiscal quarter ending on or before September 30, 2020 and (ii) 3.5 to 1.0 as of the last day of each fiscal quarter, commencing with fiscal quarter ending December 31, 2020; and
•a current ratio, as defined in the Credit Agreement, which includes in the numerator available borrowings undrawn under the borrowing base, of not less than 1.0 to 1.0 as of the last day of each fiscal quarter.
As of December 31, 2020, the Company was in compliance with all financial covenants under the Credit Agreement. Maintaining or increasing our borrowing base under our Credit Facility is dependent on many factors, including commodities pricing, our hedge positions, changes in our lender's lending criteria and our ability to raise capital to drill wells to replace produced reserves.
Additionally, the Credit Agreement contains certain representations, warranties and covenants, including but not limited to, limitations on incurring debt and liens, limitations on making certain restricted payments, limitations on investments, limitations on asset sales and hedge unwinds, limitations on transactions with affiliates and limitations on modifying organizational documents and material contracts. The Credit Agreement contains customary events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the Credit Facility to be immediately due and payable.
Total interest expense on the Credit Facility, which includes commitment fees and amortization of debt issuance costs, was $12.6 million and $15.7 million for the years ended December 31, 2020 and 2019, respectively. The amount of commitment fee amortization included in interest expense, net was $0.4 million and $0.7 million for the years ended December 31, 2020 and 2019, respectively.
There was no capitalized interest and $0.2 million on our unproved properties for the years ended December 31, 2020 and 2019, respectively.
Senior Secured Second Lien Notes. On December 15, 2017, the Company entered into a Note Purchase Agreement for Senior Secured Second Lien Notes (as amended, the “Note Purchase Agreement”, such second lien facility, the “Second Lien” and such notes, the “Second Lien Notes”) among the Company as issuer, U.S. Bank National Association as agent and collateral agent and certain holders that are a party thereto, and issued notes in an initial principal amount of $200.0 million, with a $2.0 million discount, for net proceeds of $198.0 million. The Company has the ability, subject to the satisfaction of certain conditions (including compliance with the Asset Coverage Ratio described below and the agreement of the holders to purchase such additional notes), to issue additional notes in a principal amount not to exceed $100.0 million. The Second Lien matures on December 15, 2024.
Interest on the Second Lien is payable quarterly and accrues at LIBOR plus 7.5%; provided that if LIBOR ceases to be available, the Second Lien provides for a mechanism to use ABR (an alternate base rate) plus 6.5% as the applicable interest rate. The definitions of LIBOR and ABR are set forth in the Second Lien. To the extent that a payment, insolvency or, at the holders’ election, another default exists and is continuing, all amounts outstanding under the Second Lien will bear interest at 2.0% per annum above the rate and margin otherwise applicable thereto. Additionally, to the extent the Company were to default on the Second Lien, this would potentially trigger a cross-default under our Credit Facility.
The Company has the right, to the extent permitted under the Credit Facility and subject to the terms and conditions of the Second Lien, to optionally prepay the notes, subject to the following repayment fees: during year three, 2.0% of the principal amount of the Second Lien being prepaid; during year four, 1.0% of the principal amount of the Second Lien being prepaid; and thereafter, no premium. Additionally, the Second Lien contains customary mandatory prepayment obligations upon asset sales (including hedge terminations), casualty events and incurrences of certain debt, subject to, in certain circumstances, reinvestment periods.
The obligations under the Second Lien are secured, subject to certain exceptions and other permitted liens (including the liens created under the Credit Facility), by a perfected security interest, second in priority to the liens securing our Credit Facility, and mortgage lien on substantially all assets of the Company and its subsidiary, including a mortgage lien on oil and gas properties attributed with at least 85% of estimated PV-9 (defined below), of proved reserves of the Company and its subsidiary and 85% of the book value attributed to the PV-9 of the non-proved oil and gas properties of the Company. PV-9 is determined using commodity price assumptions by the administrative agent of the Credit Facility. PV-9 value is the estimated future net revenues to be generated from the production of proved reserves discounted to present value using an annual discount rate of 9%.
The Second Lien contains an Asset Coverage Ratio, which is only tested (i) as a condition to issuance of additional notes and (ii) in connection with certain asset sales in order to determine whether the proceeds of such asset sale must be applied as a prepayment of the notes and includes in the numerator the PV-10 (defined below), based on forward strip pricing, plus the swap mark-to-market value of the commodity derivative contracts of the Company and its restricted subsidiary and in the denominator the total net indebtedness of the Company and its restricted subsidiary, of not less than 1.25 to 1.0 as of each date of determination (the “Asset Coverage Ratio”). PV-10 Value is the estimated future net revenues to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%.
The Second Lien also contains a financial covenant measuring the ratio of total net debt to EBITDA, as defined in the Note Purchase Agreement, for the most recently completed four fiscal quarters, not to exceed 4.5 to 1.0 as of the last day of each fiscal quarter. As of December 31, 2020, the Company was in compliance with all financial covenants under the Second Lien.
The Second Lien contains certain customary representations, warranties and covenants, including but not limited to, limitations on incurring debt and liens, limitations on making certain restricted payments, limitations on investments, limitations on asset sales and hedge unwinds, limitations on transactions with affiliates and limitations on modifying organizational documents and material contracts. The Second Lien contains customary events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the Second Lien to be immediately due and payable.
As of December 31, 2020, net amounts recorded for the Second Lien Notes were $194.9 million, net of unamortized debt discount and debt issuance costs. Interest expense on the Second Lien totaled $18.6 million and $21.1 million for the years ended December 31, 2020 and 2019, respectively.
Debt Issuance Costs. Our policy is to capitalize upfront commitment fees and other direct expenses associated with our line of credit arrangement and then amortize such costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings.
5. Price-Risk Management Activities
Derivatives are recorded on the balance sheet at fair value with changes in fair value recognized in earnings. The changes in the fair value of our derivatives are recognized in “Gain (loss) on commodity derivatives, net” on the accompanying consolidated statements of operations. We have a price-risk management policy to use derivative instruments to protect against declines in oil and natural gas prices, primarily through the purchase of commodity price swaps and collars as well as basis swaps.
During the years ended December 31, 2020 and 2019, the Company recorded gains of $61.3 million and $24.2 million, respectively, relating to our derivative activities. The Company received net cash payments of $78.4 million and $24.6 million for settled derivative contracts during the years ended December 31, 2020 and 2019, respectively. Included in our collected cash payments during the year ended December 31, 2020 was $38.3 million for monetized derivative contracts received in the first quarter of 2020.
At December 31, 2020 and 2019, we had $0.8 million and $2.9 million, respectively, in receivables for settled derivatives which were included on the accompanying consolidated balance sheet in “Accounts receivable, net” and were subsequently collected in January 2021 and 2020, respectively. At December 31, 2020 and 2019, we also had $0.8 million and $0.2 million, respectively, in payables for settled derivatives which were included on the accompanying consolidated balance sheet in “Accounts payable and accrued liabilities” and were subsequently paid in January 2021 and 2020, respectively.
The fair values of our swap contracts are computed using observable market data whereas our collar contracts are valued using a Black-Scholes pricing model and are periodically verified against quotes from brokers. At December 31, 2020 there was $4.8 million and $0.3 million in current unsettled derivative assets and long-term unsettled derivative assets, respectively, and $8.2 million and $2.9 million in current unsettled derivative liabilities and long-term unsettled derivative liabilities, respectively. At December 31, 2019, the Company had $12.8 million and $3.9 million in current unsettled derivative assets and long-term unsettled derivative assets, respectively, and $6.6 million and $1.6 million in current unsettled derivative liabilities and long-term unsettled derivative liabilities, respectively.
The Company uses an International Swap and Derivatives Association master agreement for our derivative contracts. This is an industry-standardized contract containing the general conditions of our derivative transactions including provisions relating to netting derivative settlement payments under certain circumstances (such as default). For reporting purposes, the Company has elected to not offset the asset and liability fair value amounts of its derivatives on the accompanying balance sheets. Under the right of set-off, there was an $6.0 million net fair value liability at December 31, 2020 and $8.4 million net fair value asset at December 31, 2019. For further discussion related to the fair value of the Company's derivatives, refer to Note 10 of these Notes to Consolidated Financial Statements.
The following tables summarize the weighted average prices as well as future production volumes for our future derivative contracts in place as of December 31, 2020.
6. Commitments and Contingencies
We have gas transportation and processing minimum obligations amounting to $5.2 million for 2021, $3.9 million for 2022, $2.6 million for 2023, $1.6 million for 2024, $1.1 million for 2025 and $14.4 million in the aggregate.
In the ordinary course of business, we are party to various legal actions, which arise primarily from our activities as operator of oil and natural gas wells. In management's opinion, the outcome of any such currently pending legal actions will not have a material adverse effect on our financial position or results of operations.
7. Share-Based Compensation
Share-Based Compensation Plans
In 2016, the Company adopted the 2016 Equity Incentive Plan (as amended from time to time, the “2016 Plan”). The Company also adopted the Inducement Plan (as amended from time to time, the “Inducement Plan,” and, together with the 2016 Plan, the “Plans”) on December 15, 2016. The Company accounts for forfeitures in compensation cost when they occur.
The Company computes a deferred tax benefit for restricted stock awards (“RSUs”), performance-based stock units (“PSUs”) and stock options designed to generate future tax deductions by applying its effective tax rate to the expense recorded. For restricted stock units, the Company's actual tax deduction is based on the value of the units at the time of vesting.
The expense for awards issued to both employees and non-employees, which was recorded in “General and administrative, net” in the accompanying consolidated statements of operations was $4.6 million and $6.1 million for the years ended December 31, 2020 and 2019 respectively. Capitalized share-based compensation was $0.2 million and $0.5 million for the years ended December 31, 2020 and 2019, respectively.
We view stock option awards and restricted stock unit awards with graded vesting as single awards with an expected life equal to the average expected life of component awards, and we amortize the awards on a straight-line basis over the life of the awards.
Our shares available for future grant under the Plans were 726,723 at December 31, 2020.
On April 2, 2019, our Board of Directors authorized a one-time grant of market-based awards (both RSUs and PSUs) in exchange for the cancellation of special equity awards (both RSUs and stock options) made to our named executive officers on
August 9, 2018 (the “Equity Award Exchange”). As required under the terms of the 2016 Plan, this Equity Award Exchange was subject to shareholder approval. Pursuant to the Equity Award Exchange our executives were given the opportunity to exchange out-of-the-money or “underwater” stock options that were granted in August 2018 and certain RSUs also granted in August 2018 to receive a new equity award that consists of 50% time-based RSUs and 50% PSUs, granted under the 2016 Plan. The incremental compensation cost associated with the Equity Award Exchange was determined to be $1.2 million. This incremental cost was measured as the excess of the fair value of each new equity award, measured as of the date the new equity awards were granted, over the fair value of the stock options and RSUs surrendered in exchange for the new equity awards, measured immediately prior to the cancellation. This incremental compensation cost is being recognized ratably over the vesting period or performance period, as applicable, of the new equity awards.
Stock Option Awards
The compensation cost related to these awards is based on the grant date fair value and is expensed over the vesting period (generally one to five years). We use the Black-Scholes-Merton option pricing model to estimate the fair value of stock option awards.
At December 31, 2020, we had $0.6 million in unrecognized compensation cost related to stock option awards. The following table represents stock option award activity for the year ended December 31, 2020:
Our outstanding stock option awards at December 31, 2020 had no measurable aggregate intrinsic value. At December 31, 2020 the weighted-average remaining contract life of stock option awards outstanding was 4.8 years and exercisable was 4.0 years. The stock option awards exercisable as of December 31, 2020 had no intrinsic value.
Restricted Stock Units
The Plans allow for the issuance of restricted stock unit awards that generally may not be sold or otherwise transferred until certain restrictions have lapsed. The compensation cost related to these awards is based on the grant date fair value and is typically expensed over the requisite service period (generally one to five years).
As of December 31, 2020, we had unrecognized compensation expense of $2.4 million related to our restricted stock units which is expected to be recognized over a weighted-average period of 1.1 years.
The following table provides information regarding restricted stock unit activity for the year ended December 31, 2020:
Performance-Based Stock Units
On February 20, 2018, the Company granted 30,700 performance share units for which the number of shares earned is based on the total shareholder return (“TSR”) of the Company's common stock relative to the TSR of its selected peers during the performance period from January 1, 2018 to December 31, 2020. The awards contain market conditions which allow a payout ranging between 0% payout and 200% of the target payout. The fair value as of the date of valuation was $41.66 per unit or 150.61% of the stock price. The compensation expense for these awards is based on the per unit grant date valuation
using a Monte-Carlo simulation multiplied by the target payout level. The payout level is calculated based on actual stock price performance achieved during the performance period. The awards have a cliff-vesting period of three years.
On May 21, 2019, the Company granted an additional 99,500 performance-based stock units (as part of the Equity Award Exchange discussed above) for which the number of shares earned is based on the TSR of the Company's common stock relative to the TSR of its selected peers during the performance period from January 1, 2019 to December 31, 2021. The awards contain market conditions which allow a payout ranging between 0% payout and 200% of the target payout. The fair value as of the grant date was $18.86 per unit or 112.9% of stock price. The awards have a cliff-vesting period of three years.
As of December 31, 2020, we had unrecognized compensation expense of $1.0 million related to our performance-based stock units based on the assumption of 100.0% target payout. The remaining weighted-average performance period is 1.0 years. No shares vested during the year ended December 31, 2020.
Employee Savings Plan
We have a savings plan under Section 401(k) of the Internal Revenue Code. The Company contributed on behalf of eligible employees an amount up to 100% of the first 6% of compensation based on the contributions made by the eligible employees in 2020 and 2019. The Company's plan contributions of $0.6 million for both the years ended December 31, 2020 and 2019, respectively, were paid in cash during each pay period. These amounts were recorded as “General and administrative, net” on the accompanying consolidated statements of operations.
8. Leases
SilverBow Resources has contractual agreements for its corporate office lease, vehicle fleet, drilling rigs, compressors, treating equipment, and for surface use rights. For leases with a primary term of more than 12 months, a right-of-use (“ROU”) asset and the corresponding lease liability is recorded. The Company determines at inception if an arrangement is an operating or financing lease. All of the Company’s leases are operating leases.
The initial asset and liability balances are recorded at the present value of the payment obligations over the lease term. If lease terms include options to extend the lease and it is reasonably certain that the Company will exercise that option, the lease term used for capitalization includes the expected renewal periods. Most leases do not provide an implicit interest rate. Unless the lease contract contains an implicit interest rate, the Company uses its incremental borrowing rate at the time of lease inception to compute the fair value of the lease payments. The ROU asset balance and current and non-current lease liabilities are reported separately on the accompanying Consolidated Balance Sheets. Certain leases have payment terms that vary based on the usage of the underlying assets. Variable lease payments are not included in ROU assets and lease liabilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the Company does not account for lease and non-lease components separately. The Company recognizes lease expense on a straight-line basis over the lease term.
Lease costs represent the straight-line lease expense of ROU assets and short-term leases. The components of lease cost are classified as follows (in thousands):
The lease term and the discount rate related to the Company's leases are as follows:
As of December 31, 2020, the Company's future undiscounted cash payment obligation for its operating lease liabilities are as follows (in thousands):
Supplemental cash flow information related to leases was as follows (in thousands):
Rental and lease expense was $5.8 million and $5.4 million for the years ended December 31, 2020 and 2019, respectively. The rental and lease expense primarily relates to compressor rentals and the lease of our office space in Houston, Texas. During 2016 the Company entered into a four-year sub-lease agreement for office space in Houston, Texas. The operating lease commenced on January 1, 2017. Additionally, on August 31, 2017 we amended the sub-lease agreement for additional office space. As of December 31, 2020, the minimum contractual obligations were approximately $0.3 million in the aggregate.
9. Acquisitions and Dispositions
Effective December 22, 2017, the Company closed a purchase and sale contract to sell the Company's wellbores and facilities in Bay De Chene and recorded a $16.3 million obligation related to the funding of certain plugging and abandonment costs. Of the $16.3 million original obligation, $0.8 million and $5.1 million was paid during the years ended December 31,
2020 and 2019, respectively. The remaining obligation under this contract is $1.6 million and is carried in the accompanying consolidated balance sheet as a current liability in “Accounts payable and accrued liabilities” as of December 31, 2020.
On April 3, 2020, we acquired additional properties in the Eagle Ford for approximately $5.0 million, including assumed liabilities. The acquisition included eight producing wells, basic infrastructure and acreage in Webb, La Salle, and McMullen Counties. We allocated all of the purchase price to proved oil and gas properties. The Company accounted for this transaction as an asset acquisition with the properties added to our full cost pool balance.
On May 13, 2020, the Company divested an overriding royalty interest in Converse and Niobrara Counties, Wyoming for approximately $4.8 million. The sales of our Wyoming assets did not significantly alter the relationship between capitalized costs and proved reserves, and as such, all proceeds were recorded as adjustments to our domestic full cost pool with no gain or loss recognized. These consolidated financial statements include the results of our Wyoming operations through the date of sale.
10. Fair Value Measurements
Fair Value on a Recurring Basis. Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives, the Credit Facility and the Second Lien Notes. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the highly liquid or short-term nature of these instruments.
The fair values of our derivative contracts are computed using observable market data whereas our derivative collar contracts are valued using a Black-Scholes pricing model and are periodically verified against quotes from brokers. These are considered Level 2 valuations (defined below).
The carrying value of our Credit Facility and Second Lien approximates fair value because the respective borrowing rates do not materially differ from market rates for similar borrowings. These are considered Level 3 valuations (defined below).
The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value (in millions):
Level 1 - Uses quoted prices in active markets for identical, unrestricted assets or liabilities. Instruments in this category have comparable fair values for identical instruments in active markets.
Level 2 - Uses quoted prices for similar assets or liabilities in active markets or observable inputs for assets or liabilities in non-active markets. Instruments in this category are periodically verified against quotes from brokers and include our commodity derivatives that we value using commonly accepted industry-standard models which contain inputs such as contract prices, risk-free rates, volatility measurements and other observable market data that are obtained from independent third-party sources.
Level 3 - Uses unobservable inputs for assets or liabilities that are in non-active markets.
The following table presents our assets and liabilities that are measured on a recurring basis as of December 31, 2020 and 2019, and are categorized using the fair value hierarchy. For additional discussion related to the fair value of the Company's derivatives, refer to Note 5 of these Notes to Consolidated Financial Statements.
Our current and long-term unsettled derivative assets and liabilities in the table above are measured at gross fair value and are shown on the accompanying condensed consolidated balance sheets in “Fair value of commodity derivatives” and “Fair value of long-term commodity derivatives,” respectively.
11. Asset Retirement Obligations
Liabilities for legal obligations associated with the retirement obligations of tangible long-lived assets are initially recorded at fair value in the period in which they are incurred. When a liability is initially recorded, the carrying amount of the related asset is increased. The liability is discounted from the expected date of abandonment. Over time, accretion of the liability is recognized each period, and the capitalized cost is amortized on a unit-of-production basis as part of depreciation, depletion, and amortization expense for our oil and gas properties. Upon settlement of the liability, the Company either settles the obligation for its recorded amount or incurs a gain or loss upon settlement which is included in the “Property and Equipment” balance on our accompanying consolidated balance sheets.
The following provides a roll-forward of our asset retirement obligations (in thousands):
At December 31, 2020 and 2019, approximately $0.4 million of our asset retirement obligations were classified as current liabilities in “Accounts payable and accrued liabilities” on the accompanying consolidated balance sheets.
Supplementary Information (unaudited)
SilverBow Resources, Inc. and Subsidiary
Oil and Gas Operations
Capitalized Costs. The following table presents our aggregate capitalized costs relating to oil and natural gas producing activities and the related depreciation, depletion, and amortization (in thousands):
There were $28.1 million and $41.2 million of unproved property costs at December 31, 2020 and 2019, respectively, excluded from the amortizable base. We evaluate the majority of these unproved costs within a two- to four-year time frame.
Capitalized asset retirement obligations have been included in the Proved oil and gas properties as of December 31, 2020 and 2019.
Costs Incurred. The following table sets forth costs incurred related to our oil and natural gas operations (in thousands) for the periods indicated:
(1) Facility construction costs and capital costs have been included in development costs, and totaled $4.2 million and $18.9 million for the years ended December 31, 2020 and 2019, respectively.
(2) Includes capitalized general and administrative costs directly associated with the acquisition, exploration, and development efforts of approximately $3.5 million and $5.3 million for the years ended December 31, 2020 and 2019, respectively. In addition, the total includes $0.2 million of capitalized interest on unproved properties for the year ended December 31, 2019. There was no capitalized interest on unproved properties for the year ended December 31, 2020.
(3) Includes asset retirement obligations incurred, including revisions, of approximately $0.2 million and ($0.1) million for the years ended December 31, 2020 and 2019, respectively. Does not include accrued payments associated with our Bay De Chene sale for the years ended December 31, 2020 and 2019.
Supplementary Reserves Information. The following information presents estimates of our proved oil and natural gas reserves. Reserves were prepared in accordance with SEC rules by Gruy as of December 31, 2020, 2019 and 2018. Proved reserves, as of December 31, 2020, 2019 and 2018, were based upon the preceding 12-months' average price based on closing prices on the first business day of each month, or prices defined by existing contractual arrangements which are held constant, for that year's reserves calculation. The 12-month 2020 average adjusted prices after differentials used in our calculations were $2.13 per Mcf of natural gas, $37.83 per barrel of oil, and $11.66 per barrel of NGL compared to $2.62 per Mcf of natural gas, $58.37 per barrel of oil, and $16.83 per barrel of NGL for the 12-month average 2019 prices and $3.04 per Mcf of natural gas, $66.96 per barrel of oil, and $26.63 per barrel of NGL for 2018.
(1) Revisions of previous estimates are related to upward or downward variations based on current engineering information for production rates, volumetrics, reservoir pressure and commodity pricing. The downward revisions for 2020 and 2019 were primarily attributable to the reclassification of PUDs to unproved due to changes in the Company's five-year development plans.
(2) At December 31, 2020 and 2019, 46% and 41% of our reserves were proved developed, respectively.
(3) We have added proved reserves through our drilling activities. The 2020 and 2019 additions were primarily due to additions from drilling results and leasing of adjacent acreage.
Standardized Measure of Discounted Future Net Cash Flows. The Standardized Measure of discounted future net cash flows relating to proved oil and natural gas reserves is as follows (in thousands):
(1) These amounts include future costs related to plugging and abandoning the Company's wells.
The Standardized Measure of discounted future net cash flows from production of proved reserves as of December 31, 2020 and 2019, were developed as follows:
1. Estimates were made of quantities of proved reserves and the future periods during which they are expected to be produced based on year-end economic conditions.
2. The estimated future gross revenues of proved reserves were based on the preceding 12-months' average price based on closing prices on the first day of each month, or prices defined by existing contractual arrangements.
3. The future gross revenues were reduced by estimated future costs to develop and to produce the proved reserves, including asset retirement obligation costs, based on year-end cost estimates and the estimated effect of future income taxes.
4. Future income taxes were computed by applying the statutory tax rate to future net cash flows reduced by the tax basis of the properties, the estimated permanent differences applicable to future oil and natural gas producing activities and tax carry forwards.
The Standardized Measure of discounted future net cash flows is not intended to present the fair market value of our oil and natural gas reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, an allowance for return on investment, and the risks inherent in reserves estimates.
The following are the principal sources of changes in the Standardized Measure of discounted future net cash flows (in thousands) for the years ended December 31, 2020 and 2019:
Selected Quarterly Financial Data (Unaudited). The following table presents summarized quarterly financial information for the years ended December 31, 2020 and 2019 (in thousands, except per share data):
The sum of the individual quarterly net income (loss) per common share amounts may not agree with year-to-date net income (loss) per common share as each quarterly computation is based on the weighted average number of common shares outstanding during that period. In addition, certain potentially dilutive securities were not included in certain of the quarterly computations of diluted net income per common share amounts because to do so would have been antidilutive.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, consisting of controls and other procedures designed to give reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and our chief financial officer, to allow timely decisions regarding such required disclosure.
As of the end of the period covered by this Form 10-K, the Company’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the last day of the period covered by this report at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. See management's report on internal control over financial reporting at Item 8 in this Form 10-K.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The information required under Item 10 which will be set forth in our definitive proxy statement to be filed within 120 days after the close of the fiscal year-end in connection with our May 18, 2021 annual shareholders' meeting is incorporated herein by reference.
The Company has adopted a Code of Ethics for Senior Financial Officers and the Principal Executive Officers (“Code of Ethics”). The Company has posted this Code of Ethics on its website at www.sbow.com where it also intends to post any waivers from or amendments to this Code of Ethics, to the extent required.
Item 11.
Item 11. Executive Compensation.
The information required under Item 11 which will be set forth in our definitive proxy statement to be filed within 120 days after the close of the fiscal year-end in connection with our May 18, 2021 annual shareholders' meeting is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required under Item 12 which will be set forth in our definitive proxy statement to be filed within 120 days after the close of the fiscal year-end in connection with our May 18, 2021 annual shareholders' meeting is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required under Item 13 which will be set forth in our definitive proxy statement to be filed within 120 days after the close of the fiscal year-end in connection with our May 18, 2021 annual shareholders' meeting is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services.
The information required under Item 14 which will be set forth in our definitive proxy statement to be filed within 120 days after the close of the fiscal year-end in connection with our May 18, 2021 annual shareholders' meeting is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
1. The following consolidated financial statements of SilverBow Resources together with the report thereon of BDO USA, LLP dated March 4, 2021, and the data contained therein are included in Item 8 hereof:
Management's Report on Internal Control Over Financial Reporting50
Report of Independent Registered Public Accounting Firm52
Consolidated Balance Sheets54
Consolidated Statements of Operations55
Consolidated Statements of Stockholders' Equity56
Consolidated Statements of Cash Flows57
Notes to Consolidated Financial Statements58
2. Financial Statement Schedules
None.
3. Exhibits
* Filed herewith.
# Furnished herewith.
+ Management contract or compensatory plan or arrangement.
Item 16. 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, SilverBow Resources, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 4, 2021.
SILVERBOW RESOURCES, INC.
By: /s/ Sean C. Woolverton
Sean C. Woolverton
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, SilverBow Resources, Inc., and in the capacities and on the dates indicated: