Liquidity and Ability to Continue as a Going Concern

12 Months Ended

Dec. 31, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Substantial Doubt about Going Concern [Text Block]

UNIT LIQUIDITY AND ABILITY TO CONTINUE AS A GOING CONCERN

As a result of the sustained commodity price decline and our substantial debt burden, we do not believe that we will be able to satisfy our commitments and debt repayments over the next twelve months. This conclusion is based on the following principal conditions which are explained in further detail below.

•Inability to meet anticipated commitments due to recurring losses, negative working capital and limited access to liquidity.

•A forecasted covenant violation of the Unit credit agreement for the quarter ending June 30, 2020.

•The expected acceleration of the amounts outstanding under the Unit credit agreement from October 18, 2023 to November 16, 2020.

The company has incurred significant losses and is in a negative working capital position at December 31, 2019. Additionally, our cash balance as of December 31, 2019 was $0.6 million and, effective January 17, 2020, the company’s borrowing base under the Unit credit facility was reduced to $200.0 million of which $108.2 million has been borrowed. On March 11, 2020, the Company entered into a Standstill agreement with regards to the Unit credit facility which delays the scheduled borrowing base redetermination date for the facility from April 1, 2020 to April 15, 2020. Once the borrowing base is redetermined, the company anticipates that the borrowing base will be further reduced, potentially below the current amount outstanding under the credit facility. Such a reduction would prevent the company from further accessing the facility. Additionally, under the Standstill agreement, the company is prevented from withdrawing more than an additional $15.0 million between March 11, 2020 and the expiration of the agreement on April 15, 2020, which further reduces the company’s ability to access liquidity during the term of the agreement. Due to our further anticipated losses, negative working capital position and lack of access to liquidity under the credit agreement, we do not anticipate that forecasted cash and available credit capacity will be sufficient to meet our commitments as they come due over the next twelve months.

Additionally, once the amounts outstanding on our 2021 Senior Notes are classified as current on our June 30, 2020 balance sheet, we will be in violation of the current ratio covenant in our credit agreement. If we are unable to cure the covenant violation, renegotiate the terms of the credit agreement or obtain a waiver, the covenant violation would result in all amounts outstanding under the Unit credit agreement becoming due and payable during the third quarter of 2020 (after we file our second quarter Form 10-Q). The covenant violation would also cause a cross-default of the indenture on our 2021 Senior Notes, which would make those notes immediately due and payable. The amounts outstanding as of December 31, 2019 on our

Unit credit agreement and 2021 Senior Notes are $108.2 million and $650.0 million, respectively. If we are unable to avoid the anticipated credit violation or otherwise obtain a waiver, we will be unable to pay these amounts when due.

In addition, the October 18, 2023 scheduled maturity date of the loans under the Unit credit agreement will accelerate to November 16, 2020 to the extent that, on or before that date, all the 2021 Senior Notes are not repurchased, redeemed, or refinanced with indebtedness having a maturity date at least six months following October 18, 2023 (the “Credit Agreement Extension Condition”). On November 5, 2019, the company filed with the SEC a registration statement on Form S-4 (the Registration Statement) to commence an offer to exchange (the Exchange Offer) any and all of the existing 2021 Senior Notes for new notes with terms and conditions that would satisfy the Credit Agreement Extension Condition. However, there can be no assurance that the company will be able to complete the Exchange Offer as contemplated, if at all.

Due to the Credit Agreement Extension Condition, the company's debt associated with the Unit credit agreement is reflected as a current liability in its consolidated balance sheet as of December 31, 2019. The classification as a current liability is based on the uncertainty regarding the company's ability to repay or refinance the 2021 Senior Notes before November 16, 2020. Based on our current forecasted cash flows and cash on hand, we will not be able to pay the outstanding amount of the Unit credit agreement if the maturity is accelerated. Inability to pay the amount outstanding under the credit agreement would cause a covenant violation and also create cross-default with the indenture of the 2021 Senior Notes, which would also become due and payable. If we are unable to pay the balance of the Unit credit agreement upon acceleration, we would be required to file for protection under Chapter 11 of the U.S. Bankruptcy Code (Chapter 11).

Based on our evaluation of the conditions described above, substantial doubt exists about our ability to continue as a going concern. The consolidated financial statements do not reflect any adjustments that might result if we are unable to continue as a going concern.

In order to alleviate the conditions that give rise to substantial doubt about our ability to continue as a going concern, the company is currently undertaking a number of actions, including (i) minimizing capital expenditures, (ii) aggressively managing working capital, (iii) further reducing recurring operating expenses, (iv) exploring potential business transactions, and (v) negotiating with existing debt holders to restructure existing debts. We believe that even after taking these actions, we will not have sufficient liquidity to satisfy our debt service obligations, meet other financial obligations, and comply with our debt covenants. We have engaged financial and legal advisors to, among other things, assist with analyzing various strategic alternatives, to include a potential reorganization under Chapter 11, to address our liquidity and capital structure. However, there can be no assurance that we will be able to restructure our financial obligations on terms acceptable to the company and our creditors, and there can be no assurance that we will generate the necessary liquidity to satisfy these obligations when they come due.