10-Q 1 ampy-10q_20200331.htm 10-Q ampy-10q_20200331.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10–Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File Number: 001-35512

 

Amplify Energy Corp.

(Exact name of registrant as specified in its charter)

 

Delaware

 

82-1326219

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

500 Dallas Street, Suite 1700, Houston, TX

 

77002

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (713) 490-8900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No    

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  

Accelerated filer  

Non-accelerated filer    

Smaller reporting company  

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).    Yes      No  

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes       No

Securities Registered Pursuant to Section 12(b):

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

AMPY

NYSE

 

As of May 1, 2020, the registrant had 37,566,430 outstanding shares of common stock, $0.01 par value outstanding.

 

 

 

 


AMPLIFY ENERGY CORP.

Table of Contents

 

 

 

 

 

Page

 

 

 

 

 

 

 

 

 

 

 

 

Glossary of Oil and Natural Gas Terms

 

1

 

 

Names of Entities

 

4

 

 

Cautionary Note Regarding Forward-Looking Statements

 

5

 

 

PART I—FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

 

8

 

 

Unaudited Condensed Statements of Consolidated Operations for the Three Months Ended March 31, 2020 and 2019

 

9

 

 

Unaudited Condensed Statements of Consolidated Cash Flows for the Three Months Ended March 31, 2020 and 2019

 

10

 

 

Unaudited Condensed Statements of Consolidated Equity for the Three Months Ended March 31, 2020 and 2019

 

11

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

12

 

 

Note 1 – Organization and Basis of Presentation

 

12

 

 

Note 2 – Summary of Significant Accounting Policies

 

13

 

 

Note 3 – Revenue

 

14

 

 

Note 4 – Acquisitions and Divestitures

 

15

 

 

Note 5 – Fair Value Measurements of Financial Instruments

 

15

 

 

Note 6 – Risk Management and Derivative Instruments

 

15

 

 

Note 7 – Asset Retirement Obligations

 

19

 

 

Note 8 – Long-term Debt

 

20

 

 

Note 9 – Equity (Deficit)

 

20

 

 

Note 10 – Earnings per Share

 

21

 

 

Note 11 – Long-Term Incentive Plans

 

22

 

 

Note 12 – Leases

 

24

 

 

Note 13 -Supplemental Disclosures to the Unaudited Condensed Consolidated Balance Sheets and Unaudited Condensed Statements of Consolidated Cash Flows

 

25

 

 

Note 14 – Related Party Transactions

 

26

 

 

Note 15 – Commitments and Contingencies

 

26

 

 

Note 16 – Income Taxes

 

26

 

 

Note 17 – Subsequent Events

 

27

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

Item 4.

 

Controls and Procedures

 

36

 

 

PART II—OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

38

Item 1A.

 

Risk Factors

 

38

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

Item 3.

 

Defaults Upon Senior Securities

 

39

Item 4.

 

Mine Safety Disclosures

 

39

Item 5.

 

Other Information

 

39

Item 6.

 

Exhibits

 

39

 

 

 

Signatures

 

41

 

 

 

i


 

GLOSSARY OF OIL AND NATURAL GAS TERMS

Analogous Reservoir: Analogous reservoirs, as used in resource assessments, have similar rock and fluid properties, reservoir conditions (depth, temperature and pressure) and drive mechanisms, but are typically at a more advanced stage of development than the reservoir of interest and thus may provide concepts to assist in the interpretation of more limited data and estimation of recovery. When used to support proved reserves, analogous reservoir refers to a reservoir that shares all of the following characteristics with the reservoir of interest: (i) the same geological formation (but not necessarily in pressure communication with the reservoir of interest); (ii) the same environment of deposition; (iii) similar geologic structure; and (iv) the same drive mechanism.

Bbl: One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil or other liquid hydrocarbons.

Bbl/d: One Bbl per day.

Bcfe: One billion cubic feet of natural gas equivalent.

Boe: One barrel of oil equivalent, calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Bbl of oil.

BOEM: Bureau of Ocean Energy Management.

Btu: One British thermal unit, the quantity of heat required to raise the temperature of a one-pound mass of water by one degree Fahrenheit.

Development Project: A development project is the means by which petroleum resources are brought to the status of economically producible. As examples, the development of a single reservoir or field, an incremental development in a producing field or the integrated development of a group of several fields and associated facilities with a common ownership may constitute a development project.

Dry Hole or Dry Well: A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production would exceed production expenses and taxes.

Economically Producible: The term economically producible, as it relates to a resource, means a resource which generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation. For this determination, the value of the products that generate revenue are determined at the terminal point of oil and natural gas producing activities.

Exploitation: A development or other project which may target proven or unproven reserves (such as probable or possible reserves), but which generally has a lower risk than that associated with exploration projects.

Field: An area consisting of a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.

Gross Acres or Gross Wells: The total acres or wells, as the case may be, in which we have a working interest.

ICE: Inter-Continental Exchange.

MBbl: One thousand Bbls.  

MBbls/d: One thousand Bbls per day.

MBoe: One thousand barrels of oil equivalent.

MBoe/d: One thousand barrels of oil equivalent per day.

MMBoe: One million barrels of oil equivalent.

Mcf: One thousand cubic feet of natural gas.

Mcf/d: One Mcf per day.

MMBtu: One million Btu.

MMcf: One million cubic feet of natural gas.

MMcfe: One million cubic feet of natural gas equivalent.

MMcfe/d: One MMcfe per day.

Net Production: Production that is owned by us less royalties and production due to others.

NGLs: The combination of ethane, propane, butane and natural gasolines that, when removed from natural gas, become liquid under various levels of higher pressure and lower temperature.

1


 

NYMEX: New York Mercantile Exchange.

Oil: Oil and condensate.

Operator: The individual or company responsible for the exploration and/or production of an oil or natural gas well or lease.

OPIS: Oil Price Information Service.

Plugging and abandonment: Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another stratum or to the surface. Regulations of all states require plugging of abandoned wells.

Probabilistic Estimate: The method of estimation of reserves or resources is called probabilistic when the full range of values that could reasonably occur for each unknown parameter (from the geoscience and engineering data) is used to generate a full range of possible outcomes and their associated probabilities of occurrence.

Proved Developed Reserves: Proved reserves that can be expected to be recovered from existing wells with existing equipment and operating methods.

Proved Reserves: Those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced, or the operator must be reasonably certain that it will commence the project, within a reasonable time. The area of the reservoir considered as proved includes (i) the area identified by drilling and limited by fluid contacts, if any, and (ii) adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or natural gas on the basis of available geoscience and engineering data. In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons, as seen in a well penetration, unless geoscience, engineering or performance data and reliable technology establishes a lower contact with reasonable certainty. Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an associated natural gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty. Reserves which can be produced economically through application of improved recovery techniques (including fluid injection) are included in the proved classification when (i) successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir, or an analogous reservoir or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (ii) the project has been approved for development by all necessary parties and entities, including governmental entities. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price used is the average price during the twelve-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

Realized Price: The cash market price less all expected quality, transportation and demand adjustments.

Reliable Technology: Reliable technology is a grouping of one or more technologies (including computational methods) that has been field tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.

Reserves: Reserves are estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to market and all permits and financing required to implement the project. Reserves should not be assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).

Reservoir: A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reserves.

Resources: Resources are quantities of oil and natural gas estimated to exist in naturally occurring accumulations. A portion of the resources may be estimated to be recoverable and another portion may be considered unrecoverable. Resources include both discovered and undiscovered accumulations.

Working Interest: An interest in an oil and natural gas lease that gives the owner of the interest the right to drill for and produce oil and natural gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations.

2


 

Workover: Operations on a producing well to restore or increase production.

WTI: West Texas Intermediate.

 

3


 

NAMES OF ENTITIES

As used in this Form 10-Q, unless we indicate otherwise:

“Amplify Energy,” “Company,” “we,” “our,” “us” or like terms refers to Amplify Energy Corp. (f/k/a Midstates Petroleum Company, Inc.) individually and collectively with its subsidiaries, as the context requires;

“Legacy Amplify” refers to Amplify Energy Holdings LLC (f/k/a Amplify Energy Corp.), the successor reporting company of Memorial Production Partners LP;

“Midstates” refers to Midstates Petroleum Company, Inc., which, on the effective date of the Merger (as defined below), changed its name to “Amplify Energy Corp.”; and

“OLLC” refers to Amplify Energy Operating LLC, our wholly owned subsidiary through which we operate our properties.

 

 

4


 

CAUTIONARY NOTE REGARDING FORWARD–LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

 

business strategies;

 

acquisition and disposition strategy;

 

cash flows and liquidity;

 

financial strategy;

 

ability to replace the reserves we produce through drilling;

 

drilling locations;

 

oil and natural gas reserves;

 

technology;

 

realized oil, natural gas and NGL prices;

 

production volumes;

 

lease operating expense;

 

gathering, processing, and transportation;

 

general and administrative expense;

 

future operating results;

 

ability to procure drilling and production equipment;

 

ability to procure oil field labor;

 

planned capital expenditures and the availability of capital resources to fund capital expenditures;

 

ability to access capital markets;

 

marketing of oil, natural gas and NGLs;

 

risks relating to transportation and storage capacity constraints;

 

risks relating to production curtailment;

 

a sustained decrease or further decline in the demand for oil and natural gas;

 

acts of God, fires, earthquakes, storms, floods, other adverse weather conditions, war, acts of terrorism, military operations, or national emergency;

 

the occurrence or threat of epidemic or pandemic diseases, such as the recent outbreak of a novel strain of coronavirus (“COVID-19”), or any government response to such occurrence or threat;

 

expectations regarding general economic conditions;

 

competition in the oil and natural gas industry;

 

effectiveness of risk management activities;

 

environmental liabilities;

 

counterparty credit risk;

 

expectations regarding governmental regulation and taxation;

 

expectations regarding developments in oil-producing and natural-gas producing countries; and

 

plans, objectives, expectations and intentions.

5


 

All statements, other than statements of historical fact included in this report, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “would,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “outlook,” “continue,” the negative of such terms or other comparable terminology. These statements address activities, events or developments that we expect or anticipate will or may occur in the future, including things such as projections of results of operations, plans for growth, goals, future capital expenditures, competitive strengths, references to future intentions and other such references. These forward-looking statements involve risks and uncertainties. Important factors that could cause our actual results or financial condition to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following risks and uncertainties:

 

our results of evaluation and implementation of strategic alternatives;

 

risks related to a redetermination of the borrowing base under our senior secured reserve-based revolving credit facility;

 

our ability to access funds on acceptable terms, if at all, because of the terms and conditions governing our indebtedness, including financial covenants;

 

our ability to satisfy debt obligations;

 

volatility in the prices for oil, natural gas, and NGLs, including further or sustained declines in commodity prices;

 

the potential for additional impairments due to continuing or future declines in oil, natural gas and NGL prices;

 

the uncertainty inherent in estimating quantities of oil, natural gas and NGLs reserves;

 

our substantial future capital requirements, which may be subject to limited availability of financing;

 

the uncertainty inherent in the development and production of oil and natural gas;

 

our need to make accretive acquisitions or substantial capital expenditures to maintain our declining asset base;

 

the existence of unanticipated liabilities or problems relating to acquired or divested businesses or properties;

 

potential acquisitions, including our ability to make acquisitions on favorable terms or to integrate acquired properties;

 

the consequences of changes we have made, or may make from time to time in the future, to our capital expenditure budget, including the impact of those changes on our production levels, reserves, results of operations and liquidity;

 

potential shortages of, or increased costs for, drilling and production equipment and supply materials for production, such as CO2;

 

potential difficulties in the marketing of oil and natural gas;

 

changes to the financial condition of counterparties;

 

uncertainties surrounding the success of our secondary and tertiary recovery efforts;

 

competition in the oil and natural gas industry;

 

general political and economic conditions, globally and in the jurisdictions in which we operate;

 

the impact of legislation and governmental regulations, including those related to climate change and hydraulic fracturing;

 

the risk that our hedging strategy may be ineffective or may reduce our income;

 

the cost and availability of insurance as well as operating risks that may not be covered by an effective indemnity or insurance; and

 

actions of third-party co-owners of interests in properties in which we also own an interest.

6


 

The forward-looking statements contained in this report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or that the events or circumstances described in any forward-looking statement will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors described in “Part I—Item 1A. Risk Factors” of Amplify’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2020 (“Amplify Form 10-K”). All forward-looking statements speak only as of the date of this report. We do not intend to update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

7


 

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

AMPLIFY ENERGY CORP.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except outstanding shares)

 

 

March 31,

 

 

December 31,

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

1,894

 

 

$

 

Restricted cash

 

 

 

 

325

 

Accounts receivable, net

 

24,654

 

 

 

33,145

 

Short-term derivative instruments

 

78,407

 

 

 

5,879

 

Prepaid expenses and other current assets

 

11,426

 

 

 

13,238

 

Total current assets

 

116,381

 

 

 

52,587

 

Property and equipment, at cost:

 

 

 

 

 

 

 

Oil and natural gas properties, successful efforts method

 

762,149

 

 

 

797,005

 

Support equipment and facilities

 

141,178

 

 

 

140,023

 

Other

 

8,349

 

 

 

8,045

 

Accumulated depreciation, depletion and impairment

 

(562,614

)

 

 

(141,350

)

Property and equipment, net

 

349,062

 

 

 

803,723

 

Long-term derivative instruments

 

27,455

 

 

 

6,364

 

Restricted investments

 

4,622

 

 

 

4,622

 

Operating lease - long term right-of-use asset

 

4,076

 

 

 

4,406

 

Other long-term assets

 

5,529

 

 

 

5,837

 

Total assets

$

507,125

 

 

$

877,539

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

3,947

 

 

$

8,310

 

Revenues payable

 

27,121

 

 

 

29,167

 

Accrued liabilities (see Note 13)

 

23,900

 

 

 

23,358

 

Short-term derivative instruments

 

690

 

 

 

253

 

Total current liabilities

 

55,658

 

 

 

61,088

 

Long-term debt (see Note 8)

 

290,000

 

 

 

285,000

 

Asset retirement obligations

 

91,979

 

 

 

90,466

 

Long-term derivative instruments

 

1,913

 

 

 

305

 

Operating lease liability

 

1,901

 

 

 

2,720

 

Other long-term liabilities

 

3,578

 

 

 

3,753

 

Total liabilities

 

445,029

 

 

 

443,332

 

Commitments and contingencies (see Note 15)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 50,000,000 shares authorized; no shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

 

 

 

Warrants, 9,153,522 warrants issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

4,790

 

 

 

4,790

 

Common stock, $0.01 par value: 250,000,000 shares authorized; 37,568,164 and 37,566,540 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

209

 

 

 

209

 

Additional paid-in capital

 

423,273

 

 

 

424,399

 

Accumulated earnings

 

(366,176

)

 

 

4,809

 

Total stockholders' equity

 

62,096

 

 

 

434,207

 

Total liabilities and equity

$

507,125

 

 

$

877,539

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

8


 

AMPLIFY ENERGY CORP.

UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS

(In thousands, except per share amounts)

 

 

For the Three Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

Oil and natural gas sales

$

57,787

 

 

$

65,067

 

Other revenues

 

349

 

 

 

88

 

Total revenues

 

58,136

 

 

 

65,155

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Lease operating expense

 

35,723

 

 

 

28,910

 

Gathering, processing and transportation

 

5,053

 

 

 

4,657

 

Exploration

 

16

 

 

 

15

 

Taxes other than income

 

3,986

 

 

 

4,409

 

Depreciation, depletion and amortization

 

15,556

 

 

 

11,166

 

Impairment expense

 

455,031

 

 

 

 

General and administrative expense

 

8,353

 

 

 

9,308

 

Accretion of asset retirement obligations

 

1,513

 

 

 

1,311

 

(Gain) loss on commodity derivative instruments

 

(107,713

)

 

 

32,487

 

Other, net

 

 

 

 

143

 

Total costs and expenses

 

417,518

 

 

 

92,406

 

Operating loss

 

(359,382

)

 

 

(27,251

)

Other income (expense):

 

 

 

 

 

 

 

Interest expense, net

 

(7,647

)

 

 

(4,089

)

Other income (expense)

 

16

 

 

 

 

Total other income (expense)

 

(7,631

)

 

 

(4,089

)

Loss before reorganization items, net and income taxes

 

(367,013

)

 

 

(31,340

)

Reorganization items, net

 

(186

)

 

 

(187

)

Income tax benefit (expense)

 

 

 

 

50

 

Net loss

 

(367,199

)

 

 

(31,477

)

Net (income) loss allocated to participating restricted stockholders

 

 

 

 

 

Net loss attributable to common stockholders

$

(367,199

)

 

$

(31,477

)

 

 

 

 

 

 

 

 

Earnings per share: (See Note 10)

 

 

 

 

 

 

 

Basic and diluted earnings per share

$

(9.77

)

 

$

(1.42

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic and diluted

 

37,568

 

 

 

22,179

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

9


 

AMPLIFY ENERGY CORP.

UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(In thousands)

 

 

For the Three Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(367,199

)

 

$

(31,477

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

15,556

 

 

 

11,166

 

Impairment expense

 

455,031

 

 

 

 

(Gain) loss on derivative instruments

 

(104,096

)

 

 

32,393

 

Cash settlements (paid) received on expired derivative instruments

 

12,522

 

 

 

(1,277

)

Bad debt expense

 

110

 

 

 

101

 

Amortization and write-off of deferred financing costs

 

309

 

 

 

308

 

Accretion of asset retirement obligations

 

1,513

 

 

 

1,311

 

Share-based compensation (see Note 11)

 

(1,112

)

 

 

1,443

 

Settlement of asset retirement obligations

 

 

 

 

(162

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

8,381

 

 

 

4,326

 

Prepaid expenses and other assets

 

(349

)

 

 

(6,856

)

Payables and accrued liabilities

 

(7,399

)

 

 

(537

)

Other

 

(178

)

 

 

61

 

Net cash provided by operating activities

 

13,089

 

 

 

10,800

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Additions to oil and gas properties

 

(12,416

)

 

 

(10,370

)

Additions to other property and equipment

 

(304

)

 

 

(62

)

Additions to restricted investments

 

 

 

 

(68

)

Net cash used in investing activities

 

(12,720

)

 

 

(10,500

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Advances on revolving credit facilities

 

25,000

 

 

 

 

Payments on revolving credit facilities

 

(20,000

)

 

 

(24,000

)

Deferred financing costs

 

 

 

 

(101

)

Dividends to stockholders

 

(3,786

)

 

 

 

Common stock repurchased and retired under the share repurchase program

 

 

 

 

(920

)

Costs incurred in conjunction with tender offer

 

 

 

 

(107

)

Restricted units returned to plan

 

(14

)

 

 

 

Net cash provided by (used in) financing activities

 

1,200

 

 

 

(25,128

)

Net change in cash, cash equivalents and restricted cash

 

1,569

 

 

 

(24,828

)

Cash, cash equivalents and restricted cash, beginning of period

 

325

 

 

 

50,029

 

Cash, cash equivalents and restricted cash, end of period

$

1,894

 

 

$

25,201

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

10


 

AMPLIFY ENERGY CORP.

UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED EQUITY

(In thousands)

 

 

Stockholders' Equity

 

 

 

 

 

 

Common Stock

 

 

Warrants

 

 

Additional

Paid-in Capital

 

 

Accumulated

Earnings

(Deficit)

 

 

Total

 

Balance at December 31, 2019

$

209

 

 

$

4,790

 

 

$

424,399

 

 

$

4,809

 

 

$

434,207

 

Net loss

 

 

 

 

 

 

 

 

 

 

(367,199

)

 

 

(367,199

)

Share-based compensation expense

 

 

 

 

 

 

 

(1,112

)

 

 

 

 

 

(1,112

)

Restricted shares repurchased

 

 

 

 

 

 

 

(14

)

 

 

 

 

 

(14

)

Dividends

 

 

 

 

 

 

 

 

 

 

(3,786

)

 

 

(3,786

)

Balance at March 31, 2020

$

209

 

 

$

4,790

 

 

$

423,273

 

 

$

(366,176

)

 

$

62,096

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

Common Stock

 

 

Warrants

 

 

Additional

Paid-in Capital

 

 

Accumulated

Earnings

(Deficit)

 

 

Total

 

Balance at December 31, 2018

$

3

 

 

$

4,788

 

 

$

355,872

 

 

$

55,895

 

 

$

416,558

 

Net loss

 

 

 

 

 

 

 

 

 

 

(31,477

)

 

 

(31,477

)

Costs incurred in conjunction with tender offer

 

 

 

 

 

 

 

(107

)

 

 

 

 

 

(107

)

Share-based compensation expense

 

 

 

 

 

 

 

1,443

 

 

 

 

 

 

1,443

 

Common stock repurchased and retired under the share repurchase program

 

 

 

 

 

 

 

(920

)

 

 

 

 

 

(920

)

Balance at March 31, 2019

$

3

 

 

$

4,788

 

 

$

356,288

 

 

$

24,418

 

 

$

385,497

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

11


 

AMPLIFY ENERGY CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and Basis of Presentation

General

On August 6, 2019, Midstates Petroleum Company, Inc., a Delaware corporation (“Midstates”), completed its business combination (the “Merger”) with Amplify Energy Corp. (“Legacy Amplify”) in accordance with the terms of that certain Agreement and Plan of Merger, dated May 5, 2019 (the “Merger Agreement”), by and among Midstates, Legacy Amplify and Midstates Holdings, Inc., a Delaware corporation and direct, wholly owned subsidiary of Midstates (“Merger Sub”). Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into Legacy Amplify, with Legacy Amplify surviving the Merger as a wholly owned subsidiary of Midstates, and immediately following the Merger, Legacy Amplify merged with and into Alpha Mike Holdings LLC, a Delaware limited liability company and wholly owned subsidiary of Midstates (“LLC Sub”), with LLC Sub surviving as a wholly owned subsidiary of Midstates. On the effective date of the Merger, Midstates changed its name to “Amplify Energy Corp.” (the “Company”) and LLC Sub changed its name to “Amplify Energy Holdings LLC.”

For financial reporting purposes, the Merger represented a “reverse merger” and Legacy Amplify was deemed to be the accounting acquirer in the transaction. Legacy Amplify’s historical results of operations will replace Midstates’ historical results of operations for all periods prior to the Merger and, for all periods following the Merger, the Company’s financial statements will reflect the results of operations of the combined company. Accordingly, the financial statements for the Company included in this Quarterly Report on Form 10-Q for periods prior to the Merger are not the same as Midstates prior reported filings with the SEC, which were derived from the operations of Midstates. As a result, period-to-period comparisons of our operating results may not be meaningful. The results of any one quarter should not be relied upon as an indication of future performance.

When referring to Legacy Amplify, the intent is to refer to Amplify Energy Corp. prior to the effective date of the Merger, and its consolidated subsidiaries as a whole or on an individual basis, depending on the context in which the statements are made.

We operate in one reportable segment engaged in the acquisition, development, exploitation and production of oil and natural gas properties. Our management evaluates performance based on one reportable business segment as the economic environments are not different within the operation of our oil and natural gas properties. Our assets consist primarily of producing oil and natural gas properties and are located in Oklahoma, the Rockies, federal waters offshore Southern California, East Texas / North Louisiana and South Texas. Most of our oil and natural gas properties are located in large, mature oil and natural gas reservoirs. The Company’s properties consist primarily of operated and non-operated working interests in producing and undeveloped leasehold acreage and working interests in identified producing wells.

Basis of Presentation

Our Unaudited Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and guidelines of the SEC. The results reported in these Unaudited Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. In our opinion, the accompanying Unaudited Condensed Consolidated Financial Statements include all adjustments of a normal recurring nature necessary for fair presentation. Although we believe the disclosures in these financial statements are adequate, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC.

The Unaudited Condensed Consolidated Financial Statements have been prepared as if the Company is a going concern and reflect the application of Accounting Standards Codification 852 “Reorganizations” (“ASC 852”). ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that were realized or incurred in the bankruptcy proceedings are recorded in “reorganization items, net” on the Company’s Unaudited Condensed Statements of Consolidated Operations.

All intercompany transactions and balances have been eliminated in preparation of our consolidated financial statements.

Risk and Uncertainties

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States. The spread of COVID-19 has caused significant volatility in U.S. and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and, as such, the Company is unable to determine the extent of the impact caused by the COVID-19 pandemic to the Company’s operations.

12


AMPLIFY ENERGY CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The pandemic has lowered the demand for oil and natural gas which has led to low commodity prices. The reductions in commodity prices has resulted in lower levels of cash flow from operating activities. In addition, the borrowing base under our Revolving Credit Facility (as defined below) is subject to redetermination on at least a semi-annual basis primarily based on an engineering report with respect to our estimated oil, NGL and natural gas reserves which will take into account the prevailing oil, NGL and natural gas prices at such time, as adjusted for the impact of our commodity derivative contracts. Continued low commodity prices will likely adversely impact our redeterminations. The reduction in commodity prices has directly led to an impairment of our oil and natural gas properties. There may be further impairments in future periods if commodity prices continue to decline.

Definitive Merger Agreement

On May 5, 2019, as discussed above, the Company entered into the Merger Agreement pursuant to which Legacy Amplify merged with a subsidiary of Midstates in an all-stock merger-of-equals. Under the terms of the Merger Agreement, Legacy Amplify stockholders received 0.933 shares of newly issued Company common stock for each share of Legacy Amplify common stock that they owned. The Merger closed on August 6, 2019.

Use of Estimates

The preparation of the accompanying Unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates include, but are not limited to, oil and natural gas reserves; depreciation, depletion, and amortization of proved oil and natural gas properties; future cash flows from oil and natural gas properties; impairment of long-lived assets; fair value of derivatives; fair value of equity compensation; fair values of assets acquired and liabilities assumed in business combinations and asset retirement obligations.

Note 2. Summary of Significant Accounting Policies

Other than the accounting policies implemented in connection with the adoption of the current expected credit losses, there have been no changes to the Company’s significant accounting policies and estimates as described in the Company’s annual financial statements included in our Annual Report on Form 10-K.

Lease Recognition

In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance regarding the accounting for leases. The FASB retained a dual model, requiring leases to be classified as either direct financing or operating leases. The classification will be based on criteria that are similar to the current lease accounting treatment. The Company is the lessee under various agreements for office space, compressors, equipment, vehicles and surface rentals (right of use assets) that are currently accounted for as operating leases.

The Company applied the revised lease rules for our interim and annual reporting periods starting January 1, 2019 using the modified retrospective approach with a cumulative impact to retained earnings in that period, and including several optional practical expedients relating to leases commenced before the effective date. The practical expedients the Company adopted are: (1) the original correct assessment of a contract containing a lease will be accepted without further review on all existing or expired contracts; (2) the original lease classification as an operating lease will convert as an operating lease under the new guidance; (3) initial direct costs for any existing leases will not be reassessed; (4) existing land easements or right of use agreements will continue under current accounting policy and only new agreements will be evaluated in the future; and (5) short-term leases for twelve months or less will not be evaluated under the guidance.

See Note 12 for additional information regarding the adoption of the leases standard.

Current Expected Credit Losses

In May 2019, the FASB issued an accounting standard update to provide entities with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for certain financial assets upon the adoption. The fair value option election does not apply to held-to-maturity debt securities. The Company adopted the guidance as of January 1, 2020. The Company has evaluated the impact of this guidance and concluded that the current and historical evaluation of estimated credit losses falls within the acceptable guidance.

13


AMPLIFY ENERGY CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The provisions of the standard were interpreted to relate only to the Company’s accounts receivable, net. Trade receivables relate to one common pool, revenue earned on the sale of oil, natural gas and natural gas liquids. The performance obligation is satisfied at a point in time and revenue is recognized and a trade receivable is recorded from the sale when production is delivered to, and title has transferred to, the purchaser. The majority of the Company’s purchasers have been large major companies in the industry with the wherewithal to pay.  

The Company, as operator on most of our wells, also records receivables on billings to our joint interest owners who participate in the operating costs of the wells they have an interest in. Historically an allowance for doubtful accounts has been set up to recognize credit losses on joint interest billing (“JIB”) receivables based upon an aging analysis which is an appropriate method to estimate credit losses under the guidance. The Company will continue to assess the expected credit loss in the future as economic conditions change. Considering the recent drop in commodity prices we believe the majority of our revenue purchasers have the size and financial condition to currently meet their obligations. There could be added risk on the JIB accounts receivable as some wells could become uneconomic, with the revenue not enough to cover operating expenses billed, which could result in additional write-offs. The Company will continue to closely monitor trade receivables. Based upon the analysis performed there was no impact to beginning retained earnings upon the adoption of the guidance.

New Accounting Pronouncements

Income Taxes – Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued an accounting standard update which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. This accounting standards update removes the following exceptions: (i) exception to the incremental approach for intraperiod tax allocation when there is a loss continuing operations and income or a gain from other items; (ii) exception to the requirements to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (iii) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (iv) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in the accounting standards update also improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. The new guidance is effective for fiscal years and interim period within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the impact of this guidance and does not expect the guidance to have a material impact on the Company's financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

Note 3. Revenue

Revenue from contracts with customers

Oil and natural gas revenues are recorded using the sales method. Under this method, revenues are recognized based on actual volumes of oil and natural gas sold to purchasers, regardless of whether the sales are proportionate to our ownership in the property. An asset or a liability is recognized to the extent there is an imbalance in excess of the proportionate share of the remaining recoverable reserves on the underlying properties. No significant imbalances existed at March 31, 2020.

Disaggregation of Revenue

We have identified three material revenue streams in our business: oil, natural gas and NGLs. The following table present our revenues disaggregated by revenue stream.

 

For the Three Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

 

(in thousands)

 

Revenues

 

 

 

 

 

 

 

Oil

$

41,851

 

 

$

40,057

 

NGLs

 

5,122

 

 

 

5,865

 

Natural gas

 

10,814

 

 

 

19,145

 

Oil and natural gas sales

$

57,787

 

 

$

65,067

 

 

Contract Balances

Under our sales contracts, we invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities. Accounts receivable attributable to our revenue contracts with customers was $16.2 million at March 31, 2020 and $31.9 million at December 31, 2019.

14


AMPLIFY ENERGY CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 4. Acquisitions and Divestitures

Acquisition and Divestiture Related Expenses

There were no material acquisition or divestitures during the three months ended March 31, 2020 and 2019, respectively.

Business Combination

Acquisitions qualifying as a business combination are accounted for under the acquisition method of accounting, which requires, among other items, that assets acquired and liabilities assumed be recognized on the condensed consolidated balance sheet at their fair values as of the acquisition date. The fair value measurements of the oil and natural gas properties acquired and asset retirement obligations assumed were derived utilizing an income approach and based, in part, on significant inputs not observable in the market. These inputs represent Level 3 measurements in the fair value hierarchy and include, but are not limited to, estimates of reserves, future operating and development costs, estimated future cash flows and appropriate discount rates. These inputs required significant judgments and estimates at the time of the valuation.

Merger

On May 5, 2019, Midstates, Legacy Amplify and Merger Sub entered into the Merger Agreement pursuant to which, Merger Sub merged with and into Legacy Amplify, with Legacy Amplify surviving the Merger as a wholly owned subsidiary of Midstates. At the effective time of the Merger, each share of Legacy Amplify common stock issued and outstanding immediately prior to the effective time (other than excluded shares) were cancelled and converted into the right to receive 0.933 shares of Midstates common stock, par value $0.01 per share. On August 6, 2019, the effective date of the Merger, Midstates changed its name to “Amplify Energy Corp.”

Unaudited Pro Forma Financials

The following unaudited pro forma financial information for the three months ended March 31, 2019, is based on our historical consolidated financial statements adjusted to reflect as if the Merger had occurred on January 1, 2018. The information below reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including adjustments to conform the classification of expenses in Midstates statements of operations to our classification for similar expenses and the estimated tax impact of pro forma adjustments. The unaudited pro forma financial information is not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the periods presented, nor is it necessarily indicative of future results.

 

 

For the Three Months Ended March 31, 2019

 

(Unaudited) (In thousands, except per unit amounts)

 

 

 

Revenues

$

94,996

 

Net income (loss)

 

(32,035

)

Earnings per share:

 

 

 

Basic

$

(0.73

)

Diluted

$

(0.73

)

 

Note 5. Fair Value Measurements of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk. A three-tier hierarchy has been established that classifies fair value amounts recognized or disclosed in the financial statements. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). All the derivative instruments reflected on the accompanying Unaudited Condensed Consolidated Balance Sheets were considered Level 2.

The carrying values of accounts receivables, accounts payables (including accrued liabilities), restricted investments and amounts outstanding under long-term debt agreements with variable rates included in the accompanying Unaudited Condensed Consolidated Balance Sheets approximated fair value at March 31, 2020 and December 31, 2019. The fair value estimates are based upon observable market data and are classified within Level 2 of the fair value hierarchy. These assets and liabilities are not presented in the following tables.

15


AMPLIFY ENERGY CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair market values of the derivative financial instruments reflected on the accompanying Unaudited Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 were based on estimated forward commodity prices. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement in its entirety. The significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

The following table presents the gross derivative assets and liabilities that are measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019 for each of the fair value hierarchy levels:

 

 

Fair Value Measurements at March 31, 2020 Using

 

 

Quoted Prices in

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

Active Market

 

 

Observable Inputs

 

 

Unobservable Inputs

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Fair Value

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

$

 

 

$

111,512

 

 

$

 

 

$

111,512

 

Interest rate derivatives

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

 

 

$

111,512

 

 

$

 

 

$

111,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

$

 

 

$

4,651

 

 

$

 

 

$

4,651

 

Interest rate derivatives

 

 

 

 

3,602

 

 

 

 

 

 

3,602

 

Total liabilities

$

 

 

$

8,253

 

 

$

 

 

$

8,253

 

 

 

Fair Value Measurements at December 31, 2019 Using

 

 

Quoted Prices in

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

Active Market

 

 

Observable Inputs

 

 

Unobservable Inputs

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Fair Value

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

$

 

 

$

18,509

 

 

$

 

 

$

18,509

 

Interest rate derivatives

 

 

 

 

595

 

 

 

 

 

 

595

 

Total assets

$

 

 

$

19,104

 

 

$

 

 

$

19,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

$

 

 

$

6,861

 

 

$

 

 

$

6,861

 

Interest rate derivatives

 

 

 

 

558

 

 

 

 

 

 

558

 

Total liabilities

$

 

 

$

7,419

 

 

$

 

 

$

7,419

 

 

See Note 6 for additional information regarding our derivative instruments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are reported at fair value on a nonrecurring basis as reflected on the accompanying Unaudited Condensed Consolidated Balance Sheets. The following methods and assumptions are used to estimate the fair values:

 

The fair value of asset retirement obligations (“AROs”) is based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding factors such as the existence of a legal obligation for an ARO; amounts and timing of settlements; the credit-adjusted risk-free rate; and inflation rates. The initial fair value estimates are based on unobservable market data and are classified within Level 3 of the fair value hierarchy. See Note 7 for a summary of changes in AROs.

16


AMPLIFY ENERGY CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Proved oil and natural gas properties are reviewed for impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such properties. The Company uses an income approach based on the discounted cash flow method, whereby the present value of expected future net cash flows are discounted by applying an appropriate discount rate, for purposes of placing a fair value on the assets. The future cash flows are based on management’s estimates for the future. The unobservable inputs used to determine fair value include, but are not limited to, estimates of proved reserves, estimates of probable reserves, future commodity prices, the timing of future production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and natural gas properties (some of which are Level 3 inputs within the fair value hierarchy).

 

For the three months ended March 31, 2020, we recognized $405.7 million of impairment expense on our proved oil and natural gas properties. These impairments related to certain properties located in East Texas, the Rockies and offshore Southern California. The estimated future cash flows expected from these properties were compared to their carrying values and determined to be unrecoverable primarily as a result of declining commodity prices. The impairments were due to a decline in the value of estimated proved reserves based on declining commodity prices.

 

No impairment expense was recognized during the three months ended March 31, 2019.

Note 6. Risk Management and Derivative Instruments

Derivative instruments are utilized to manage exposure to commodity price fluctuations and achieve a more predictable cash flow in connection with natural gas and oil sales from production and borrowing related activities. These instruments limit exposure to declines in prices, but also limit the benefits that would be realized if prices increase.

Certain inherent business risks are associated with commodity derivative contracts, including market risk and credit risk. Market risk is the risk that the price of natural gas or oil will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the counterparty to a contract. It is our policy to enter into derivative contracts, only with creditworthy counterparties, which generally are financial institutions, deemed by management as competent and competitive market makers. Some of the lenders, or certain of their affiliates, under our previous and current credit agreements are counterparties to our derivative contracts. While collateral is generally not required to be posted by counterparties, credit risk associated with derivative instruments is minimized by limiting exposure to any single counterparty and entering into derivative instruments only with creditworthy counterparties that are generally large financial institutions. Additionally, master netting agreements are used to mitigate risk of loss due to default with counterparties on derivative instruments. We have also entered into International Swaps and Derivatives Association Master Agreements (“ISDA Agreements”) with each of our counterparties. The terms of the ISDA Agreements provide us and each of our counterparties with rights of set-off upon the occurrence of defined acts of default by either us or our counterparty to a derivative, whereby the party not in default may set-off all liabilities owed to the defaulting party against all net derivative asset receivables from the defaulting party. Had all counterparties failed completely to perform according to the terms of the existing contracts, we would have had the right to offset $99.1 million against amounts outstanding under our Revolving Credit Facility at March 31, 2020, reducing our maximum credit exposure to approximately $5.7 million, all of which was with one counterparty. See Note 8 for additional information regarding our Revolving Credit Facility.

Commodity Derivatives

We may use a combination of commodity derivatives (e.g., floating-for-fixed swaps, put options, costless collars and three-way collars) to manage exposure to commodity price volatility. We recognize all derivative instruments at fair value.

Subsequent Events. In April 2020, the company monetized a portion of its 2021 crude oil hedges for total cash proceeds of approximately $18.0 million.  

We enter into natural gas derivative contracts that are indexed to NYMEX-Henry Hub. We also enter into oil derivative contracts indexed to NYMEX-WTI. Our NGL derivative contracts are primarily indexed to OPIS Mont Belvieu.

17


AMPLIFY ENERGY CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

At March 31, 2020, we had the following open commodity positions:

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

2020

 

 

2021

 

 

2022

 

Natural Gas Derivative Contracts:

 

 

 

 

 

 

 

 

 

 

 

Fixed price swap contracts:

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (MMBtu)

 

650,000

 

 

 

487,500

 

 

 

300,000

 

Weighted-average fixed price

$

2.54

 

 

$

2.48

 

 

$

2.46

 

 

 

 

 

 

 

 

 

 

 

 

 

Collar contracts:

 

 

 

 

 

 

 

 

 

 

 

Two-way collars

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (MMBtu)

 

420,000

 

 

 

162,500

 

 

 

 

Weighted-average floor price

$

2.60

 

 

$

2.58

 

 

$

 

Weighted-average ceiling price

$

2.88

 

 

$

2.84

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural Gas Basis Swaps:

 

 

 

 

 

 

 

 

 

 

 

PEPL basis swaps:

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (MMBtu)

 

600,000

 

 

 

500,000

 

 

 

 

Weighted-average spread

$

(0.46

)

 

$

(0.40

)

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil Derivative Contracts:

 

 

 

 

 

 

 

 

 

 

 

Fixed price swap contracts:

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (Bbls)

 

209,300

 

 

 

116,250

 

 

 

30,000

 

Weighted-average fixed price

$

57.44

 

 

$

56.05

 

 

$

55.32

 

 

 

 

 

 

 

 

 

 

 

 

 

Collar contracts:

 

 

 

 

 

 

 

 

 

 

 

Two-way collars

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (Bbls)

 

14,300

 

 

 

 

 

 

 

Weighted-average floor price

$

55.00

 

 

$

 

 

$

 

Weighted-average ceiling price

$

62.10

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-way collars

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (Bbls)

 

30,500

&nbs