BASIS OF PRESENTATION (Policies)

3 Months Ended

Mar. 31, 2020

Basis of Presentation

Prior to the Redomiciliation, SEAL reported its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). Following the Redomiciliation, the Company retroactively transitioned to accounting principles generally accepted in the United States of America (“GAAP”) and applied GAAP retrospectively for all prior periods presented. The accompanying unaudited financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, certain disclosures required by accounting principles generally accepted in the United States and normally included in Annual Reports on Form 10-K have been omitted. Although management believes that our disclosures in these interim financial statements are adequate, they should be read in conjunction with the financial statements, summary of significant accounting policies, and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2019. Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the year. In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of our consolidated financial position as of March 31, 2020 and our consolidated results of operations for the three months ended March 31, 2020 and 2019.

Going Concern

The accompanying condensed consolidated financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

In March 2020, the prevailing market price for oil prices decreased from an average of approximately $60 per barrel for December 2019 to less than $20 per barrel. As described in Note 3, the Company is required to meet certain financial and non-financial covenants as a condition to its credit facilities. Under the Company’s second lien term loan (“Term Loan”), the Company is required to maintain an Asset Coverage Ratio of not less than 1.5 to 1.0, which is calculated as the value of its Total Proved Reserves (PV 9%) based upon the forward month prices quoted on the NYMEX, adjusted for basis differentials or premiums and transportation costs and to reflect the Company’s commodity hedging agreements then in effect to Total Debt. The value of the Company’s oil and gas reserves, (including “Total Proved Reserves” as described in the Term Loan agreement) is highly sensitive to future commodity prices. The Company regularly enters into commodity derivative contracts to protect the cash flows associated with the Company’s proved developed producing wells and to provide supplemental liquidity to mitigate decreases in revenue due to reductions in commodity prices.

Based on the Company’s historical experience, in periods of sustained low commodity prices, the prevailing market price for oil and gas services has also decreased, including the types of costs included in the Company’s lease operating expenses, drilling costs, completion costs and costs to equip its wells. In March and April 2020, the Company renegotiated pricing with a number of its vendors and entered into contractual arrangements with drilling and completion service providers. As a result, the Company has realized lower drilling and completion costs on recent development relative to the costs incurred in 2019 and the assumed costs in the Company’s year-end reserve report. The Company also changed its field operating procedures in response to the material drop in oil prices which further reduces its cost structure relative to those realized in 2019 and those used in the Company’s year-end reserve report. Additionally, in early May 2020 the Company made reductions of internal costs, including implementing a reduction in force and certain salary reductions.

Commodity hedging that the Company currently has in place, combined with cost reductions are expected to reduce the impact of recent commodity price declines. However, given the recent decline and continued volatility of commodity prices, the Company cannot assert that it is probable that it will comply with the Asset Coverage Ratio and other covenants within the next 12 months following the date of this report. A breach of any covenant in Company’s credit agreements will result in default or cross-default under the Company’s Term Loan and revolving credit facility, after any applicable grace period, which could result in acceleration of the amounts outstanding under the credit facilities by the Company’s lenders.

Additionally, the Company’s credit facilities contain the requirement to deliver audited consolidated financial statements without a going concern or like qualification or exception. The issuance of the Company’s annual report for the year ended December 31, 2019 with the accompanying audit opinion which included a going concern paragraph constituted a default under the senior secured revolving credit facility (“Revolving Facility”) and Term Loan. The Company obtained waivers from its Revolving Facility and Term Loan lenders to waive any potential defaults arising from the failure to deliver audited consolidated financial statements and related reports and certificates by the applicable deadlines, and with respect to inclusion of the going concern explanatory paragraph included in the audit report for the fiscal year ended December 31, 2019. These waivers were effective April 29, 2020, subject to the conditions set forth in the waivers, described in Note 12. In consideration for the waiver with respect to the Term Loan, the Company agreed to amend certain provisions in its Term Loan. The third amendment to the Term Loan was executed on June 24, 2020. In consideration of the waiver with respect to the Revolving Facility, the Company agreed to make corresponding changes to the Revolving Facility. The fifth amendment to the Revolving Facility was executed on June 24, 2020 The amendments are described in Note 3 and Note 12.

Although the Company has obtained these waivers, there is no guarantee that its lenders will agree to waive events of default or potential events of default in the future. In the event that some or all of the amounts outstanding under its credit facilities are accelerated and become immediately due and payable, the Company does not have sufficient liquidity to repay such outstanding amounts. These conditions and events raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.

Management is implementing several initiatives to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, which include the following:

Continuing to renegotiate pricing with a number of its operating expenditure vendors;

Pursuing further changes to its cost structure in response to the material drop in oil prices; and

Pursuing additional costs savings with its vendors and reductions of other internal costs

There can be no assurance that sufficient liquidity can be obtained to meet the outstanding obligations of the Company, if repayment of its credit facilities is accelerated. As a result, and given the continued volatility in commodity prices, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Items subject to such estimates and assumptions include (i) oil and natural gas reserves; (ii) impairment tests of long-lived assets; (iii) depreciation, depletion and amortization; (iv) asset retirement obligations; (v) income taxes; (vi) accrued liabilities; (vii) valuation of derivative instruments; and (ix) accrued revenue and related receivables. Although management believes these estimates are reasonable, actual results could differ from these estimates. Further, these estimates and other factors, including those outside of the Company’s control, such as the impact of lower commodity prices, may have a significant negative impact to the Company’s business, financial condition, results of operations and cash flows.

Customer Concentration Risk

During the three months ended March 31, 2020, the Company had two customers that each accounted for 10% or more of the Company’s total oil, NGL and natural gas sales (67% and 14%, respectively). The Company does not believe the loss of any single purchaser would materially impact the Company’s operating results because oil, natural gas and NGL are commodities for which there are a large number of potential buyers. Because of the adequacy of the infrastructure to transport oil and natural gas in the areas in which the Company operates, if the Company were to lose one or more customers, management believes that it could readily procure substitute or additional customers.

Recently Issued and Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which provides a model, known as the current expected credit loss model (“CECL model”), to estimate the expected lifetime credit loss on financial assets, including trade and other receivables. The Company adopted the ASU effective January 1, 2020, and it did not have a material impact on the Company’s consolidated financial statements as the Company does not have a history of material credit losses. The Company continues to monitor the credit risk from trade receivable counterparties to determine if expected credit losses may become material.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes or modifies current fair value disclosures and adds additional disclosures to improve effectiveness The Company adopted this ASU on January 1, 2020, and the adoption did not have a material impact on the consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 was issued to reduce the complexity of accounting for income taxes including requirements related to (i) the intraperiod tax allocation exception to the incremental approach; (ii) interim-period accounting for enacted changes in tax laws; and (iii) the year-to-date loss limitation in interim-period tax accounting. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not expect adoption of ASU 2019-12 to have a material impact on the Company’s consolidated financial statements or disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Generally, the guidance is to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the options provided by ASU 2020-04 and has not and has not determined the full impact on its consolidated financial statements and related disclosures related to its Term Loan and Revolving Facility.