MONTAGE RESOURCES CORPORATION The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our Annual Report on Form 10-K for
the year ended
Overview of Our Business
We are an independent exploration and production company engaged in the
acquisition and development of oil and natural gas properties in the
As of
Approximately 178,600 of our net acres are located in the
As of
The net assets of our subsidiary,
Proposed Merger with Southwestern Energy Company
On
See Note 2-Basis of Presentation to our Condensed Consolidated Financial Statements for more information regarding the merger.
COVID-19
In
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While we did not incur significant disruptions to operations during the three or
nine months ended
Due to the downward oil price movement and demand destruction from the COVID-19
pandemic, we shut-in low margin production in our
For further information regarding the impact of COVID-19, see Part II, Item 1A of this Quarterly Report.
How We Evaluate Our Operations
In evaluating our current and future financial results, we focus on production
and revenue growth, lease operating expense, general and administrative expense
(both before and after non-cash stock compensation expense and other unusual or
infrequent items) and operating margin per unit of production. In addition to
these metrics, we use Adjusted EBITDAX, a non-GAAP measure, to evaluate our
financial results. We define Adjusted EBITDAX as net income (loss) before
interest expense or interest income; income taxes; write-down of abandoned
leases; impairments; depreciation, depletion, amortization and accretion
("DD&A"); gain (loss) on derivative instruments, net cash receipts (payments) on
settled commodity derivative instruments, and premiums (paid) received on
options that settled during the period; non-cash compensation expense; gain or
loss from sale of interest in gas properties; exploration expenses; and other
unusual or infrequent items. Adjusted EBITDAX is not a measure of net income as
determined by generally accepted accounting principles in
In addition to the operating metrics above, as we grow our reserve base, we will assess our capital spending by calculating our operated proved developed reserves and our operated proved developed finding costs and development costs. We believe that operated proved developed finding and development costs are one of the key measurements of the performance of an oil and gas exploration and production company. We will focus on our operated properties as we control the location, spending and operations associated with drilling these properties. In determining our proved developed finding and development costs, only cash costs incurred in connection with exploration and development will be used in the calculation, while the costs of acquisitions will be excluded because our board approves each material acquisition. In evaluating our proved developed reserve additions, any reserve revisions for changes in commodity prices between years will be excluded from the assessment, but any performance related reserve revisions are included.
We also continually evaluate our rates of return on invested capital in our
wells. We believe the quality of our assets combined with our technical and
managerial expertise can generate attractive rates of return as we develop our
acreage in the Utica Core Area and our
As a result of the closing of the BRMR Merger on
Overview of Results for the Three and Nine Months Ended
During the three months ended
• our average daily net production for the three months ended September 30,
2020 was 602.6 MMcfe per day representing a decrease of 3% over the
comparable period of the prior year;
• commenced drilling 2 gross (1.7 net) operated wells and turned-to-sales 4
gross (2.4 net) operated wells;
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• recognized net loss of ($92.2) million for the three months ended
September 30, 2020 compared to net income of $4.3 million for the three
months ended September 30, 2019 ; and
• realized Adjusted EBITDAX of $51.0 million for the three months ended
September 30, 2020 compared to $83.6 million for three months ended
September 30, 2019 . Adjusted EBITDAX is a non-GAAP financial measure. See
-Non-GAAP Financial Measure for more information.
During the nine months ended
• our average daily net production for the nine months ended September 30,
2020 was 588.4 MMcfe per day representing an increase of 13% over the
comparable period of the prior year;
• commenced drilling 11 gross (8.7 net) operated wells, commenced
completions of 11 gross (8.5 net) operated wells and turned-to-sales 14
gross (11.3 net) operated wells;
• recognized net loss of ($158.2) million for the nine months ended
September 30, 2020 compared to net income of $17.7 million for the nine
months ended September 30, 2019 ; and
• realized Adjusted EBITDAX of $151.2 million for the nine months ended
September 30, 2020 compared to $223.5 million for the nine months ended
September 30, 2019 . Adjusted EBITDAX is a non-GAAP financial measure. See
"-Non-GAAP Financial Measure" for more information.
Prices for various quantities of natural gas, NGLs and oil that we produce
significantly impact our revenues and cash flows. Prices for commodities, such
as hydrocarbons, are inherently volatile. The following table lists the high,
low and average daily and monthly settled NYMEX Henry Hub prices for natural gas
and the high, low and average daily NYMEX WTI prices for oil for the three and
nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
NYMEX Henry Hub High ($/MMBtu) $ 2.57 $ 2.75 $ 2.57 $ 4.25
NYMEX Henry Hub Low ($/MMBtu) 1.33 2.02 1.33 2.02
Average Daily NYMEX Henry Hub ($/MMBtu) 2.00 2.38 1.87 2.62
Average Monthly Settled NYMEX Henry Hub
($/MMBtu) 1.98 2.23 1.88 2.67
NYMEX WTI High ($/Bbl) $ 43.21 $ 63.10 $ 63.27 $ 66.24
NYMEX WTI Low ($/Bbl) 36.87 51.14 (36.98 ) 46.31
Average Daily NYMEX WTI ($/Bbl) 40.89 56.34 38.04 57.04
Historically, commodity prices have been extremely volatile, and we expect this volatility to continue for the foreseeable future. A decline in commodity prices could materially and adversely affect our future business, financial condition, results of operations, liquidity or ability to finance planned capital expenditures. We make price assumptions that are used for planning purposes, and a significant portion of our cash outlays, including rent, salaries and noncancelable capital commitments, are largely fixed in nature. Accordingly, if commodity prices are below the expectations on which these commitments were based, our financial results are likely to be adversely and disproportionately affected because these cash outlays are not variable in the short term and cannot be quickly reduced to respond to unanticipated decreases in commodity prices.
The Company is committed to profitably developing its natural gas, NGLs and oil reserves through an environmentally-responsible and cost-effective operational plan. The Company's revenues, earnings, liquidity and ability to grow are substantially dependent on the prices it receives for, and the Company's ability to develop, its reserves. Despite the continued low price commodity environment, the Company believes the long-term outlook for its business is favorable due to the Company's resource base, low cost structure, risk management strategies, and disciplined investment of capital.
It is difficult to quantify the impact of changes in future commodity prices on
our reported estimated net proved reserves with any degree of certainty because
of the various components and assumptions used in the process. However, to
demonstrate the sensitivity of our estimates of natural gas, NGLs and oil
reserves to changes in commodity prices, we provided an analysis in our Annual
Report on Form 10-K for the year ended
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per MMBtu for natural gas and
We consider future commodity prices when determining our development plan, but
many other factors are also considered. To the extent there is a significant
increase or decrease in commodity prices in the future, we will assess the
impact on our development plan at that time, and we may respond to such changes
by altering our capital budget or our development plan. We plan to fund our
development budget with a portion of the cash on hand as of
Results of Operations
The following discussion pertains to our results of operations, including
analysis of our continuing operations regarding natural gas, NGLs and oil
revenues, production, average product prices and average production costs and
expenses for the three and nine months ended
Three Months Ended
Natural Gas, NGLs and Oil Sales, Production and Realized Price Calculations
The following table illustrates the revenue attributable to our operations for
the three months ended
Three Months Ended
September 30,
2020 2019 Change
Revenues (in thousands)
Natural gas sales $ 72,926 $ 87,841 $ (14,915 )
NGL sales 18,439 20,200 (1,761 )
Oil sales 17,153 44,980 (27,827 )
Brokered natural gas and marketing revenue 6,831 10,228 (3,397 )
Other revenue 56 46 10
Total revenues $ 115,405 $ 163,295 $ (47,890 ) Our production decreased by approximately 1.8 Bcfe for the three months ended
Three Months Ended
September 30,
2020 2019 Change
Production:
Natural gas (MMcf) 45,333.6 43,289.9 2,043.7
NGLs (Mbbls) 1,150.6 1,401.1 (250.5 )
Oil (Mbbls) 533.3 916.2 (382.9 )
Total (MMcfe) 55,437.0 57,193.7 (1,756.7 )
Average daily production volume:
Natural gas (Mcf/d) 492,757 470,542 22,215
NGLs (Bbls/d) 12,507 15,229 (2,722 )
Oil (Bbls/d) 5,797 9,959 (4,162 )
Total (Mcfe/d) 602,576 621,670 (19,094 )
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Our average realized price (including cash settled commodity derivatives and
firm transportation) received during the three months ended
Three Months Ended
September 30,
2020 2019 Change
Average realized price (excluding cash
settled commodity
derivatives and firm transportation)
Natural gas ($/Mcf) $ 1.61 $ 2.03 $ (0.42 )
NGLs ($/Bbl) 16.03 14.42 1.61
Oil ($/Bbl) 32.16 49.09 (16.93 )
Total average prices ($/Mcfe) 1.96 2.68 (0.72 )
Average realized price (including cash
settled commodity
derivatives, excluding firm transportation)
Natural gas ($/Mcf) $ 1.92 $ 2.28 $ (0.36 )
NGLs ($/Bbl) 16.00 14.92 1.08
Oil ($/Bbl) 40.76 49.53 (8.77 )
Total average prices ($/Mcfe) 2.30 2.88 (0.58 )
Average realized price (including firm
transportation,
excluding cash settled commodity
derivatives)
Natural gas ($/Mcf) $ 1.18 $ 1.60 $ (0.42 )
NGLs ($/Bbl) 16.03 14.42 1.61
Oil ($/Bbl) 32.16 49.09 (16.93 )
Total average prices ($/Mcfe) 1.61 2.35 (0.74 )
Average realized price (including cash
settled commodity
derivatives and firm transportation)
Natural gas ($/Mcf) $ 1.50 $ 1.85 $ (0.35 )
NGLs ($/Bbl) 16.00 14.92 1.08
Oil ($/Bbl) 40.76 49.53 (8.77 )
Total average prices ($/Mcfe) 1.95 2.56 (0.61 )
Brokered natural gas and marketing revenue was
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Costs and Expenses
We believe some of our expense fluctuations are most accurately analyzed on a
unit-of-production, or per Mcfe, basis. The following table presents these
expenses for the three months ended
Three Months Ended
September 30,
2020 2019 Change
Operating expenses (in thousands):
Lease operating $ 11,494 $ 11,986 $ (492 )
Transportation, gathering and compression 51,961 57,027 (5,066 )
Production and ad valorem taxes 3,677 1,660 2,017
Depreciation, depletion, amortization and
accretion 53,153 45,456 7,697
General and administrative 12,144 14,580 (2,436 )
Operating expenses per Mcfe:
Lease operating $ 0.21 $ 0.21 $ -
Transportation, gathering and compression 0.93 0.99 (0.06 )
Production and ad valorem taxes 0.07 0.03 0.04
Depreciation, depletion, amortization and
accretion 0.96 0.79 0.17
General and administrative 0.22 0.25 (0.03 )
Lease operating expense was
Transportation, gathering and compression expense was
Three Months Ended
September 30,
2020 2019 ChangeTransportation, gathering and compression (in thousands): Gathering, compression and fuel
$ 16,271 $ 18,346 $ (2,075 ) Processing and fractionation 15,218 17,894 (2,676 ) Liquids transportation and stabilization 1,179 2,320 (1,141 ) Marketing - - - Firm transportation 19,293 18,467 826$ 51,961 $ 57,027 $ (5,066 )
Transportation, gathering and compression per Mcfe: Gathering, compression and fuel
$ 0.29 $ 0.32 $ (0.03 ) Processing and fractionation 0.27 0.31 (0.04 ) Liquids transportation and stabilization 0.02 0.04 (0.02 ) Marketing - - - Firm transportation 0.35 0.32 0.03$ 0.93 $ 0.99 $ (0.06 ) 37
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The decrease of
Production and ad valorem taxes are paid based on market prices and applicable
tax rates. Production and ad valorem taxes were
Depreciation, depletion, amortization and accretion was approximately
General and administrative expense was
Other Operating Expenses
Our total operating expenses also include other expenses that generally do not
trend with production. The following table details our other operating expenses
for the three months ended
Three Months Ended
September 30,
2020 2019 Change
Other operating expenses (in thousands):
Brokered natural gas and marketing expense $ 7,345 $ 10,574 $ (3,229 )
Exploration 11,767 16,621 (4,854 )
Rig termination and standby 303 1,221 (918 )
Gain on sale of assets (62 ) (733 ) 671
Brokered natural gas and marketing expense was
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Exploration expense was
Three Months Ended
September 30,
2020 2019 Change
Exploration expenses (in thousands):
Geological and geophysical $ 11 $ 180 $ (169 )
Delay rentals 669 2,327 (1,658 )
Impairment of unproved properties 10,952 14,114 (3,162 )
Dry hole and other 135 - 135
$ 11,767 $ 16,621 $ (4,854 ) Delay rentals were
Impairment of unproved properties was
Rig termination and standby expense for the three months ended
Gain on sale of assets was
Other Income (Expense)
Gain (loss) on derivative instruments was a loss of
Interest expense, net was
Income tax benefit (expense) was not recognized for the three months ended
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Nine Months Ended
Natural Gas, NGLs and Oil Sales, Production and Realized Price Calculations
The following table illustrates the revenue attributable to our operations for
the nine months ended
Nine Months Ended
September 30,
2020 2019 Change
Revenues (in thousands)
Natural gas sales $ 217,604 $ 264,030 $ (46,426 )
NGL sales 44,949 60,841 (15,892 )
Oil sales 52,918 103,407 (50,489 )
Brokered natural gas and marketing revenue 23,859 31,747 (7,888 )
Other revenue 183 307 (124 )
Total revenues $ 339,513 $ 460,332 $ (120,819 ) Our production grew by approximately 18.6 Bcfe for the nine months ended
Nine Months Ended
September 30,
2020 2019 Change
Production:
Natural gas (MMcf) 131,353.1 109,613.9 21,739.2
NGLs (Mbbls) 3,342.7 3,414.9 (72.2 )
Oil (Mbbls) 1,635.1 2,083.3 (448.2 )
Total (MMcfe) 161,219.9 142,603.1 18,616.8
Average daily production volume:
Natural gas (Mcf/d) 479,391 401,516 77,875
NGLs (Bbls/d) 12,200 12,509 (309 )
Oil (Bbls/d) 5,968 7,631 (1,663 )
Total (Mcfe/d) 588,394 522,356 66,038
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Our average realized price (including cash settled commodity derivatives and
firm transportation) received during the nine months ended
Nine Months Ended
September 30,
2020 2019 Change
Average realized price (excluding cash
settled commodity
derivatives and firm transportation)
Natural gas ($/Mcf) $ 1.66 $ 2.41 $ (0.75 )
NGLs ($/Bbl) 13.45 17.82 (4.37 )
Oil ($/Bbl) 32.36 49.64 (17.28 )
Total average prices ($/Mcfe) 1.96 3.00 (1.04 )
Average realized price (including cash
settled commodity
derivatives, excluding firm transportation)
Natural gas ($/Mcf) $ 2.02 $ 2.49 $ (0.47 )
NGLs ($/Bbl) 13.70 18.19 (4.49 )
Oil ($/Bbl) 40.32 50.15 (9.83 )
Total average prices ($/Mcfe) 2.34 3.08 (0.74 )
Average realized price (including firm
transportation,
excluding cash settled commodity
derivatives)
Natural gas ($/Mcf) $ 1.20 $ 1.94 $ (0.74 )
NGLs ($/Bbl) 13.45 17.82 (4.37 )
Oil ($/Bbl) 32.36 49.64 (17.28 )
Total average prices ($/Mcfe) 1.59 2.64 (1.05 )
Average realized price (including cash
settled commodity
derivatives and firm transportation)
Natural gas ($/Mcf) $ 1.57 $ 2.02 $ (0.45 )
NGLs ($/Bbl) 13.70 18.19 (4.49 )
Oil ($/Bbl) 40.32 50.15 (9.83 )
Total average prices ($/Mcfe) 1.97 2.72 (0.75 )
Brokered natural gas and marketing revenue was
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Costs and Expenses
We believe some of our expenses are most accurately analyzed on a
unit-of-production, or per Mcfe, basis. The following table presents these
expenses for the nine months ended
Nine Months Ended
September 30,
2020 2019 Change
Operating expenses (in thousands)
Lease operating $ 33,436 $ 29,651 $ 3,785 Transportation, gathering and compression 157,472 150,065 7,407 Production and ad valorem taxes
10,146 8,519 1,627
Depreciation, depletion, amortization and
accretion 140,058 113,950 26,108
General and administrative 33,594 57,074 (23,480 )
Operating expenses per Mcfe:
Lease operating $ 0.21 $ 0.21 $ -
Transportation, gathering and compression 0.98 1.04 (0.06 )
Production and ad valorem taxes 0.06 0.06 -
Depreciation, depletion, amortization and
accretion 0.87 0.80 0.07
General and administrative 0.21 0.40 (0.19 )
Lease operating expense was
Transportation, gathering and compression expense was
Nine Months Ended
September 30,
2020 2019 ChangeTransportation, gathering and compression (in thousands): Gathering, compression and fuel
$ 49,255 $ 48,014 $ 1,241 Processing and fractionation 44,175 44,836 (661 ) Liquids transportation and stabilization 4,582 5,347 (765 ) Marketing - 103 (103 ) Firm transportation 59,460 51,765 7,695$ 157,472 $ 150,065 $ 7,407
Transportation, gathering and compression per Mcfe: Gathering, compression and fuel
$ 0.31 $ 0.33 $ (0.02 ) Processing and fractionation 0.27 0.31 (0.04 ) Liquids transportation and stabilization 0.03 0.04 (0.01 ) Marketing - - - Firm transportation 0.37 0.36 0.01$ 0.98 $ 1.04 $ (0.06 )
The increase of
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Production and ad valorem taxes are paid based on market prices and applicable
tax rates. Production and ad valorem taxes were
Depreciation, depletion, amortization and accretion was approximately
General and administrative expense was
Other Operating Expenses
Our total operating expenses also include other expenses that generally do not
trend with production. The following table details our other operating expenses
for the nine months ended
Nine Months Ended
September 30,
2020 2019 Change
Other operating expenses (in thousands):
Brokered natural gas and marketing expense $ 24,349 $ 32,017 $ (7,668 )
Exploration 34,112 48,602 (14,490 )
Rig termination and standby 303 1,221 (918 )
Gain on sale of assets (1,419 ) (731 ) (688 )
Brokered natural gas and marketing expense was
Exploration expense was
Nine Months Ended
September 30,
2020 2019 Change
Exploration expenses (in thousands):
Geological and geophysical $ 186 $ 643 $ (457 )
Delay rentals 3,472 11,639 (8,167 )
Impairment of unproved properties 30,311 36,157 (5,846 )
Dry hole and other 143 163 (20 )
$ 34,112 $ 48,602 $ (14,490 )
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Delay rentals were
Impairment of unproved properties was
Rig termination and standby expense for the nine months ended
Gain on sale of assets was
Other Income (Expense)
Gain (loss) on derivative instruments was a loss of
Interest expense, net was
Income tax benefit (expense) was not recognized for the nine months ended
Cash Flows, Capital Resources and Liquidity
Cash Flows
Cash flows from operations are primarily affected by production volumes and commodity prices. Our cash flows from operations also are impacted by changes in working capital. Short-term liquidity needs are satisfied by our operating cash flow, proceeds from asset sales and borrowings under our revolving credit facility. We sell a large portion of our production at the wellhead under floating price contracts.
Nine Months Ended
Net cash provided by operations in the nine months ended
Net cash used in investing activities in the nine months ended
During the nine months ended
• spent $122.0 million on capital expenditures for oil and natural gas
properties;
• spent $0.3 million on property and equipment; and
• received $1.4 million from asset sales.
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During the nine months ended
• spent $268.8 million on capital expenditures for oil and natural gas
properties;
• received $1.8 million from asset sales; and
• received $12.9 million of cash as part of the assets acquired in the BRMR
Merger.
Net cash provided by financing activities in the nine months ended
During the nine months ended
• borrowed$40.0 million under our revolving credit facility; and • borrowed$1.1 million under other notes payable.
During the nine months ended
• borrowed$95.0 million under our revolving credit facility; • paid$4.2 million in debt issuance costs associated with the amendment and restatement of the Credit Agreement; and • withheld from employees' shares totaling$6.5 million related to the settlement of equity compensation awards.
Liquidity and Capital Resources
Our main sources of liquidity and capital resources are internally generated cash flow from operations, asset sales, borrowings under our revolving credit facility and access to the debt and equity capital markets. We must find new and develop existing reserves to maintain and grow our production and cash flows. We accomplish this primarily through successful drilling programs, which require substantial capital expenditures. We periodically review capital expenditures and adjust our budget based on liquidity, drilling results, leasehold acquisition opportunities, and commodity prices. We believe that our existing cash on hand, operating cash flow and available borrowings under our revolving credit facility will be adequate to meet our capital and operating requirements for 2020.
Future success in growing reserves and production will be highly dependent on capital resources available and the success of finding or acquiring additional reserves. We will continue using net cash on hand, cash flows from operations and borrowings under our revolving credit facility to satisfy near-term financial obligations and liquidity needs, and as necessary, we will seek additional sources of debt or equity to fund these requirements. Longer-term cash flows are subject to a number of variables including the level of production and prices we receive for our production as well as various economic conditions that have historically affected the natural gas and oil business. Our ability to expand our reserve base is, in part, dependent on obtaining sufficient capital through internal cash flow, bank borrowings, asset sales or the issuance of debt or equity securities. There can be no assurance that internal cash flow and other capital sources will provide sufficient funds to maintain capital expenditures that we believe are necessary to offset inherent declines in production and proven reserves. Furthermore, no assurance can be made that additional debt or equity financing will be available to us, or if available, will be available on satisfactory terms.
As of
Credit Arrangements
Long-term debt as of
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Commodity Hedging Activities
Our primary market risk exposure is in the prices we receive for our natural
gas, NGLs and oil production. Realized pricing is primarily driven by the spot
regional market prices applicable to our
To mitigate the potential negative impact on our cash flow caused by changes in natural gas, NGLs and oil prices, we may enter into financial commodity derivative contracts to ensure that we receive minimum prices for a portion of our future natural gas production when management believes that favorable future prices can be secured. We typically hedge the NYMEX Henry Hub price for natural gas and the WTI price for oil.
Our hedging activities are intended to support natural gas, NGLs and oil prices
at targeted levels and to manage our exposure to price fluctuations. The
counterparty is required to make a payment to us for the difference between the
floor price specified in the contract and the settlement price, which is based
on market prices on the settlement date, if the settlement price is below the
floor price. We are required to make a payment to the counterparty for the
difference between the ceiling price and the settlement price if the ceiling
price is below the settlement price. These contracts may include price swaps
whereby we will receive a fixed price for our production and pay a variable
market price to the contract counterparty, zero cost collars that set a floor
and ceiling price for the hedged production, and puts that require us to pay a
premium either up front or at settlement and allow us to receive a fixed price
at our option if the put price is above the market price. Information regarding
our outstanding derivative contracts as of
By using derivative instruments to hedge exposures to changes in commodity
prices, we expose ourselves to the credit risk of our counterparties. Credit
risk is the potential failure of the counterparty to perform under the terms of
the derivative contract. When the fair value of a derivative contract is
positive, the counterparty is expected to owe us, which creates credit risk. To
minimize the credit risk in derivative instruments, it is our policy to enter
into derivative contracts only with counterparties that are creditworthy
financial institutions deemed by management as competent and competitive market
makers. The creditworthiness of our counterparties is subject to periodic
review. We have derivative instruments in place with Bank of Montreal,
Capital Requirements
Our primary needs for cash are for exploration, development and acquisition of
natural gas and oil properties and repayment of principal and interest on
outstanding debt. Our Board of Directors approved a capital budget for 2020 of
between approximately
In addition, we may from time to time seek to pay down, retire or repurchase our outstanding debt using cash or through exchanges of other debt or equity securities, in open market purchases, privately negotiated transactions or otherwise. Such transactions, if any, will depend on available funds, prevailing market conditions, our liquidity requirements, contractual restrictions in the Credit Agreement governing our revolving credit facility and other factors.
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Capitalization
As of
September 30, December 31,
2020 2019
Senior unsecured notes $ 510.5 $ 510.5
Revolving credit facility 170.0 130.0
Stockholders' equity 842.0 997.1
Total capitalization $ 1,522.5 $ 1,637.6
Cash Contractual Obligations
Our contractual obligations include long-term debt, operating leases, drilling
commitments, firm transportation, gas processing, gathering, and compression
services, fractionation services, marketing agreements and asset retirement
obligations. As of
During the nine months ended
Other
We lease acreage that is generally subject to lease expiration if operations are not commenced within a specified period, generally five years. However, based on our evaluation of prospective economics, including the cost of infrastructure to connect production, we have allowed acreage to expire and will allow additional acreage to expire in the future. To date, our expenditures to comply with environmental or safety regulations have not been a significant component of our cost structure and are not expected to be significant in the future. However, new regulations, enforcement policies, claims for damages or other events could result in significant future costs.
Interest Rates
As of
As of
In
Information related to our interest rates is described in Note 8-Debt to our Condensed Consolidated Financial Statements and is incorporated herein by reference.
Off-Balance Sheet Arrangements
We do not currently utilize any off-balance sheet arrangements with unconsolidated entities to enhance our liquidity or capital resource position, or for any other purpose. However, as is customary in the oil and gas industry, we have various contractual work commitments, which are described above under "-Cash Contractual Obligations."
Inflation and Changes in Prices
Our revenues, the value of our assets and our ability to obtain bank loans or additional capital on attractive terms have been and will continue to be affected by changes in natural gas, NGLs and oil prices and the costs to produce our reserves. Natural gas, NGLs and oil prices are subject to significant fluctuations that are beyond our ability to control or predict. Although certain of our costs and expenses are affected by general inflation, it does not normally have a significant effect on our business. We expect our costs in fiscal
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2020 to continue to be a function of supply and demand. Further strengthening of commodity prices could stimulate demand for ancillary services causing service costs to increase. The majority of our service costs is expected to remain flat in 2020 due to previously negotiated drilling, stimulation, and rentals contracts. Along with these contracts, we have secured quality service equipment and tenured personnel to limit our exposure to increasing service costs and improve operational efficiencies.
Non-GAAP Financial Measure
"Adjusted EBITDAX" is a non-GAAP financial measure that we define as net income
(loss) before interest expense or interest income; income taxes; write-down of
abandoned leases; impairments; DD&A; gain (loss) on derivative instruments, net
cash receipts (payments) on settled commodity derivative instruments, and
premiums (paid) received on options that settled during the period; non-cash
compensation expense; gain or loss from sale of interest in gas properties;
exploration expenses; and other unusual or infrequent items set forth in the
table below. Adjusted EBITDAX, as used and defined by us, may not be comparable
to similarly titled measures employed by other companies and is not a measure of
performance calculated in accordance with
• is widely used by investors in the oil and natural gas industry to measure
a company's operating performance without regard to items excluded from
the calculation of such term, which can vary substantially from company to
company depending upon accounting methods and book value of assets,
capital structure and the method by which assets were acquired, among
other factors;
• helps investors to more meaningfully evaluate and compare the results of
our operations from period to period by removing the effect of our capital
structure from our operating structure; and
• is used by our management team for various purposes, including as a
measure of operating performance, in presentations to our Board of
Directors, as a basis for strategic planning and forecasting and by our
lenders pursuant to covenants under the Credit Agreement governing the
revolving credit facility and the indenture governing the senior unsecured
notes.
There are significant limitations to using Adjusted EBITDAX as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss, the lack of comparability of results of operations of different companies and the different methods of calculating Adjusted EBITDAX reported by different companies. The following table represents a reconciliation of our net income (loss) to Adjusted EBITDAX for the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
$ thousands 2020 2019 2020 2019
Net income (loss) $ (92,200 ) $ 4,284 $ (158,227 ) $ 17,698
Depreciation, depletion, amortization
and accretion 53,153 45,456 140,058 113,950
Exploration expense 11,767 16,621 34,112 48,602
Rig termination and standby 303 1,221 303 1,221
Stock-based compensation 961 1,061 3,585 7,614
Gain on sale of assets (62 ) (733 ) (1,419 ) (731 )(Gain) loss on derivative instruments 40,535 (15,812 ) 11,329 (40,620 ) Net cash receipts on settled commodity derivatives
18,806 11,818 61,829 11,072
Interest expense, net 14,402 15,192 44,166 44,140
Other income (2 ) - (19 ) (8 )
Merger-related expenses 2,520 3,291 2,696 21,812
(Income) loss from discontinued
operations(1) 801 1,237 10,092 (1,286 )
Severance - - 2,681 -
Adjusted EBITDAX $ 50,984 $ 83,636 $ 151,186 $ 223,464
(1) We recorded a $6.8 million impairment of proved properties held for sale
during the nine months ended September 30, 2020 . See Note 5-Assets Held for
Sale and Discontinued Operations.
48
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Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our Condensed Consolidated Financial Statements, which have been
prepared in accordance with
Recent Accounting Pronouncements
The Company's critical accounting policies are described in Note 2-Summary of
Significant Accounting Policies of the Consolidated Financial Statements for the
year ended
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