Amplify Energy Corp. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in millions unless otherwise noted. The August 6, 2019 all-stock merger with Midstates makes year-over-year comparisons imperfect: Legacy Amplify is the accounting acquirer, and 2019 results include Midstates only after closing.
Business context and financial performance
The company acquires, develops and produces oil and natural gas in Oklahoma, the Rockies, offshore Southern California, East Texas/North Louisiana and South Texas.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Oil and gas sales | $72.4 | $85.4 | $197.0 | $264.2 |
| Operating income (loss) | $14.8 | $3.2 | $11.1 | $(5.5) |
| Net income (loss) | $5.2 | $(2.6) | $(7.7) | $(24.6) |
| Adjusted EBITDA (non-GAAP) | $27.9 | $39.7 | $66.0 | $128.8 |
| Operating cash flow | Not presented separately | Not presented separately | $25.9 | $116.6 |
| Capital expenditures for oil and gas properties | Not stated separately | Not stated separately | $63.0 | $46.0 |
Q3 operating margin was approximately 20.3% versus 3.7%; net margin was approximately 7.1% versus (3.0%). These calculated margins reflect derivative fair-value gains and other reported items and are not presented as company-defined measures.
- Q3 average net production increased to 28.8 MBoe/d from 25.4 MBoe/d, primarily due to the merger. Nine-month production declined to 23.8 MBoe/d from 27.5 MBoe/d, reflecting natural well decline, lower drilling activity and the South Texas asset divestiture.
- Average realized price fell to $27.37/Boe in Q3 from $36.56/Boe; the nine-month average was $30.30/Boe versus $35.19/Boe. Lower commodity prices reduced sales despite higher Q3 production.
- Q3 commodity-derivative gains were $28.7 million, versus losses of $21.1 million in Q3 2018. Nine-month derivative results were a $19.2 million gain versus a $67.2 million loss. These include noncash mark-to-market changes and can make earnings volatile.
- Q3 lease operating expense was $33.0 million, or $12.46/Boe, versus $27.5 million, or $11.77/Boe. Nine-month expense was $88.2 million, or $13.56/Boe, versus $84.6 million, or $11.26/Boe.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $7.4 million, down from $49.7 million at December 31, 2018. Working capital was $17.2 million.
- Long-term debt was $278.0 million, compared with $294.0 million at year-end 2018. The reserve-based revolving facility had a $530 million borrowing base, matures November 2023, and had $145.4 million of disclosed available borrowings after letters of credit. The company reported covenant compliance.
- Cash from operations for the first nine months fell to $25.9 million from $116.6 million. Investing activities provided $46.9 million, including the $90 million release from the Beta decommissioning trust and $19.3 million of cash acquired in the merger; oil and gas property additions used $63.0 million.
- Financing activities used $115.1 million, including net revolving-facility repayments, $13.3 million of share repurchases and an $8.2 million dividend. The $90 million trust release was used to reduce revolving-credit borrowings.
Material changes, outlook and risks
- The merger closed August 6 in an all-stock transaction. Legacy Amplify shareholders and Midstates shareholders each held approximately 50% of the combined company after closing. The preliminary purchase-price allocation and acquired asset/liability values remained subject to revision.
- Q3 general and administrative expense rose to $27.0 million from $8.2 million and included $12.8 million of merger-related acquisition costs, which management described as nonrecurring. Nine-month G&A included $16.7 million of acquisition costs.
- A $4.2 million loss was recorded for the Midstates corporate office lease; the office was expected to be vacated by mid-November 2019. The company accrued rent and related costs given excess local sublease space.
- Management expected operating cash flow and available revolver capacity to fund remaining-2019 needs; it did not provide specific production, earnings or capital-spending guidance in the supplied filing text. Its stated hedging objective was generally to cover 25%–50% of estimated proved-developed-producing output over a one-to-three-year period, subject to market conditions and covenant requirements.
- Key risks include commodity-price volatility, borrowing-base redeterminations, debt covenants and repayment capacity, declining production/reserves, capital access, hedge and counterparty performance, and operational, environmental and decommissioning obligations. The company said it knew of no litigation expected to materially harm its financial position, results or cash flows and had no environmental reserves recorded. Offshore decommissioning support after the trust release consisted of $161.3 million of surety bonds and $0.3 million of cash.
Most important facts for investors to verify
- How much of reported operating performance and cash generation is recurring versus merger-related, derivative mark-to-market, acquisition costs and other unusual items.
- The combined company’s production trends, realized prices, unit operating costs and capital requirements, bearing in mind the limited post-merger period and non-comparable historical results.
- Actual revolver availability, future borrowing-base determinations, covenant headroom and the ability to service debt as commodity prices and reserves change.
- The final merger purchase-price allocation, acquired liabilities and integration costs, including the status and economics of the vacated Midstates office lease.
- Whether the Beta decommissioning obligations remain fully supported and whether the company can sustain discretionary dividends and repurchases alongside capital spending and debt needs.