Amplify Energy Corp. annual report, FY2019

Business context and reporting period

Amplify Energy Corp. filed this Form 10-K for the fiscal year ended December 31, 2019. It is an independent oil and natural gas producer with assets in Oklahoma, the Rockies, offshore Southern California, East Texas/North Louisiana, and South Texas. Fourth-quarter figures below are unaudited.

On August 6, 2019, Midstates Petroleum merged with Legacy Amplify in an all-stock transaction; the companies’ stockholders each held approximately 50% of the combined company. Legacy Amplify was the accounting acquirer, so 2019 results include Midstates only after closing, and comparisons with 2018 are not fully like-for-like. Legacy Amplify’s earlier financial statements also reflect fresh-start accounting after its 2017 emergence from bankruptcy.

Key financial and operating metrics

Metric20192018
Total revenue$275.6 million$340.1 million
Operating income (loss)$(12.0) million$81.5 million
Net income (loss)$(35.2) million$54.6 million
Net cash from operating activities$47.3 million$141.8 million
Adjusted EBITDA, non-GAAP$93.0 million$161.2 million
Average net production25.4 MBoe/d26.6 MBoe/d
Average realized sales price$29.67/Boe$35.06/Boe
Lease operating expense$123.9 million; $13.39/Boe$114.4 million; $11.80/Boe

Calculated operating margin was approximately -4.3% in 2019, versus 24.0% in 2018; net margin was approximately -12.8%, versus 16.1%. These margins are calculated from reported revenue and income figures.

Fourth-quarter 2019 revenue was $77.9 million, operating loss was $23.1 million, and net loss was $27.5 million. The corresponding fourth-quarter 2018 figures were revenue of $75.7 million, operating income of $87.0 million, and net income of $79.2 million; the 2018 results included significant quarter-to-quarter volatility.

At year-end, total assets were $877.5 million, long-term debt was $285.0 million, unrestricted cash was zero, and working capital was a deficit of $8.5 million. The revolving facility borrowing base was $450.0 million, with reported available borrowings of approximately $163.4 million after letters of credit. The facility matures November 2, 2023; the company reported compliance with its covenants at year-end.

2019 capital expenditures were approximately $71.6 million. The company paid $15.9 million in dividends and repurchased approximately $26.2 million of shares during the year. Year-end proved reserves were 163.0 MMBoe, 80% proved developed; the SEC standardized measure was $916.6 million and is not presented as market value.

Material changes versus the prior comparable period

  • Revenue declined about 19% year over year. Average production fell about 4.5%, while realized price per Boe fell about 15%; the company attributed production changes primarily to reduced drilling, partly offset by the merger.
  • Oil and natural gas sales declined to $274.6 million from $339.8 million. Oil revenue was $192.9 million, NGL revenue $22.3 million, and natural gas revenue $59.3 million.
  • Lease operating expense rose about $9.5 million, with per-Boe cost increasing from $11.80 to $13.39, primarily due to workover activity and lower production. Gathering, processing and transportation expense fell to $18.5 million from $23.2 million.
  • General and administrative expense increased to $55.3 million from $43.1 million, including $17.3 million of acquisition-related expense and $7.3 million of severance payments in 2019. The company described merger acquisition expense as non-recurring.
  • Proved reserves increased from 140.2 MMBoe to 163.0 MMBoe, largely from 69.7 MMBoe acquired in the merger, offset by production and downward revisions. The company cited a 25.9 MMBoe downward price revision and a 12.1 MMBoe downward revision based on well performance and anticipated maintenance costs.
  • The fall 2019 borrowing-base redetermination reduced the borrowing base from $530 million to $450 million. Net cash from operations also decreased materially from 2018.

Outlook, commentary, risks and unusual items

  • Management expected 2020 capital expenditures of approximately $40 million to $52 million, funded primarily from internally generated cash flow. It said it would review spending during the year in light of commodity prices and other factors.
  • The company planned to hedge approximately 25%–50% of estimated proved-developed-producing production over a one-to-three-year period, while noting hedges can limit gains when prices rise. Year-end hedge positions included 2020 oil swaps at a weighted-average $57.28/Bbl and natural gas swaps at $2.53/MMBtu, alongside collars and basis swaps.
  • Key risks include commodity-price volatility, reserve-based borrowing-base reductions, covenant compliance and debt service, production decline and reserve replacement, operating and offshore hazards, environmental regulation, water disposal and induced seismicity, and dependence on major customers and third-party infrastructure.
  • Three customers accounted for at least 10% of 2019 revenue: Phillips 66 (27%), Sinclair Oil & Gas (21%), and BP America Production Company (13%).
  • Unusual items included a $2.2 million impairment of unproved Oklahoma leasehold costs, a $4.2 million loss related to vacating the Midstates corporate office, and $6.7 million of net losses on commodity derivatives. The filing reported no material pending litigation and no environmental reserves at year-end.
  • The company reported an Oklahoma NGL minimum-volume shortfall beginning in June 2019: fees were $0.7 million for June–December, with an estimated 2020 fee of $0.1 million per month. It also disclosed $65.7 million of asset-retirement obligations, primarily associated with plugging and abandonment.
  • Richard P. Smiley, Senior Vice President, Operations, notified the company of his intent to resign on January 30, 2020 and planned to assist with an orderly transition; the filing stated the departure was not due to disagreement.

Most important facts for investors to verify

  • Whether the company can sustain operating cash flow and fund the 2020 capital program while unrestricted cash is zero and working capital is negative.
  • The outcome of the spring 2020 borrowing-base redetermination, remaining facility availability, and continued covenant compliance.
  • How much production and cash flow are protected by hedges, including exposure to basis differentials, hedge settlements, and counterparty performance.
  • Whether reserve revisions, decline rates, and development spending support reserve replacement and the reported 163.0 MMBoe reserve base.
  • The costs and timing of offshore decommissioning obligations, and any changes to required collateral or surety support.
  • Whether customer concentration and minimum-volume commitments affect realized prices, sales continuity, or operating costs.