Amplify Energy Corp. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amplify is an oil and natural gas producer operating in Oklahoma, the Rockies, offshore Southern California, East Texas/North Louisiana, and South Texas. The 2019 merger affects comparability: the merger closed in August 2019, and reported 2019 results do not include the same combined operations as 2020.
Financial performance and liquidity
Amounts are in millions except per-share, production, and per-Boe figures.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $35.2 | $59.5 | $93.3 | $124.7 |
| Net income (loss) | $(41.3) | $18.6 | $(408.5) | $(12.8) |
| Adjusted EBITDA (non-GAAP) | $21.3 | $19.1 | $38.6 | $38.1 |
| Cash provided by operating activities | $29.9 | $22.5 | $43.0 | $33.3 |
| Capital expenditures for oil and gas properties | Not stated by quarter | Not stated by quarter | $26.1 | $33.2 |
- Production and pricing: Average net production was 27.7 MBoe/d in Q2, versus 21.1 MBoe/d a year earlier; for the first half it was 28.7 versus 21.3 MBoe/d. The average realized price fell to $13.83/Boe in Q2 from $30.95, and to $17.74/Boe for the first half from $32.32.
- Costs and margins: Q2 lease operating expense was $27.8 million, or $11.03/Boe, versus $26.3 million, or $13.69/Boe. Gathering, processing and transportation was $4.7 million ($1.86/Boe); general and administrative expense was $6.8 million ($2.68/Boe). The filing does not provide a single overall operating-margin figure.
- Impairments and derivatives: First-half impairment expense was $455.0 million: $405.7 million on proved properties and $49.3 million on unproved properties. Q2 recorded a $19.2 million loss on commodity derivatives, while first-half results included an $88.5 million derivative gain. These fair-value and settlement effects materially affect reported earnings.
- Cash and working capital: Cash was $13.2 million at June 30, versus none reported at December 31, 2019. Working capital was $18.0 million, substantially including $32.2 million of short-term derivative assets.
- Debt and borrowing capacity: Total debt was $285.5 million, comprising $280.0 million drawn under the revolving facility and a $5.5 million PPP loan. The revolving facility borrowing base was cut from $450 million to $285 million; only about $5 million was available to borrow at June 30. The borrowing base was scheduled to decline by $5 million monthly until reaching $260 million effective November 1, 2020. The company reported covenant compliance at quarter-end.
Material changes and management commentary
- Lower commodity prices drove the revenue decline despite higher production, which management attributed principally to the merger. Management also cited natural well decline and reduced drilling activity.
- Management reported cost-saving measures, reduced capital programs, monetization of part of its 2021 oil hedges, PPP proceeds, Beta royalty relief, and suspension of the quarterly dividend as measures to navigate the downturn.
- In June, the company received royalty relief for three offshore California leases, effective July 1, 2020. Rates on two primary leases fell from 25% to 12.5%, and on a third from 16.67% to 8.33%, subject to stated price and duration conditions.
- The $0.10-per-share dividend paid in March was suspended until further notice. Management said it did not anticipate near-term capital-markets activity.
- The CEO retired effective April 3, 2020; CFO Martyn Willsher became interim CEO while retaining the CFO role. The company regained NYSE minimum-share-price compliance on June 2.
Outlook, risks, and contingencies
- No specific production, earnings, or capital-spending guidance is provided. Management expected continued market and commodity-price volatility through the remainder of 2020 and said the pandemic’s full effects were uncertain.
- Key risks include sustained low prices and demand, further borrowing-base reductions, limited liquidity, production curtailments or transportation/storage constraints, additional impairments, and counterparty performance. Commodity hedges reduce downside exposure but also limit gains if prices rise.
- The credit amendment increased required hedging to at least 30%–60% of estimated proved-developed-producing production and requires prepayment when defined cash exceeds $25 million for five consecutive business days.
- Asset retirement obligations were $94.2 million. The company also supported offshore decommissioning obligations with $161.3 million of surety bonds and $0.3 million cash. It reported minimum-volume commitment costs, including $0.6 million for Oklahoma and a $0.8 million East Texas accrual for the first half.
- The company reported no material litigation it believed would adversely affect its financial position, results, or cash flows, and no environmental reserves. It cautioned that outcomes could still affect cash flow when resolved.
Important facts for investors to verify
- Subsequent borrowing-base determinations, scheduled reductions, covenant headroom, and actual liquidity available beyond the reported $5 million of revolver capacity.
- Commodity prices, hedge coverage and settlements, and the effect of hedges on future cash receipts and earnings.
- Whether production, operating costs, and capital spending can support positive cash generation amid low realized prices.
- Potential additional proved- and unproved-property impairments and any changes in reserve estimates.
- PPP loan forgiveness status, royalty-relief benefits and conditions, and minimum-volume commitment costs.