Amplify Energy Corp. quarterly report, Q1 FY2022

Amplify Energy Corp. — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022. The unaudited filing covers Amplify Energy’s oil and natural gas exploration and production business, with assets in Oklahoma, the Rockies, offshore Southern California, East Texas/North Louisiana and the Eagle Ford.

Financial performance and liquidity

Metric	Q1 2022	Q1 2021
Oil and gas sales	$93.9 million	$72.3 million
Total revenues, including other revenues	$111.4 million	$72.5 million
Operating loss	$(46.2) million	$(16.2) million
Net loss	$(48.6) million	$(19.3) million
Basic and diluted loss per share	$(1.27)	$(0.51)
Net cash from operating activities	$9.7 million	$15.6 million
Adjusted EBITDA (non-GAAP)	$24.9 million	$22.9 million

Oil and gas sales rose 30%, while total production fell to 20.4 MBoe/d from 24.7 MBoe/d. Average realized price increased to $51.10/Boe from $32.56/Boe. The filing attributes lower production mainly to the shut-in Beta properties and natural declines.
Q1 2022 other revenues included $17.5 million of loss-of-production-income insurance proceeds related to Beta. Oil and gas sales alone exclude these proceeds.
Commodity derivative loss was $93.4 million, versus $34.6 million in Q1 2021; the 2022 loss included a $62.5 million fair-value decrease and $30.9 million of cash settlements on expired positions. Derivatives are not designated for hedge accounting, so fair-value changes flow through earnings.
Average unit lease operating expense increased to $17.92/Boe from $13.01/Boe; gathering, processing and transportation rose to $4.36/Boe from $2.06/Boe. Management cited higher costs, lower production and a change in the classification of certain Oklahoma gas revenue deductions.
Cash used in investing activities was $7.8 million, including $5.2 million of oil and gas property additions and $2.7 million added to restricted investments. Financing activities used $5.1 million, including a $5.0 million credit-facility repayment. Cash ended the quarter at $15.6 million.
At March 31, 2022, debt was $225.0 million, all under the revolving credit facility, against a $235.0 million borrowing base; the company reported $10.0 million of borrowing availability and compliance with covenants. The facility matures November 2, 2023. The filing reports an April 30 borrowing base of $230.0 million after scheduled reductions and expected the next redetermination in Q2 2022.
Working capital deficit was $84.2 million, driven largely by $103.9 million of current derivative liabilities. Total liabilities were $569.1 million versus assets of $456.1 million; stockholders’ deficit was $113.0 million.

Material changes and management outlook

Compared with Q1 2021, higher commodity prices lifted realized prices and sales revenue, but production declined and operating costs per Boe increased. Net loss widened substantially, primarily reflecting the larger derivative loss.
Management said internally generated cash flow and available credit were expected to support normal operating needs and planned 2022 development activities, subject to commodity prices, production and capital needs. Expected funding sources for the remainder of 2022 included operating cash flow, the revolver, and debt or equity markets. No specific earnings or production guidance is provided in the filing.
Management’s stated hedging objective is to cover approximately 30%–60% of estimated proved-developed-producing production over a one-to-three-year period, although actual coverage may vary. Hedges can limit benefits from rising prices as well as reduce exposure to price declines.
Beta production and pipeline operations remained suspended pending regulatory approvals for permanent repair and restart. The company said it could not assure whether or when Beta operations would resume; no Beta operations were underway at the reporting date.

Risks, contingencies and unusual items

The October 2021 Southern California pipeline incident remains a major uncertainty. The Unified Command ended response and monitoring on February 2, 2022, but investigations and claims continued. As of March 31, the company had incurred $111.2 million in gross costs, including temporary repair, and had received or considered probable $109.0 million of insurance recoveries. It had collected $70.4 million of those recoveries. The company estimated total incident response/remediation and certain legal costs at $100 million–$120 million, excluding several uncertain items, including potential future legal costs, lost Beta revenue, permanent repair and restart costs, and losses not then estimable or considered probable.
The company reported approximately $38.6 million of probable incident-cost insurance receivables and $8.9 million of approved but unpaid loss-of-production-income claims. Coverage remains subject to policy terms, exclusions and deductibles; management cautioned that recoveries may not cover all losses.
A federal criminal indictment alleges a misdemeanor Clean Water Act violation; trial was set for November 1, 2022. Federal and state investigations continued, and the company disclosed an EPA Show Cause Notice concerning possible suspension from future federal contracting. Civil class-action claims and an OPA 90 claims process also remained ongoing. Potential liability from these matters was not estimable in the filing.
Other commitments include minimum-volume fees under Oklahoma and East Texas gas contracts, where the company was not meeting specified minimums. Reported Q1 fees were approximately $0.4 million and $0.5 million, respectively. The contracts end June 2023 and November 2022.
The company had $104.1 million of long-term asset retirement obligations and supported offshore decommissioning obligations with $161.3 million of surety bonds and $0.3 million cash. It reported no material environmental reserves and no material recorded contingent liabilities for other litigation.
Commodity prices, borrowing-base redeterminations, debt covenants and liquidity, insurance recoveries, counterparty performance, and the uncertain timing and costs of Beta’s restart are material risks. Management reported disclosure controls effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Progress and outcome of the borrowing-base redetermination, remaining revolver availability, covenant compliance and the November 2023 facility maturity.
Timing and conditions for pipeline repair approval and Beta restart, including the associated production and cash-flow impact.
Insurance collections versus the approximately $109 million considered probable, and whether incident costs, legal exposure or uncovered claims require additional accruals.
Developments in the federal criminal case, EPA proceeding, state investigations, civil litigation and OPA 90/natural-resource-damage claims.
Production trends, realized prices, derivative settlements and fair-value movements, and the effect of hedges on cash flow and earnings.
Whether operating cash generation can fund planned capital spending while addressing the working capital deficit, debt service and asset retirement obligations.