Amplify Energy Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; amounts below are in millions unless stated otherwise. Amplify explores and produces oil and natural gas across several U.S. regions, including offshore Southern California.
Financial performance and position
- Q2 revenue: $121.8, up from $80.4 in Q2 2021. Oil and gas sales were $112.9; other revenue was $8.9, primarily loss-of-production-income (LOPI) insurance proceeds. Q2 net income was $29.2 ($0.73 per share), versus a $35.0 loss ($0.92 per share). Operating income was $32.3, approximately 26.5% of revenue; net income was approximately 24.0% of revenue.
- First-half revenue and earnings: Revenue was $233.2 versus $152.9 in the first half of 2021. Net loss narrowed to $19.4 ($0.51 per share) from $54.4 ($1.43 per share), while operating loss narrowed to $13.9 from $53.5. First-half net margin was approximately negative 8.3%.
- Production and realized prices: Q2 production averaged 20.4 MBoe/d, down from 25.3 MBoe/d; first-half average production was 20.4 MBoe/d, down from 25.0 MBoe/d. Average realized price, excluding derivatives, rose to $60.74/Boe in Q2 and $55.95/Boe for the first half, versus $34.93 and $33.76, respectively, in 2021. Higher commodity prices supported revenue, while the Beta field shutdown and natural declines reduced volumes.
- Costs and derivatives: First-half lease operating expense increased to $66.2 from $57.6; gathering, processing and transportation to $15.3 from $9.6; taxes other than income to $16.2 from $9.7; and G&A to $16.4 from $13.0. First-half commodity derivative losses were $112.0, including $79.5 of cash settlements paid on expired contracts; the 2021 loss was $98.5. Derivatives are not designated for hedge accounting, so fair-value movements affect reported earnings.
- Cash flow: First-half operating cash flow was $30.4, down from $36.4. Investing cash outflow was $16.9, including $12.9 of oil and gas property additions and $4.0 added to restricted investments. Financing cash outflow was $15.6, including net $15.0 of revolving-credit-facility repayments. Cash ended the period at $16.7, versus $18.8 at year-end 2021.
- Debt and liquidity: Revolver borrowings were $215.0, down from $230.0 at year-end, against a $225.0 borrowing base; the company reported about $10.0 of availability and compliance with covenants. The facility matures November 2, 2023. Q2 weighted-average borrowing rate was 4.54%. Working capital was negative $78.1, in part because of $80.0 of current derivative liabilities. Total liabilities were $539.9 and stockholders’ deficit was $83.4.
- Other balance-sheet items: Asset retirement obligations were $106.6. Restricted investments totaled $8.6. The company reported no income tax expense, primarily due to valuation allowances.
- Adjusted EBITDA: $16.3 for Q2, versus $23.8 in Q2 2021; $41.2 for the first half, versus $46.8. This is a non-GAAP measure and should not be viewed as a substitute for GAAP earnings or operating cash flow.
Material changes and management commentary
- Higher realized commodity prices drove the increase in sales revenue, but production volumes declined because Beta remained shut in after the October 2021 pipeline incident, and other assets experienced natural declines.
- The company said higher workover spending, operating costs and production taxes contributed to higher expenses. Some gathering and transportation expense growth reflected a change in marketing natural gas in Oklahoma and associated expense classification.
- A June 2022 credit amendment reaffirmed the $225.0 borrowing base, ended automatic monthly borrowing-base reductions and modified the affirmative hedging covenant. Special Case Royalty Relief for the company’s Beta interest ended June 8, 2022.
- Management stated that operating cash flow and revolver availability, based on its commodity-price expectations, should support normal needs and planned 2022 development activity. It expected remaining-2022 funding primarily from internally generated cash, revolver borrowings and potentially capital markets. It did not provide quantified earnings or production guidance and said it did not anticipate near-term capital-markets activity.
- Capital expenditures were approximately $20.4 for the first half on the MD&A measure, mainly workovers, maintenance and facilities. This differs from the $12.9 cash-flow statement amount for property additions.
Risks, contingencies and unusual items
- Southern California pipeline incident: Beta operations and the pipeline remain shut in pending required regulatory approvals; the filing gives no assurance whether or when operations will restart. The company estimated total incident costs at $110–$130, excluding uncertain items such as lost Beta revenue, future unestimable liabilities, and permanent repair and restart costs. It warned costs could rise materially.
- For the first half, gross incident costs were $18.7; $13.0 was received or expected to be recoverable from insurance, leaving $5.7 recorded as incident loss, primarily legal costs. The company received $35.7 of insurance recoveries in the period and recognized $26.2 of LOPI proceeds. At June 30, insurance receivables were $26.5. Subsequent to quarter-end, approximately $6.2 of additional LOPI proceeds were approved for July 1–August 12.
- Claims under the Oil Pollution Act, a putative class action, federal and state criminal investigations, and other agency proceedings remain unresolved. A federal criminal trial was scheduled for November 1, 2022. Potential liability is not estimable for the civil litigation; outcomes and insurance coverage remain uncertain. An EPA show-cause notice raised possible suspension from future federal contracting.
- The company was not meeting minimum-volume requirements under Oklahoma and East Texas gas contracts, incurring first-half commitment fees of approximately $1.1 under each. The Oklahoma commitment ends June 30, 2023; the East Texas commitment ends November 30, 2022.
- Commodity prices, derivative settlements, reserve-based borrowing-base redeterminations, limited revolver availability, counterparty performance, and the Beta shutdown may materially affect liquidity and results. Management expects commodity prices to remain volatile. The company reported no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Progress and timing of regulatory approvals, pipeline repair and any restart of Beta operations.
- Actual incident costs versus the $110–$130 estimate, remaining insurance recoveries, LOPI approvals and any uncovered claims or penalties.
- Available liquidity and covenant headroom under the $225.0 borrowing base, including effects of future redeterminations and the November 2023 maturity.
- Production, realized prices and hedge settlements, including how the hedge book affects cash generation as contracts expire.
- Operating-cost trends, minimum-volume commitment fees, and the difference between reported cash additions to properties and the broader capital-expenditure figure.