Notes to Condensed Consolidated Financial
Statements
(Unaudited)
NOTE 1 – ORGANIZATION
Carbon Energy Corporation is an independent
oil and natural gas company engaged in the acquisition, exploration, development and production of oil, natural gas and natural
gas liquids properties. The terms “we”, “us”, “our”, the “Company” or “Carbon”
refer to Carbon Energy Corporation and our consolidated subsidiaries.
On May 26, 2020 Carbon Energy Corporation
completed its sale of all of the issued and outstanding membership interests of Carbon Appalachia Company, LLC and Nytis Exploration
Company LLC. See Note 3 – Divestiture for more information. Following the sale, Carbon’s operations are substantially
limited to those in the Ventura Basin through Carbon California Company, LLC, a Delaware limited liability company (“Carbon
California”), its majority-owned subsidiary.
Ventura Basin Operations
In California, Carbon California Operating
Company, LLC conducts operations on behalf of Carbon California. We own 53.92% of the voting and profits interests and Prudential
Legacy Insurance Company of New Jersey and Prudential Insurance Company of America or its affiliates (collectively, “Prudential”)
owns 46.08% of the voting and profits interest in Carbon California. The following organizational chart illustrates this
relationship as of June 30, 2020:
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission
(“SEC”) and in accordance with U.S. generally accepted accounting principles (“GAAP”)
applicable to interim financial statements. These unaudited condensed consolidated financial statements reflect all normal recurring
adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim period. Operating
results for the interim periods presented require management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes and are not necessarily indicative of the results that may be expected for
the full year. The condensed consolidated balance sheet data as of December 31, 2019 was derived from audited financial statements
but does not include all disclosures required by GAAP. These unaudited condensed consolidated financial statements should be read
in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the
year ended December 31, 2019. The Company follows the same accounting policies for preparing quarterly and annual reports.
Principles of Consolidation
The unaudited condensed consolidated financial
statements include the accounts of the Company and its consolidated subsidiaries. Partnerships and subsidiaries in which we have
a controlling interest are consolidated. We reflect the non-controlling ownership interest in partnerships and subsidiaries as
non-controlling interests on our unaudited condensed consolidated statements of operations and also reflect the non-controlling
ownership interest in the net assets of the partnerships as non-controlling interests within stockholders’ equity on our
unaudited condensed consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated.
In accordance with established practice
in the oil and gas industry, our unaudited condensed consolidated financial statements also include our pro-rata share of assets,
liabilities, income, lease operating costs and general and administrative expenses of the oil and gas partnerships in which we
have a non-controlling interest.
Non-majority owned investments that do
not meet the criteria for pro-rata consolidation are accounted for using the equity method when we have the ability to significantly
influence the operating decisions of the investee. When we do not have the ability to significantly influence the operating decisions
of an investee, the cost method is used. All transactions, if any, with investees have been eliminated in the accompanying unaudited
condensed consolidated financial statements.
Cash and Cash Equivalents and Restricted
Cash
The following table provides a reconciliation
of cash, cash equivalents and restricted cash reported in the unaudited condensed consolidated balance sheet to amounts shown
in the unaudited condensed consolidated statement of cash flows in thousands:
|
|
June 30,
2020
|
|
Cash and cash equivalents
|
|
$
|
1,311
|
|
Restricted cash
|
|
|
4,612
|
|
Other non-current assets
|
|
|
2,100
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
8,023
|
|
NOTE 3 – DIVESTITURE
On April 7, 2020, Carbon Energy Corporation, together with Nytis
Exploration (USA) Inc. (the “Sellers”), and certain of the Company’s other direct and indirect
wholly owned subsidiaries, entered into a Membership Interest Purchase Agreement (“MIPA”) to sell all
of the issued and outstanding membership interests of Carbon Appalachia Company, LLC (“Carbon Appalachia”) and
Nytis Exploration Company LLC (“Nytis LLC”) to Diversified Gas & Oil Corporation (“DGOC”)
for $110.0 million, subject to customary purchase price adjustments, and a contingent payment of up to $15.0 million (the “Appalachia
Divestiture”). The assets sold in the Appalachia Divestiture comprised substantially all of the Company’s assets
in the Appalachian and Illinois basin. The transaction closed on May 26, 2020 for net proceeds of $98.1 million based on preliminary
estimates of closing adjustments, resulting in a loss of approximately $34.5 million. The contingent payment of up to $15.0 million
in the aggregate represents a contingent receivable that is not recorded in our unaudited condensed consolidated balance sheet.
The contingent payment will be calculated based on fixed volumes and the average settled natural gas pricing for 2020, 2021, and
2022 as compared to established benchmark pricing. Any payments due will be paid yearly by January 5 of each of 2021, 2022 and
2023 based on the contingent payment calculation for the respective calendar years.
Proceeds from the closing were used to
settle all outstanding amounts associated with the 2018 Credit Facility (as defined below) and repay a portion of the Old Ironsides
Notes. See Note 7 – Credit Facilities and Notes Payable for more information. We incurred exit costs in conjunction with
the divestiture of one-time severance and termination benefits for the affected employees.
The assets, liabilities and equity disposed
of are set out in the table below:
|
|
Amount
(in thousands)
|
|
Assets:
|
|
|
|
Accounts
receivable
|
|
$
|
9,651
|
|
Prepaid
expenses
|
|
|
892
|
|
Derivative
assets
|
|
|
3,159
|
|
Inventory
|
|
|
1,409
|
|
Oil
and gas properties
|
|
|
128,993
|
|
Other
property and equipment
|
|
|
14,035
|
|
Right-of-use
assets
|
|
|
3,406
|
|
Other
non-current assets
|
|
|
436
|
|
Liabilities
and Equity:
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(13,355
|
)
|
Firm
transportation contract obligations
|
|
|
(12,981
|
)
|
Lease
liabilities
|
|
|
(3,406
|
)
|
Derivative
liabilities
|
|
|
(11
|
)
|
Production
and property taxes payable
|
|
|
(3,342
|
)
|
Asset
retirement obligations
|
|
|
(14,027
|
)
|
Equity
in subsidiaries
|
|
|
8,785
|
|
Net
assets disposed
|
|
|
123,644
|
|
Cash
received
|
|
|
98,121
|
|
Transaction
costs
|
|
|
(8,940
|
)
|
Loss
on Appalachia Divestiture
|
|
$
|
34,463
|
|
At June 30, 2020, restricted cash on the
condensed consolidated balance sheet of approximately $6.7 million represents amounts held in escrow from the purchase price.
The escrow amount will be released to the Company upon satisfaction of certain indemnification obligations and will be released
upon the fulfillment of associated release requirements over the 36 months following the closing of the Appalachia Divestiture.
Carbon and DGOC entered into a transition
services agreement to provide, on an interim basis, certain services associated with the sold assets. The services commenced on
May 26, 2020 and are expected to terminate in November 2020. Billings of approximately $269,000 are recorded as a reduction of
general and administrative expenses during the three months ended June 30, 2020.
The following table presents net income
before non-controlling interests and net income attributable to controlling interests for the subsidiaries sold for the three
and six months ended June 30, 2020 and 2019:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net (loss) income before non-controlling interests
|
|
$
|
(3,000)
|
|
|
$
|
5,003
|
|
|
$
|
1,645
|
|
|
$
|
3,923
|
|
Net (loss) income attributable to controlling interests
|
|
$
|
(2,737)
|
|
|
$
|
5,309
|
|
|
$
|
1,541
|
|
|
$
|
3,719
|
|
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following:
(in thousands)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Oil and gas properties:
|
|
|
|
|
|
|
Proved oil and gas properties
|
|
$
|
125,006
|
|
|
$
|
351,488
|
|
Unproved properties
|
|
|
1,616
|
|
|
|
4,872
|
|
Accumulated depreciation, depletion, amortization
and impairment
|
|
|
(10,911
|
)
|
|
|
(109,344
|
)
|
Oil and gas properties, net
|
|
|
115,711
|
|
|
|
247,016
|
|
|
|
|
|
|
|
|
|
|
Pipeline facilities and equipment
|
|
|
-
|
|
|
|
12,814
|
|
Base gas
|
|
|
-
|
|
|
|
1,937
|
|
Furniture and fixtures, computer hardware and software, and other equipment
|
|
|
2,614
|
|
|
|
6,762
|
|
Accumulated depreciation and amortization
|
|
|
(1,425
|
)
|
|
|
(5,529
|
)
|
Other property and equipment, net
|
|
|
1,189
|
|
|
|
15,984
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
116,900
|
|
|
$
|
263,000
|
|
Unproved oil and gas properties not subject
to depletion are excluded from the full cost pool until it is determined if reserves can be assigned to the related properties.
Subject to industry conditions, evaluation of most of these properties and the inclusion of their costs in the full cost pool
is expected to be completed within five years. Unproved properties are assessed for impairment at least annually. During the three
and six months ended June 30, 2020 and 2019, there were no expiring or impaired leasehold costs that were reclassified into proved
property.
We capitalized overhead applicable to
acquisition, development and exploration activities of approximately $134,000 and $372,000 for the three and six months ended
June 30, 2020, respectively. For the three and six months ended June 30, 2019, we capitalized overhead applicable to acquisition,
development and exploration activities of approximately $305,000 and $373,000, respectively.
Depletion expense related to oil and gas
properties for the three and six months ended June 30, 2020 was approximately $1.9 million and $5.3 million, respectively. Depletion
expense related to oil and gas properties for the three and six months ended June 30, 2019 was approximately $3.5 million and
$7.0 million, respectively.
For the three and six months ended June
30, 2020 and 2019, we did not recognize any ceiling test impairments as our full cost pool did not exceed the ceiling limitations.
Future declines in oil and natural gas prices, increases in future operating expenses and future development costs could result
in impairments of our oil and gas properties in future periods. Impairment changes are a non-cash charge and accordingly would
not affect cash flows but would adversely affect our net income and stockholders’ equity.
NOTE 5 – ACCOUNTS PAYABLE
AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities
consist of the following:
(in thousands)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,717
|
|
|
$
|
9,875
|
|
Oil and gas revenue suspense
|
|
|
135
|
|
|
|
3,620
|
|
Gathering and transportation payables
|
|
|
906
|
|
|
|
1,877
|
|
Production taxes payable
|
|
|
31
|
|
|
|
3,212
|
|
Accrued lease operating costs
|
|
|
-
|
|
|
|
664
|
|
Accrued ad valorem taxes-current
|
|
|
562
|
|
|
|
4,407
|
|
Accrued general and administrative expenses
|
|
|
2,521
|
|
|
|
3,260
|
|
Asset retirement obligations-current
|
|
|
3,384
|
|
|
|
5,021
|
|
Accrued interest
|
|
|
791
|
|
|
|
1,335
|
|
Accrued gas purchases
|
|
|
-
|
|
|
|
1,392
|
|
Other liabilities
|
|
|
453
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued liabilities
|
|
$
|
12,500
|
|
|
$
|
35,157
|
|
NOTE 6 – ASSET RETIREMENT
OBLIGATIONS
The Company’s asset retirement obligations
(“ARO”) relate to future costs associated with the plugging and abandonment of oil and gas wells, removal
of equipment and facilities from leased acreage and returning such land to its original condition. The fair value of a liability
for an ARO is recorded in the period in which it is incurred, and the cost of such liability is recorded as an increase in the
carrying amount of the related long-lived asset by the same amount. The liability is accreted each period and the capitalized
cost is depleted on a units-of-production basis as part of the full cost pool. Revisions to the estimated ARO liability result
in adjustments to the related capitalized asset and corresponding liability.
The ARO liability is based on estimated
economic lives, estimates of the cost to abandon the wells in the future, and federal and state regulatory requirements. The liability
is discounted using a credit-adjusted risk-free rate estimated at the time the liability is incurred or adjusted as a result of
a reassessment of expected cash flows and assumptions inherent in the estimation of the liability. Revisions to the liability
could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new
requirements regarding the abandonment of wells.
The following table is a reconciliation
of ARO:
|
|
Six Months Ended
June 30,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Balance at beginning of period
|
|
$
|
22,535
|
|
|
$
|
22,310
|
|
Accretion expense
|
|
|
777
|
|
|
|
799
|
|
Obligations discharged with Appalachia Divestiture
|
|
|
(14,027
|
)
|
|
|
-
|
|
Additions
|
|
|
7
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
9,292
|
|
|
$
|
23,109
|
|
Less: Current portion
|
|
|
(3,384
|
)
|
|
|
(3,708
|
)
|
Non-current portion
|
|
$
|
5,908
|
|
|
$
|
19,401
|
|
NOTE 7 – CREDIT FACILITIES
AND NOTES PAYABLE
The table below summarizes the outstanding
credit facilities and notes payable:
(in thousands)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
2018 Credit Facility – revolver
|
|
$
|
-
|
|
|
$
|
69,150
|
|
2018 Credit Facility – term note
|
|
|
-
|
|
|
|
5,833
|
|
Old Ironsides Notes
|
|
|
15,836
|
|
|
|
25,675
|
|
Paycheck Protection Program Loan
|
|
|
1,339
|
|
|
|
-
|
|
Other debt
|
|
|
26
|
|
|
|
45
|
|
Total debt
|
|
|
17,201
|
|
|
|
100,703
|
|
Less: unamortized debt discount
|
|
|
-
|
|
|
|
(45
|
)
|
Total credit facilities and notes payable
|
|
|
17,201
|
|
|
|
100,658
|
|
Current portion of credit facilities and notes payable
|
|
|
(1,339
|
)
|
|
|
(5,788
|
)
|
Non-current debt, net of current portion and unamortized
debt discount
|
|
$
|
15,862
|
|
|
$
|
94,870
|
|
Paycheck Protection Program Loan
Reclass of non-current portion is open.
In May 2020, the Company received loan
proceeds of approximately $1.3 million (“PPP Loan”) under the Paycheck Protection Program (“PPP”).
The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”),
provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying
business. The PPP Loan and accrued interest are forgivable after 24 weeks as long as the borrower uses the loan proceeds for eligible
purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. For purposes of the PPP Loan, payroll
costs exclude cash compensation of an individual employee in excess of $100,000, prorated annually. Not more than 40% of the forgiven
amount may be for non-payroll costs. The amount of loan forgiveness will be reduced if the borrower terminates full-time employees
or reduces salaries and wages for employees with salaries of $100,000 or less annually by more than 25% during the 24-week period.
The PPP Loan is evidenced by a promissory
note, dated as of May 13, 2020 (the “PPP Note”), which contains customary events of default relating
to, among other things, payment defaults and breaches of representations and warranties, and bears interest at 1.0% per annum.
No payments of principal or interest are due during the six-month period beginning on the date of the PPP Note (the “Deferral
Period”).
The Company intends to use the proceeds
for purposes consistent with the PPP. In order to obtain full or partial forgiveness of the PPP Loan, the Company must request
forgiveness and must provide satisfactory documentation in accordance with applicable Small Business Administration (“SBA”)
guidelines. Interest payable on the PPP Note may be forgiven only if the SBA agrees to pay such interest on the forgiven principal
amount of the PPP Note. The Company will be obligated to repay any portion of the principal amount of the PPP Note that is not
forgiven, together with interest accrued and accruing thereon at the rate set forth above, until such unforgiven portion is paid
in full. We intend to apply for forgiveness of the PPP Note as soon as we are eligible.
Beginning one month following expiration
of the Deferral Period, and continuing monthly until 24 months from the date of the PPP Note (the “Maturity Date”),
the Company is obligated to make monthly payments of principal and interest to the Lender with respect to any unforgiven portion
of the PPP Note, in such equal amounts required to fully amortize the principal amount outstanding on the PPP Note as of the last
day of the Deferral Period by the Maturity Date. The Company is permitted to prepay the PPP Note at any time without payment of
any prepayment premium or penalty.
Carbon Appalachia
2018 Credit Facility
In 2018, the Company and its subsidiaries
amended and restated its prior credit facilities and entered into a $500.0 million senior secured asset-based revolving credit
facility maturing December 31, 2022 and a $15.0 million term loan maturing in 2020 (the “2018 Credit Facility”).
The borrowers under the 2018 Credit Facility were Carbon Appalachia Enterprises, LLC (“CAE”) and various
other subsidiaries of the Company (including Nytis Exploration (USA) Inc., a direct wholly owned subsidiary of the Company (“Nytis
USA”), together with CAE, the “Borrowers”). Under the 2018 Credit Facility, the Company
was neither a borrower nor a guarantor. The initial borrowing base under the 2018 Credit Facility was $75.0 million. Loans under
the 2018 Credit Facility may be prepaid without premium or penalty.
Using proceeds from the Appalachia Divestiture,
we repaid the outstanding principal balance and accrued interest under the 2018 Credit Facility, including the term loan, of $72.3
million, and terminated the 2018 Credit Facility on May 26, 2020.
Old Ironsides Notes
On December 31, 2018, in connection with
our acquisition (the “OIE Membership Acquisition”) of all of the Class A Units of Carbon Appalachia
from Old Ironside Fund II-A Portfolio Holding Company, LLC, a Delaware limited liability company, and Old Ironside Fund II-B Portfolio
Holding Company, LLC, a Delaware limited liability company (collectively, “Old Ironsides”), we delivered
unsecured, promissory notes in the aggregate original principal amount of approximately $25.1 million to Old Ironsides (the “Old
Ironsides Notes”). The Old Ironsides Notes bear interest at 10.0% per annum and have a term of five years, the first
three of which require interest-only payments at the end of each calendar quarter beginning with the quarter ending March 31,
2019. At the end of the three-year interest-only period, the then current outstanding principal balance and interest is to be
paid in 24 equal monthly payments. The Old Ironsides Notes also require mandatory prepayments upon the occurrence of certain subsequent
liquidity events. A mandatory, one-time principal reduction payment in the aggregate amount of $2.0 million was made to Old Ironsides
on February 1, 2019.
The interest payable under the Old Ironsides
Notes can be paid-in-kind at the election of the Company. This provision allows the Company to increase the principal balance
associated with the Old Ironsides Notes. This election creates a second tranche of principal, which bears interest at 12.0% per
annum. For the six months ended June 30, 2020, the Company elected payment-in-kind interest of approximately $662,000.
On May 25, 2020, Carbon entered into an
Agreement Regarding Payoff and Release or Amendment of Notes (the “Payoff Agreement”) with Old Ironsides.
Pursuant to the terms of the Payoff Agreement, Carbon is required to apply certain net proceeds from the Appalachia Divestiture
in repayment of the Old Ironsides Notes on specified repayment dates tied to milestones under the MIPA. The initial payment of
$10.5 million was paid within three business days after the closing date of the Appalachia Divestiture. The second payment is
due within three business days after the settlement and payment of the Final Base Purchase Price (as defined in the MIPA). If
the sum of the initial payment and the second payment is at least $20.0 million, the Old Ironsides Notes will be deemed paid in
full. If the sum of the initial payment and the second payment is at least $18.0 million but less than $20.0 million, the Old
Ironsides Notes will be amended such that the outstanding principal balance plus all accrued and unpaid interest is equal to $21.5
million (less the amount of the initial and second payments) and the Old Ironsides Notes will remain outstanding with no other
change to the existing terms. If the sum of the initial payment and the second payment is less than $18.0 million, then Carbon
will have the opportunity to make a third payment.
The third payment would be due within
three business days after the first Contingent Payment (as defined in the MIPA). If the sum of the initial payment, the second
payment and the third payment is at least $18.0 million, the Old Ironsides Notes will be amended such that the outstanding principal
balance plus all accrued and unpaid interest is equal to $23.0 million (less the amount of the initial, second and third payments)
and the Old Ironsides Notes will remain outstanding with no other change to the existing terms. If the sum of the initial payment,
the second payment and the third payment is less than $18.0 million, the payments made by Carbon as of such date will be considered
mandatory prepayments and the Old Ironsides Notes will remain outstanding with a maturity date of December 31, 2023 and no change
to the existing terms.
Carbon California
The table below summarizes the outstanding
notes payable – related party:
(in thousands)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Senior Revolving Notes, related party, due February 15, 2022
|
|
$
|
37,200
|
|
|
$
|
33,000
|
|
Subordinated Notes, related party, due February 15, 2024
|
|
|
13,390
|
|
|
|
13,000
|
|
Total principal
|
|
|
50,590
|
|
|
|
46,000
|
|
Less: Deferred notes costs
|
|
|
(154
|
)
|
|
|
(175
|
)
|
Less: unamortized debt discount
|
|
|
(952
|
)
|
|
|
(1,084
|
)
|
Total notes payable – related party
|
|
$
|
49,484
|
|
|
$
|
44,741
|
|
Senior Revolving Notes, Related Party
On February 15, 2017, Carbon California
entered into a Note Purchase Agreement (the “Note Purchase Agreement”) for the issuance and sale
of Senior Secured Revolving Notes to Prudential with an initial revolving borrowing capacity of $25.0 million which mature on
February 15, 2022 (the “Senior Revolving Notes”). The Company is not a guarantor of the Senior Revolving
Notes. The closing of the Note Purchase Agreement on February 15, 2017 resulted in the sale and issuance by Carbon California
of Senior Revolving Notes in the principal amount of $10.0 million. The maximum principal amount available under the Senior Revolving
Notes is based upon the borrowing base attributable to Carbon California’s proved oil and gas reserves which is to be determined
at least semi-annually. On April 1, 2020, the borrowing base was redetermined and reduced to $40.0 million. Effective June
30, 2020, and through December 31, 2020, Prudential is no longer obligated to make advances under the Senior Revolving Notes.
Carbon California may elect to incur interest
at either (i) 5.50% plus LIBOR or (ii) 4.50% plus the Prime Rate (which is defined as the interest rate published daily by JPMorgan
Chase Bank, N.A.). As of December 31, 2019, the effective borrowing rate for the Senior Revolving Notes was 7.10%. In addition,
the Senior Revolving Notes include a commitment fee for any unused amounts at 0.50% as well as an annual administrative fee of
$75,000, payable on February 15 each year.
The Senior Revolving Notes are secured
by all the assets of Carbon California. The Senior Revolving Notes require Carbon California, as of January 1 and July 1 of each
year, to hedge its anticipated proved developed production at such time for year one, two and three at a rate of 75%, 65% and
50%, respectively. Carbon California may make principal payments in minimum installments of $500,000. Distributions to equity
members are generally restricted.
Carbon California incurred fees directly
associated with the issuance of the Senior Revolving Notes and amortizes these fees over the life of the Senior Revolving Notes.
The current portion of these fees are included in prepaid expenses and deposits and the long-term portion is included in other
non-current assets for a combined value of approximately $458,000. For the three and six months ended June 30, 2020, Carbon California
amortized fees of $70,000 and $141,000, respectively.
Carbon California may at any time repay
the Senior Revolving Notes, in whole or in part, without penalty. Carbon California must pay down Senior Revolving Notes or provide
mortgages of additional oil and natural gas properties to the extent that outstanding loans and letters of credit exceed the borrowing
base.
Subordinated Notes, Related Party
On February 15, 2017, Carbon California
entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Prudential Capital
Energy Partners, L.P. for the issuance and sale of Subordinated Notes due February 15, 2024, bearing interest of 12.0% per annum
(the “Subordinated Notes”). The Company is not a guarantor of the Subordinated Notes. The closing of
the Securities Purchase Agreement on February 15, 2017 resulted in the sale and issuance by Carbon California of Subordinated
Notes in the original principal amount of $10.0 million, all of which remains outstanding as of June 30, 2020.
Prudential received an additional 1,425
Class A Units, representing 5.0% of the total sharing percentage, for the issuance of the Subordinated Notes. Carbon California
valued this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount
with the outstanding Subordinated Notes of $10.0 million. The Company then allocated the non-cash value of the units of approximately
$1.3 million, which was recorded as a discount to the Subordinated Notes. As of June 30, 2020, Carbon California had an outstanding
discount of approximately $646,000, which is presented net of the Subordinated Notes within Notes payable-related party on the
unaudited condensed consolidated balance sheets. During the three and six months ended June 30, 2020, Carbon California amortized
$45,000 and $89,000, respectively, associated with the Subordinated Notes.
The Subordinated Notes require Carbon
California, as of January 1 and July 1 of each year, to hedge its anticipated production at such time for year one, two and three
at a rate of 67.5%, 58.5% and 45.0%, respectively.
Prepayment of the Subordinated Notes is
allowed at 100%, subject to a 3.0% fee of outstanding principal. Prepayment is not subject to a prepayment fee after February
17, 2020. Distributions to equity members are generally restricted.
2018 Subordinated Notes, Related Party
On May 1, 2018, Carbon California entered
into an agreement with Prudential for the issuance and sale of $3.0 million in subordinated notes due February 15, 2024, bearing
interest of 12.0% per annum (the “2018 Subordinated Notes”), of which $3.0 million remains outstanding
as of June 30, 2020.
Prudential received 585 Class A Units,
representing an approximate 2.0% additional sharing percentage, for the issuance of the 2018 Subordinated Notes. Carbon California
valued this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount
with the outstanding 2018 Subordinated Notes of $3.0 million. The Company then allocated the non-cash value of the units of approximately
$490,000, which was recorded as a discount to the 2018 Subordinated Notes. As of June 30, 2020, Carbon California had an outstanding
discount of $307,000 associated with these notes, which is presented net of the 2018 Subordinated Notes within Notes payable -
related party on the unaudited condensed consolidated balance sheets. During the three and six months ended June 30, 2020, Carbon
California amortized $42,000 and $21,000, respectively, associated with the 2018 Subordinated Notes.
The 2018 Subordinated Notes require Carbon
California, as of January 1 and July 1 of each year, to hedge its anticipated production at such time for year one, two and three
at a rate of 67.5%, 58.5% and 45.0%, respectively.
Prepayment of the 2018 Subordinated Notes
is allowed at 100%, subject to a 3.0% fee of outstanding principal. Prepayment is not subject to a prepayment fee after February
17, 2020. Distributions to equity members are generally restricted.
Restrictions and Covenants
The Senior Revolving Notes, Subordinated
Notes and 2018 Subordinated Notes contain affirmative and negative covenants that, among other things, limit Carbon California’s
ability to (i) incur additional debt; (ii) incur additional liens; (iii) sell, transfer or dispose of assets; (iv) merge or consolidate,
wind-up, dissolve or liquidate; (v) make dividends and distributions on, or repurchases of, equity; (vi) make certain investments;
(vii) enter into certain transactions with our affiliates; (viii) enter into sales-leaseback transactions; (ix) make optional
or voluntary payments of debt; (x) change the nature of our business; (xi) change our fiscal year to make changes to the accounting
treatment or reporting practices; (xii) amend constituent documents; and (xiii) enter into certain hedging transactions.
In December 2019, Carbon California amended
the Senior Revolving Notes, the Subordinated Notes and the 2018 Subordinated Notes to amend the total leverage ratio and senior
leverage ratio, effective September 30, 2019. The Senior Revolving Notes were also amended to provide a mechanism to determine
a successor reference rate to LIBOR.
In July 2020, Carbon California amended the Senior Revolving
Notes, the Subordinated Notes and the 2018 Subordinated Notes to restrict additional withdrawals under the Senior Revolving Notes
through December 31, 2020, amend the total leverage ratio, senior leverage ratio and interest coverage ratio and provide a waiver
for non-compliance with its Senior Revolving Notes/EBITDA ratio at March 31, 2020. Also, the interest payable under the Subordinated
Notes and the 2018 Subordinated Notes beginning May 15, 2020 would be paid in kind and added to the outstanding principal amount
of each note. For the three months ended June 30, 2020, paid in kind interest was approximately $390,000.
The affirmative and negative covenants
are subject to various exceptions, including basket amounts and acceptable transaction levels. In addition, (i) the Senior Revolving
Notes require at June 30, 2020 Carbon California’s compliance with (A) a maximum Debt/EBITDA ratio of 6.0 to 1.0 (B) a maximum
Senior Revolving Notes/EBITDA ratio of 4.5 to 1.0 and (C) a minimum interest coverage ratio of 1.65 to 1 and (ii) the Subordinated
Notes require at June 30, 2020 Carbon California’s compliance with (A) a maximum Debt/EBITDA ratio of 6.90 to 1.0, (B) a
maximum Senior Revolving Notes/EBITDA ratio of 5.18 to 1.0, (C) a minimum interest coverage ratio of 1.4 to 1.0, (D) an asset
coverage test whereby indebtedness may not exceed the product of 0.65 times Adjusted PV-10 of proved developed reserves set forth
in the most recent reserve report, (E) maintenance of a minimum borrowing base of $30.0 million under the Senior Revolving Notes
and (F) a minimum current ratio of 0.85 to 1.00.
As of June 30, 2020, Carbon California
was in compliance with its financial covenants.
NOTE 8 – REVENUE
The following tables present our disaggregated
revenue by primary region within the United States and major product line:
For the three months ended June 30, 2020
and 2019 (in thousands):
|
|
Appalachian and Illinois Basins
|
|
|
Ventura Basin
|
|
|
Total
|
|
|
|
Three Months Ended
June 30,
|
|
|
Three Months Ended
June 30,
|
|
|
Three Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas sales
|
|
$
|
4,011
|
|
|
$
|
13,879
|
|
|
$
|
127
|
|
|
$
|
337
|
|
|
$
|
4,138
|
|
|
$
|
14,216
|
|
Natural gas liquids sales
|
|
|
-
|
|
|
|
-
|
|
|
|
49
|
|
|
|
195
|
|
|
|
49
|
|
|
|
195
|
|
Oil sales
|
|
|
194
|
|
|
|
1,558
|
|
|
|
3,573
|
|
|
|
8,344
|
|
|
|
3,767
|
|
|
|
9,902
|
|
Transportation and handling
|
|
|
274
|
|
|
|
322
|
|
|
|
-
|
|
|
|
-
|
|
|
|
274
|
|
|
|
322
|
|
Marketing gas sales
|
|
|
2,380
|
|
|
|
3,221
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,380
|
|
|
|
3,221
|
|
Total
|
|
$
|
6,859
|
|
|
$
|
18,980
|
|
|
$
|
3,749
|
|
|
$
|
8,876
|
|
|
$
|
10,608
|
|
|
$
|
27,856
|
|
For the six months ended June 30, 2020
and 2019 (in thousands):
|
|
Appalachian and Illinois Basins
|
|
|
Ventura Basin
|
|
|
Total
|
|
|
|
Six Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas sales
|
|
$
|
12,030
|
|
|
$
|
32,671
|
|
|
$
|
542
|
|
|
$
|
861
|
|
|
$
|
12,572
|
|
|
$
|
33,532
|
|
Natural gas liquids sales
|
|
|
-
|
|
|
|
-
|
|
|
|
201
|
|
|
|
441
|
|
|
|
201
|
|
|
|
441
|
|
Oil sales
|
|
|
1,339
|
|
|
|
3,095
|
|
|
|
9,643
|
|
|
|
15,796
|
|
|
|
10,982
|
|
|
|
18,891
|
|
Transportation and handling
|
|
|
908
|
|
|
|
1,056
|
|
|
|
-
|
|
|
|
-
|
|
|
|
908
|
|
|
|
1,056
|
|
Marketing gas sales
|
|
|
8,698
|
|
|
|
8,165
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,698
|
|
|
|
8,165
|
|
Total
|
|
$
|
22,975
|
|
|
$
|
44,987
|
|
|
$
|
10,386
|
|
|
$
|
17,098
|
|
|
$
|
33,361
|
|
|
$
|
62,085
|
|
We record revenue in the month production
is delivered to the purchaser, but settlement statements may not be received until 30 to 90 days after the month of production.
As such, we estimate the production delivered and the related pricing. The estimated revenue is recorded within Accounts receivable
– Revenue on the consolidated balance sheets. Any differences between our initial estimates and actuals are recorded in
the month payment is received from the customer. These differences have not historically been material.
NOTE 9 – STOCK-BASED COMPENSATION
PLANS
We have three stock plans, the Carbon
2011 Stock Incentive Plan, the Carbon 2015 Stock Incentive Plan and the Carbon 2019 Long Term Incentive Plan (collectively the
“Carbon Plans”). The Carbon 2019 Long Term Incentive Plan was approved by the Company’s stockholders
in May 2019. The Carbon Plans provide for the issuance of approximately 1.6 million shares of common stock to our officers, directors,
employees or consultants eligible to receive the awards under the Carbon Plans. As of June 30, 2020, there were approximately
254,000 shares of common stock available to be granted under the Carbon Plans.
The Carbon Plans provide for the granting
of incentive stock options, non-qualified stock options, restricted stock awards, performance awards and phantom stock awards,
or a combination of the foregoing, to employees, officers, directors or consultants, provided that only employees may be granted
incentive stock options and directors may only be granted restricted stock awards and phantom stock awards.
The Appalachia Divestiture was a change in
control event; therefore, we accelerated the vesting of substantially all outstanding unvested restricted stock and unvested restricted
performance units. Any remaining unvested restricted performance units were forfeited due to certain performance measures not
achieved.
Restricted Stock
As of June 30, 2020, approximately 847,000
shares of restricted stock have been granted under the terms of the Carbon Plans. Restricted stock awards for employees vest ratably
over a three-year service period or cliff vest at the end of a three-year service period. For non-employee directors, the awards
vest upon the earlier of a change in control of us or the date their membership on the Board of Directors is terminated other
than for cause as defined in the agreement. During the six months ended June 30, 2020, approximately 400,000 restricted stock
units vested.
Compensation costs recognized for restricted
stock grants were approximately $1.7 million and $1.9 million for the three and six months ended June 30, 2020, respectively,
and approximately $224,000 and $403,000 for the three and six months ended June 30, 2019, respectively.
Restricted Performance Units
As of June 30, 2020, approximately 804,000
shares of performance units have been granted under the terms of the Carbon Plans. Performance units represent a contractual right
to receive one share of our common stock subject to the terms and conditions of the agreements, including the achievement of certain
performance measures relative to a defined peer group or the growth of certain performance measures over a defined period of time
as well as, in some cases, continued service requirements.
We account for the performance units granted
during 2018 and 2019 at their fair value determined at the date of grant, which were $9.80 and $10.00 per share, respectively.
The final measurement of compensation cost will be based on the number of performance units that ultimately vest. During the six
months ended June 30, 2020, approximately 251,000 performance units vested and we recognized $1.4 million of compensation costs.
NOTE 10 – EARNINGS (LOSS)
PER COMMON SHARE
Basic earnings (loss) per common share
is computed by dividing the net income (loss) attributable to common stockholders for the period by the basic weighted average
number of common shares outstanding during the period. Diluted earnings (loss) per common share includes potentially issuable
shares consisting primarily of non-vested restricted stock and contingent restricted performance units, using the treasury stock
method. In periods when we report a net loss, all common stock equivalents are excluded from the calculation of diluted weighted
average shares outstanding because they would have an anti-dilutive effect, meaning the loss per share would be reduced.
For the three and six months ended June
30, 2019, approximately 276,000 shares of restricted performance units subject to future contingencies were excluded from the
computation of basic and diluted earnings per share.
The following table sets forth the calculation
of basic and diluted income (loss) per share:
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
(in thousands, except per share amounts)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders, basic and diluted
|
|
|
(48,011
|
)
|
|
|
6,154
|
|
|
|
(38,287
|
)
|
|
|
1,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding, basic
|
|
|
8,118
|
|
|
|
7,815
|
|
|
|
7,964
|
|
|
|
7,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add dilutive effects of non-vested shares of restricted stock and restricted performance units
|
|
|
-
|
|
|
|
342
|
|
|
|
-
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding, diluted
|
|
|
8,118
|
|
|
|
8,157
|
|
|
|
7,964
|
|
|
|
8,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share, basic
|
|
$
|
(5.91
|
)
|
|
$
|
0.79
|
|
|
$
|
(4.81
|
)
|
|
$
|
0.26
|
|
Net (loss) income per common share, diluted
|
|
$
|
(5.91
|
)
|
|
$
|
0.75
|
|
|
$
|
(4.81
|
)
|
|
$
|
0.24
|
|
Series B Convertible Preferred Stock
- Related Party
In May 2018, we raised $5.0 million through
the issuance of 50,000 shares of Series B Convertible Preferred Stock, par value $0.01 per share (“Preferred Stock”)
to Yorktown. The Preferred Stock converts into common stock at the election of the holder or will automatically convert into shares
of our common stock upon completion of a qualifying equity financing event. The number of shares of common stock issuable upon
conversion is dependent upon the price per share of common stock issued in connection with any such qualifying equity financing
but has a floor conversion price equal to $8.00 per share. The conversion ratio at which the Preferred Stock will convert into
common stock is equal to an amount per share of $100 plus all accrued but unpaid dividends payable in respect thereof divided
by the greater of (i) $8.00 per share or (ii) the price that is 15.0% less than the lowest price per share of shares sold to the
public in the next equity financing. Using the floor of $8.00 per share would yield 12.5 shares of common stock for every unit
of Preferred Stock. The conversion price will be proportionately increased or decreased to reflect changes to the outstanding
shares of common stock, such as the result of a combination, reclassification, subdivision, stock split, stock dividend or other
similar transaction involving the common stock. Additionally, after the third anniversary of the issuance of the Preferred Stock,
we have the option to redeem the shares for cash.
The Preferred Stock accrues cash dividends
at a rate of 6.0% of the initial issue price of $100 per share per annum. The holders of the Preferred Stock are entitled to the
same number of votes of common stock that such share of Preferred Stock would represent on an as converted basis. The holders
of the Preferred Stock receive liquidation preference based on the initial issue price of $100 per share plus a preferred return
over common stockholders and the holders of any junior ranking stock. The preferred return was approximately $674,000 as of June
30, 2020 and increased by $150,000 during the six months ended June 30, 2020.
Yorktown waived its right to be paid a
liquidating distribution of approximately $5.6 million in connection with the Appalachia Divestiture until the restricted
payment covenant in the Old Ironsides Notes is waived by Old Ironsides or until the payment in full of the Old Ironsides Notes
or the earlier termination or cancellation of the Old Ironsides Notes, at which point the liquidating distribution will become
immediately due and payable by Carbon out of Carbon’s assets legally available for distribution to its stockholders.
NOTE 11 – INCOME TAXES
We recognize deferred income tax assets
and liabilities for the estimated future tax consequences attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. We have net operating loss carryforwards available
in certain jurisdictions to reduce future taxable income. Future tax benefits from net operating loss carryforwards are recognized
to the extent that realization of these benefits is considered more likely than not. To the extent that available evidence raises
doubt about the realization of a deferred income tax asset, a valuation allowance is established.
At June 30, 2020, the Company has established
a full valuation allowance against the balance of net deferred tax assets.
NOTE 12 – FAIR VALUE MEASUREMENTS
The following table presents our financial
assets and liabilities that were accounted for at fair value on a recurring basis by level:
(in thousands)
|
|
Fair Value Measurements Using
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
-
|
|
|
$
|
9,000
|
|
|
$
|
-
|
|
|
$
|
9,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
-
|
|
|
$
|
7,079
|
|
|
$
|
-
|
|
|
$
|
7,079
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
-
|
|
|
$
|
556
|
|
|
$
|
-
|
|
|
$
|
556
|
|
Commodity Derivative
As of June 30, 2020, our commodity derivative
financial instruments are comprised of oil swaps and costless collars. The fair values of these agreements are determined under
an income valuation technique. The valuation model requires a variety of inputs, including contractual terms, published forward
prices, volatilities for options and discount rates, as appropriate. Our estimates of fair value of derivatives include consideration
of the counterparty’s credit worthiness, our credit worthiness and the time value of money. The consideration of these factors
results in an estimated exit-price for each derivative asset or liability under a marketplace participant’s view. All significant
inputs are observable, either directly or indirectly; therefore, our derivative instruments are included within the Level 2 fair
value hierarchy.
Assets and Liabilities Measured
and Recorded at Fair Value on a Non-Recurring Basis
Certain assets and liabilities are measured
at fair value on a non-recurring basis. These assets and liabilities are not measured at fair value on an ongoing basis; however,
they are subject to fair value adjustments in certain circumstances. The fair value of the following assets and liabilities are
based on unobservable pricing inputs and therefore, are included within the Level 3 fair value hierarchy.
Firm transportation contracts.
We assume, at times, certain firm transportation contracts as part of our acquisitions of oil and natural gas properties. The
fair value of the firm transportation contract obligations was determined based upon the contractual obligations assumed by us
and discounted based upon our effective borrowing rate. Subsequent to the Appalachia Divestiture, we no longer have any firm transportation
contracts.
Debt Discount. The fair value of
the debt discount from the 1,425 and 585 additional Class A Units issued in connection with the Subordinated Notes and 2018 Subordinated
Notes was $1.3 million and $490,000, respectively. The debt discount was based on the relative fair value of Class A Units. Class
A Units were issued contemporaneously at $1,000 per Class A Unit.
Asset Retirement Obligations. The
fair value of our asset retirement obligation liability is recorded in the period in which it is incurred or assumed by taking
into account the cost of abandoning oil and gas wells ranging from $20,000 to $45,000, which is based on our historical experience
and industry expectations for similar work; the estimated timing of reclamation ranging from one to 75 years based on estimates
from reserve engineers; an inflation rate between 1.52% to 2.79%; and a credit adjusted risk-free rate between 3.28% to 8.27%,
which takes into account our credit risk and the time value of money.
NOTE 13 – COMMODITY DERIVATIVES
We historically use commodity-based derivative
contracts to manage exposures to commodity price on a portion of our oil and natural gas production. We do not hold or issue derivative
financial instruments for speculative or trading purposes. We also have entered into, on occasion, oil and natural gas physical
delivery contracts to effectively provide commodity price hedges. Because these contracts are not expected to be net cash settled,
they are considered to be normal sales contracts and not derivatives. These contracts are not recorded at fair value in the unaudited
condensed consolidated financial statements.
We have entered into swap and costless
collar derivative agreements to hedge a portion of our oil production through December 2022. Subsequent to the Appalachia Divestiture,
our remaining derivative contracts relate to Carbon California production. As of June 30, 2020, these derivative agreements consisted
of the following:
|
|
Oil Swaps*
|
|
|
Oil Collars*
|
Year
|
|
WTI
Bbl
|
|
|
Weighted
Average
Price (a)
|
|
|
Brent
Bbl
|
|
|
Weighted
Average
Price (b)
|
|
|
Brent
Bbl
|
|
|
Weighted
Average
Price (b)
|
2020
|
|
|
41,867
|
|
|
$
|
50.12
|
|
|
|
123,630
|
|
|
$
|
64.22
|
|
|
|
30,400
|
|
|
$ 47.00 - $75.00
|
2021
|
|
|
-
|
|
|
$
|
-
|
|
|
|
86,341
|
|
|
$
|
67.12
|
|
|
|
190,000
|
|
|
$ 47.00 - $75.00
|
2022
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
199,900
|
|
|
$ 50.00 - $61.00
|
|
*
|
Includes
100% of Carbon California’s outstanding derivative hedges at June 30, 2020, and
not our proportionate share.
|
|
(a)
|
NYMEX
Light Sweet Crude West Texas Intermediate futures contracts for the respective period.
|
|
(b)
|
Brent
future contracts for the respective period.
|
For our swap instruments, we receive a
fixed price for the hedged commodity and pay a floating price to the counterparty. The fixed-price payment and the floating-price
payment are netted, resulting in a net amount due to or from the counterparty. Costless collars are designed to establish floor
and ceiling prices on anticipated future oil and gas production. The ceiling establishes a maximum price that the Company will
receive for the volumes under contract, while the floor establishes a minimum price.
The following table summarizes the fair
value of the derivatives recorded in the unaudited condensed consolidated balance sheets. These derivative instruments are not
designated as cash flow hedging instruments for accounting purposes:
(in thousands)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Commodity derivative contracts:
|
|
|
|
|
|
|
Commodity derivative asset
|
|
$
|
6,129
|
|
|
$
|
5,915
|
|
Commodity derivative asset – non-current
|
|
$
|
2,871
|
|
|
$
|
1,164
|
|
Commodity derivative liability
|
|
$
|
-
|
|
|
$
|
469
|
|
Commodity derivative liability – non-current
|
|
$
|
-
|
|
|
$
|
87
|
|
The table below summarizes the commodity
settlements and unrealized gains and losses related to the Company’s derivative instruments for the three and six months
ended June 30, 2020 and 2019. Changes in the fair value of commodity derivative contracts are recognized in revenues in the unaudited
condensed consolidated statements of operations and gains and losses are included within the cash flows from operating activities
in the unaudited condensed consolidated statements of cash flows.
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement gain (loss)
|
|
$
|
5,363
|
|
|
$
|
225
|
|
|
$
|
8,441
|
|
|
$
|
(231
|
)
|
Unrealized gain (loss)
|
|
|
(11,010
|
)
|
|
|
8,455
|
|
|
|
5,626
|
|
|
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commodity derivative gain (loss)
|
|
$
|
(5,647
|
)
|
|
$
|
8,680
|
|
|
$
|
14,067
|
|
|
$
|
(627
|
)
|
Commodity derivative settlement gains
and losses are included within the cash flows from operating activities in the unaudited condensed consolidated statements of
cash flows.
We net our derivative instrument fair
value amounts pursuant to ISDA Master Agreements, which provide for the net settlement over the term of the contracts and in the
event of default or termination of the contracts. The following table summarizes the effect of netting arrangements for recognized
derivative assets and liabilities that are subject to master netting arrangements or similar arrangements in the unaudited condensed
consolidated balance sheet as of June 30, 2020:
|
|
|
|
|
|
|
|
Net
|
|
|
|
Gross
|
|
|
|
|
|
Recognized
|
|
|
|
Recognized
|
|
|
Gross
|
|
|
Fair Value
|
|
|
|
Assets/
|
|
|
Amounts
|
|
|
Assets/
|
|
Balance Sheet Classification (in thousands)
|
|
Liabilities
|
|
|
Offset
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative assets:
|
|
|
|
|
|
|
|
|
|
Commodity derivative asset
|
|
$
|
6,196
|
|
|
$
|
(67
|
)
|
|
$
|
6,129
|
|
Commodity derivative asset – non-current
|
|
|
3,674
|
|
|
|
(803
|
)
|
|
|
2,871
|
|
Total derivative assets
|
|
$
|
9,870
|
|
|
$
|
(870
|
)
|
|
$
|
9,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative liability
|
|
$
|
(67
|
)
|
|
$
|
67
|
|
|
$
|
-
|
|
Commodity derivative liability – non-current
|
|
|
(803
|
)
|
|
|
803
|
|
|
|
-
|
|
Total derivative liabilities
|
|
$
|
(870
|
)
|
|
$
|
870
|
|
|
$
|
-
|
|
Due to the volatility of oil and natural
gas prices, the estimated fair value of our derivatives is subject to fluctuations from period to period.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
Delivery Commitments
We had firm transportation contracts to
ensure the transport for certain of our gas production to purchasers. These contracts were assumed in the EXCO Acquisition in
October 2016 and the OIE Membership Acquisition in December 2018 and were reflected in the Company’s unaudited condensed
consolidated balance sheet. The remaining volumes and related demand charges for the remaining term of these contracts were assumed
by DGOC as of the closing of the Appalachia Divestiture.
Natural gas processing agreement
We entered into an initial five-year gas
processing agreement expiring in 2022 with an option to extend the term of the agreement by another five years. The related demand
charges for volume commitments over the remaining term of the agreement were approximately $1.8 million per year. We paid a processing
fee of $2.50 per Mcf for the term of the agreement, with a minimum annual volume commitment of 720,000 Mcf.
Effective June 1, 2020 we entered into
a revised gas processing agreement expiring July 31, 2022. We will pay a processing fee based on actual midstream expenditures
and processed gas volumes for the prior calendar year. The base fee for calendar year 2020 is $3.50 per Mcf delivered to
the processor. An additional fee, ranging from 5% to 15% of the processing fee, is attributable to the price of the residue gas
sold by the processor. We will receive 100% of the allocated proceeds for the processor’s sale of our residue gas and natural
gas liquids.
Capital Commitments
As of June 30, 2020, we had no capital
commitments.
Litigation
The Company is subject to litigation and
claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the
amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation and claims
are not expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company.
NOTE 15 – SUPPLEMENTAL CASH FLOW DISCLOSURE
Supplemental cash flow disclosures for
the six months ended June 30, 2020 and 2019 are presented below:
|
|
Six Months Ended
June 30,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,445
|
|
|
$
|
4,536
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued liabilities
|
|
$
|
(269
|
)
|
|
$
|
(39
|
)
|
Increase in asset retirement obligations
|
|
$
|
7
|
|
|
$
|
-
|
|
Adjustments to OIE Membership Acquisition purchase price
|
|
$
|
-
|
|
|
$
|
1,317
|
|
|
|
|
|
|
|
|
|
|
NOTE 16 – SUBSEQUENT EVENTS
On August 7, 2020, we obtained the necessary consent that allowed
for the conveyance of certain assets associated with the Appalachia Divestiture that were initially excluded pending receipt of
such consent. As a result, approximately $400,000 in escrowed funds were released to Carbon, and pursuant to the MIPA, within 10
business days DGOC is to deliver to Carbon approximately $1.6 million in additional funds that were allocated to the properties
as part of the MIPA.