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Financial report summary
?Competition
Noble Energy • Marathon Oil • EOG Resources • SM Energy • Chesapeake Energy Corp. - Ordinary Shares • Lonestar Resources USRisks
- Market conditions for oil, natural gas and NGLs are highly volatile. A sustained decline in prices for these commodities could adversely affect our revenue, cash flows, profitability and growth.
- We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate
- our business, remain in compliance with debt covenants and make payments on our debt.
- If we were to receive a report from our independent registered public accounting firm with our annual audited financial statements containing a going concern or like qualification or exception, this would constitute an event of default under the Credit Agreement, which may result in cross-defaults under our other debt obligations.
- We are evaluating a variety of strategic alternatives to improve our balance sheet and to satisfy our obligations under our debt instruments; however, there is no guarantee that any such alternatives can be effectuated on acceptable terms or at all, and such alternatives could adversely affect our creditors and put our stockholders at significant risk of losing all of their respective investments in us.
- We may need to seek relief under the U.S. Bankruptcy Code to complete a strategic transaction that restructures or refinances our debt and/or preferred stock. If we seek bankruptcy relief, we expect that our common stockholders and preferred stockholders would likely receive little or no consideration for their interests. In addition, unsecured creditors would likely realize recoveries significantly less than the principal amount of their claims and, possibly, no recovery at all.
- Even if we are able to complete a strategic transaction to restructure or refinance our debt and/or preferred stock without seeking relief under the U.S. Bankruptcy Code, we may still be unsuccessful in our operating plan, particularly if oil and natural gas prices do not recover. If we are not successful in executing our current plan for operations, we may need to seek relief under the U.S. Bankruptcy Code notwithstanding the success of the strategic transaction. If we seek bankruptcy relief, we expect that holders of our common stock, preferred stock and, possibly, any unsecured notes that remain outstanding would likely receive little or no consideration.
- The Company’s derivative risk management activities could result in financial losses or reduced income.
- Further declines in commodity prices or unsuccessful exploration efforts may result in write-downs of our asset carrying values.
- The Comanche Acquisition or any other acquisition we may undertake involves risks associated with acquisitions and integration of acquired assets, and the intended benefits of the Comanche Acquisition or any other acquisition we may undertake may not be realized.
- Under the terms of the Catarina lease and Comanche development agreement, we are subject to certain annual drilling and development requirements. Failure to comply with these requirements may result in loss of our interests in the Catarina area that are not held by production or sizable default payments to Anadarko, respectively.
- Our agreements with Blackstone and GSO Capital Partners LP (“GSO”) restrict us from transferring our right, title and interest to the Comanche Assets.
- The JDA contains right of first offer (“ROFO”) and tag-along provisions that may hinder our ability to sell our interest in the Comanche Assets within our desired time frame or on our desired terms, and could delay or prevent an acquisition of us, even if the acquisition would be beneficial to our stockholders.
- The JDA establishes an operating committee for the Comanche Assets that keeps us from having unilateral control over many key variables of operation and development of the Comanche Assets and also provides for certain circumstances under which we could be removed as operator.
- Our estimated reserves and future production rates are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our estimated reserves.
- Our estimated reserves of oil, natural gas and NGLs will naturally decline over time, and we may be unable to develop, find or acquire additional reserves to replace our current and future production at acceptable costs, which would adversely affect our business, financial condition and results of operations.
- Developing and producing oil, natural gas and NGLs are costly and high‑risk activities with many uncertainties that could adversely affect our business, financial condition and results of operations.
- Trading in our common stock on the NYSE was suspended on February 20, 2019, and the NYSE has notified us that our common stock is subject to delisting proceedings. At this time, we expect that the NYSE could file a Form 25 to delist our common stock as early as March 7, 2019. Our common stock is quoted only in the over-the-counter market, which could negatively affect our stock price and liquidity.
- Our stock price has declined significantly, and investors in our common stock could incur substantial losses if our stock price remains depressed.
- Our lack of diversification increases the risk of an investment in us and we are vulnerable to risks associated with operating in one major contiguous area.
- Our acquisition, development and production operations require us to make substantial capital expenditures. Although we expect to fund our capital expenditure budget for 2019 using cash flow from operations and cash on hand, if our cash flow from operations turns out to be less than we currently expect and we are required, but are unable, to fund our remaining capital budget from other sources, such as borrowings under the credit agreements and/or the issuance of debt or equity securities, our failure to obtain the funds that we need could have a material adverse effect on our business, financial condition and results of operations.
- A portion of our oil and natural gas production is subject to commodity derivative contracts and the price we receive for such production is dependent on conditions in the market at the time we enter into such contracts.
- Certain 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 or the leases are extended.
- Our identified drilling location inventories are scheduled out over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling.
- We may be unable to compete effectively with other companies in our industry, which may adversely affect our ability to generate revenue.
- An increase in the differential between the NYMEX or other benchmark prices of oil, natural gas and NGLs and the wellhead price we receive for our production could adversely affect our business, financial condition and results of operations.
- Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured.
- We cannot control activities on properties that we do not operate and are unable to control their proper operation and profitability.
- Our ability to produce oil and natural gas could be impaired if we are unable to acquire adequate supplies of water for our drilling and completion operations or are unable to dispose of the water we use at a reasonable cost and within applicable environmental rules.
- We may lose our rights to the Sanchez Group’s technological database, including its 3D and 2D seismic data, under certain circumstances.
- If we do not purchase additional acreage or make acquisitions on economically acceptable terms, our future growth will be limited.
- Any acquisitions we complete or geographic expansions we undertake will be subject to substantial risks that could have a negative impact on our business, financial condition and results of operations.
- We have extended the term of our net operating loss carryforwards (“NOLs”) Rights Plan, which may discourage the acquisition and sale of large blocks of our common stock and may result in significant dilution for certain stockholders.
- If we were to experience an ownership change, we could be limited in our ability to use NOLs arising prior to the ownership change to offset future taxable income. In addition, our ability to use NOLs to reduce future tax payments may be limited if our taxable income does not reach sufficient levels.
- Despite our current level of indebtedness and recent borrowing base decrease, we may be able to incur substantially more debt. This could exacerbate the risks associated with our indebtedness.
- Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
- Restrictive covenants may adversely affect our operations.
- Because we have no plans to pay dividends on our common stock and have suspended our preferred stock dividend payments, investors must look solely to stock appreciation for a return on their investment in us.
- Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.
- We are subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of conducting our operations. In addition, the third parties on whom we rely for gathering and transportation services are also subject to complex federal, state and other laws that could adversely affect the cost, manner or feasibility of conducting our business.
- Climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for the oil and natural gas that we produce.
- Our operations are subject to environmental and operational safety laws and regulations that may expose us to significant costs and liabilities.
- Derivatives reform legislation and related regulations could have an adverse effect on our ability to hedge risks associated with our business.
- Tax laws and regulations may change over time, including the elimination of federal income tax deductions currently available with respect to oil and natural gas exploration and development.
- We are subject to anti‑takeover provisions in our restated certificate of incorporation and amended and restated bylaws, our Rights Plan and Delaware law that could delay or prevent an acquisition of the Company, even if the acquisition would be beneficial to our stockholders.
- We are subject to legal proceedings and legal compliance risks.
- We may have potential business conflicts of interest with members of the Sanchez Group regarding our past, ongoing and future relationships and the resolution of these conflicts may not be favorable to us.
- Pursuant to the terms of our restated certificate of incorporation, members of the Sanchez Group are not required to offer corporate opportunities to us, and our directors and officers may be permitted to offer certain corporate opportunities to members of the Sanchez Group before us.
- We depend on SOG to provide us with certain services for our business. The services that SOG provides to us may not be sufficient to meet our needs, and we may have difficulty finding replacement services or be required to pay increased costs to replace these services after our agreements with SOG expire.
- Sector cost inflation could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget.
- A portion of our total outstanding shares is held by members of the Sanchez Group and may be sold into the market at any time. In addition, Blackstone and GSO (or their affiliates) received a substantial number of our securities in connection with the Comanche Acquisition which they may also sell into the market at their discretion, subject to certain limitations. Such sale transactions could cause the market price of our common stock to drop significantly, even if our business is doing well.
Management Discussion
- Net Production. Production decreased from 6,969 MBoe for the three months ended September 30, 2018 to 5,856 MBoe for the three months ended September 30, 2019, primarily due to the reduction in our drilling and development activity. The number of gross wells producing at the period end and net production for the periods were as follows:
- For the three months ended September 30, 2019 and 2018, 33% of our production was oil, 35% was NGLs and 32% was natural gas.
- Revenues from Production. Sales revenue for oil, NGLs and natural gas from production totaled $155.3 million and $270.7 million for the three months ended September 30, 2019 and 2018, respectively. Sales revenue for oil, NGLs and natural gas for the three months ended September 30, 2019 decreased $55.2 million, $47.3 million and $12.9 million, respectively, as compared to the three months ended September 30, 2018. These decreases were due to decreases in production, as discussed above, as well as decreases in average realized prices as compared to the comparable period of 2018.