RIVIERA RESOURCES, INC. The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10K for the year endedDecember 31, 2019 . The following discussion contains forward-looking statements based on expectations, estimates and assumptions. Actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, volatility of oil, natural gas and natural gas liquids ("NGL") prices or a prolonged period of low oil, natural gas or NGL prices and the effects of actions by, or disputes among or between, members of theOrganization of Petroleum Exporting Countries and other oil producing nations ("OPEC+"), such asSaudi Arabia , and other oil and natural gas producing countries, such asRussia , with respect to production levels or other matters related to the price of oil, the effects of excess supply of oil and natural gas resulting from the reduced demand caused by the novel coronavirus disease ("COVID-19") global pandemic and the actions by certain oil and natural gas producing countries, market prices for oil, natural gas and NGLs, production volumes, estimates of proved reserves, capital expenditures, the capacity and utilization of midstream facilities, economic and competitive conditions, credit and capital market conditions, regulatory changes and other uncertainties, as well as those factors set forth in "Cautionary Statement Regarding Forward-Looking Statements" below and in Item 1A. "Risk Factors" in this Quarterly Report on Form 10Q and in the Company's Annual Report on Form 10K for the year endedDecember 31, 2019 , and elsewhere in the Annual Report.
The reference to a "Note" herein refers to the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1. "Financial Statements."
Unless otherwise indicated or the context otherwise requires, references herein to the "Company" refer toRiviera Resources, Inc. ("Riviera") and its consolidated subsidiaries. Unless otherwise indicated or the context otherwise requires, references herein to "LINN Energy" refer toLinn Energy, Inc. and its consolidated subsidiaries. In 2016,Linn Energy, LLC , certain of its direct and indirect subsidiaries, andLinnCo, LLC (collectively, the "LINN Debtors") filed Bankruptcy Petitions for relief under Chapter 11 of the Bankruptcy Code. The LINN Debtors emerged from bankruptcy in 2017. See Note 10 for additional details. In 2018, LINN Energy completed the spin-off of Riviera fromLINN Energy.
Riviera is an independent oil and natural gas company quoted for trading on the OTCQX Market under the ticker "RVRA."
Executive Overview
The Company has two reporting segments: upstream and
• Mid-Continent, which includes properties in the Northwest STACK in
northwestern Oklahoma and various other oil and natural gas producing
properties and mineral acreage throughout Oklahoma ; and
•
primarily from the
During the first half of 2020, the Company divested all of its properties located in theUinta Basin andEast Texas operating regions and is pursuing divestiture of its remaining oil and natural gas properties by the end of 2020. During 2019, the Company divested all of its properties located in theHugoton Basin andMichigan /Illinois operating regions. See Note 3 for additional information.The Blue Mountain reporting segment consists of a state of the art cryogenic natural gas processing facility, a network of gathering pipelines and compressors and produced water services and a crude oil gathering system located in the Merge/SCOOP/STACK play, each of which is owned byBlue Mountain Midstream LLC ("Blue Mountain Midstream"), a wholly owned subsidiary of the Company. In addition to the upstream divestiture activity noted above, the Company is working with an investment bank to explore a potential sale or merger of Blue Mountain Midstream.
For the three months ended
• oil, natural gas and NGL sales of approximately
million for the three months ended June 30, 2019 ;
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
• average daily production of approximately 52 MMcfe/d compared to 286 MMcfe/d
for the three months ended
• net loss of approximately
months ended
• noncash impairment charges of approximately
million for the three months ended
• no capital expenditures compared to
• no wells drilled compared to 22 wells drilled (all successful) for the three
months ended
For the six months ended
• oil, natural gas and NGL sales of approximately
million for the six months ended
• average daily production of approximately 62 MMcfe/d compared to 275 MMcfe/d
for the six months ended
• net loss of approximately
for the six months ended
• noncash impairment charges of approximately
million for the six months ended
• capital expenditures of approximately
for the six months ended June 30, 2019 ; and
• 11 wells drilled (all successful) compared to 35 wells drilled (all
successful) for the six months ended June 30, 2019 .
Divestitures - 2020
OnJanuary 15, 2020 , the Company completed the sale of its interest in non-operated properties located in the Drunkards Wash field in theUinta Basin (the "Drunkards Wash Asset Sale"). Cash proceeds from the sale of these properties were approximately$4 million (including a deposit of approximately$450,000 received in 2019), and the Company recorded a net gain of approximately$1 million .
On
On
On
On
Divestitures - Subsequent Events
OnJuly 27, 2020 , the Company signed a definitive agreement to sell its interest in properties located inNorth Louisiana for a contract price of approximately$27 million . The transaction is expected to close in the third quarter of 2020, subject to satisfactory completion of due diligence and the satisfaction of closing conditions. During the three months endedJune 30, 2020 , the Company recorded a noncash impairment charge of approximately$12 million to reduce the carrying value of these assets to fair value. OnAugust 4, 2020 , the Company signed a definitive agreement to sell its interest in properties located in theAnadarko Basin inOklahoma for a contract price of approximately$16 million . The transaction is expected to close in the fourth quarter of 2020, subject to satisfactory completion of due diligence and the satisfaction of closing conditions. 30
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Divestitures - 2019 OnNovember 22, 2019 , the Company completed the sale of its interest in properties located in theHugoton Basin (the "Hugoton Basin Assets Sale"). Cash proceeds from the sale of these properties were approximately$286 million . In connection with theHugoton Basin Assets Sale, the buyer also acquired the Company's interest inMayzure, LLC ("Mayzure"), a wholly owned subsidiary of the Company, which was the counterparty to the volumetric production payment agreements based on helium produced from certain oil and natural gas properties in theHugoton Basin . The Company recognized pre-tax loss of approximately$1 million and pre-tax income of approximately$9 million for the three months and six months endedJune 30, 2019 , respectively, from theHugoton Basin .
On
OnAugust 30, 2019 , the Company completed the sale of its interest in non-core assets located inNorth Louisiana . Cash proceeds from the sale were approximately$2 million and the Company recorded a net gain of approximately$376,000 . OnJuly 3, 2019 , the Company completed the sale of its interest in properties located inMichigan . Cash proceeds from the sale of these properties were approximately$39 million . The Company recorded a noncash impairment charge to reduce the carrying value of these assets to fair value of approximately$18 million . OnMay 31, 2019 , the Company completed the sale of its interest in non-operated properties located in theHugoton Basin inKansas . Cash proceeds from the sale of these properties were approximately$29 million and the Company recorded a net loss of approximately$10 million . OnJanuary 17, 2019 , the Company completed the sale of its interest in properties located in theArkoma Basin inOklahoma (the "Arkoma Assets Sale"). Cash proceeds from the sale of these properties were approximately$64 million (including a deposit of approximately$5 million received in 2018), and the Company recorded a net gain of approximately$28 million .
Impact of Decline in Commodity Prices
The Company and the oil and gas industry has been adversely impacted by recent events, including the initial dramatic increase in output from OPEC+ in the first quarter of 2020 and the destruction of demand resulting from the unprecedented global health and economic crisis sparked by the COVID-19 pandemic. In order to reduce expenses, inApril 2020 , the Board of Directors of the Company made the decision to consolidate the management of Blue Mountain Midstream within the Company's existing executive management team. The Company plans to further reduce expenses by integration of the operations of the two companies wherever practical. The Company incurred severance expenses of approximately$4 million and$5 million for the three months and six months endedJune 30, 2020 , respectively, in connection with these activities.
Impairment of Assets Held for Sale and Long-Lived Assets
During the six months endedJune 30, 2020 , the Company recorded noncash impairment charges of approximately$122 million . Of this, approximately$88 million related to proved and unproved oil and natural gas properties located inOklahoma , approximately$12 million related to properties to be divested located inNorth Louisiana , and approximately$4 million related to divested properties located inEast Texas . In addition, approximately$18 million related to Blue Mountain Midstream's crude oil gathering system assets. The impairment charges were primarily due to a decline in commodity prices and a decline in expected future volumes. See Note 1 for additional information.
2020
For 2020, the Company estimates its total capital expenditures, excluding acquisitions, will be approximately$22 million , including approximately$3 million related to its oil and natural gas capital program and approximately$19 million related to Blue Mountain Midstream. This estimate is under continuous review and subject to ongoing adjustments.
Impact of COVID-19 Pandemic
Certain remote work arrangements implemented by the Company in response to the COVID-19 pandemic have not adversely affected its ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures. However, the COVID-19 pandemic is still evolving and identification of all trends,
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
events and uncertainties, including a possible widespread resurgence in COVID-19 infections in the second half of 2020 without the availability of generally effective therapeutics or a vaccine for the disease, that may impact the Company's financial condition and results of operations are unknown at this time, therefore the Company's results of operations for the three months and six months endedJune 30, 2020 , may not be indicative of its future results. If the pandemic and low commodity price environment continues, it may have a material adverse effect on the Company's operating cash flows, liquidity, and future development plans. Financing Activities Riviera Credit Facility Riviera's credit agreement provides for a senior secured reserve-based revolving loan facility (the "Riviera Credit Facility") with a borrowing base and borrowing commitments of$30 million atJune 30, 2020 . OnJune 1, 2020 , the Company entered into a Fifth Amendment (the "Amendment") to the Riviera Credit Facility. Pursuant to the Amendment, the borrowing base was reduced from$90 million to$30 million and the applicable margin for interest on borrowings was increased by 0.25%. A reduction to the borrowing base, in whole or in part, is expected should the Company close the sale of its interests in properties inNorth Louisiana andOklahoma as currently anticipated. See Note 3. During the three months and six months endedJune 30, 2020 , the Company recorded a finance fee expense of approximately$468,000 related to the write-off of a portion of unamortized deferred financing fees due to the reduction of the Riviera Credit Facility borrowing base.
Blue Mountain Midstream Credit Facility
Blue Mountain Midstream's credit agreement provides for a senior secured revolving loan facility (the "Blue Mountain Credit Facility"), with a borrowing base and borrowing commitments of$200 million atJune 30, 2020 . The Blue Mountain Credit Facility together with the Riviera Credit Facility, are referred to as the "Credit Facilities").
Share Repurchase Program
OnJuly 18, 2019 , the Board of Directors of the Company authorized the repurchase of up to$150 million of the Company's outstanding shares of common stock. During the six months endedJune 30, 2020 , the Company repurchased an aggregate of 282,742 shares of common stock at an average price of$7.31 per share for a total cost of approximately$2 million . AtJuly 31, 2020 , approximately$22 million was available for share repurchases under the program. Any share repurchases are subject to restrictions in the Riviera Credit Facility. Dividends Although the Company paid cash distributions in 2019 and 2020, the Company is not paying a regular cash dividend. The Board of Directors periodically reviews the Company's liquidity position to evaluate whether or not to pay a cash dividend. Any future payment of cash dividends would be subject to the restrictions in the Riviera Credit Facility.
Cash Distributions
OnMarch 9, 2020 , the Board of Directors of the Company declared a cash distribution of$1.00 per share. A cash distribution totaling approximately$58 million was paid onApril 22, 2020 , to shareholders of record as of the close of business onApril 8, 2020 . OnApril 23, 2020 , the Board of Directors of the Company declared a cash distribution of$0.75 per share. The distribution totaling approximately$43 million was paid onMay 11, 2020 , to shareholders of record as of the close of business onMay 7, 2020 . In addition, approximately$13 million and$11 million for potential future distributions related to nonvested share-based compensation awards was voluntarily recorded in restricted cash atJune 30, 2020 , andDecember 31, 2019 , respectively. AtJune 30, 2020 , andDecember 31, 2019 , distributions payable, based on the vesting schedule of awards, of approximately$819,000 and$2 million , respectively, related to outstanding share-based compensation awards was also recorded. These amounts are included in "other accrued liabilities" and "asset retirement obligations and other noncurrent liabilities" on the condensed consolidated balance sheets.
Commodity Derivatives
During the six months endedJune 30, 2020 , the Company entered into commodity derivative contracts consisting of natural gas fixed price swaps for 2021. In addition, the Company unwound certain of its oil fixed price swaps associated with Blue Mountain Midstream for 2020 and received proceeds of approximately$377,000 . 32
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Field Level Cash Flow To assess the performance of the Company's reporting segments, the Company's Chief Operating Decision Maker ("CODM") analyzes field level cash flow, a non-generally accepted accounting principles financial metric. The Company defines field level cash flow as revenues less direct operating expenses. Other indirect income (expenses) include "general and administrative expenses," "exploration costs," "depreciation, depletion and amortization," "(gains) on sale of assets and other, net," "impairment of long-lived assets," "other income and (expenses)" and "reorganization items, net." Field level cash flow is disclosed herein to provide financial information about the Company's reporting segments in alignment with the information reviewed by its CODM. Information regarding total assets by reporting segment is not presented because it is not reviewed by the CODM. During the first quarter of 2020, the definition of field level cash flow analyzed by the Company's CODM was revised to report within segment results, expenses previously reported as unallocated to segments. Information presented for the prior period has been recast to conform to current presentation. 33
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Results of Operations Three Months EndedJune 30, 2020 , Compared to Three Months EndedJune 30, 2019 Three Months Ended June 30, 2020 2019 Variance (in thousands) Revenues and other: Natural gas sales$ 5,439 $ 46,604 $ (41,165 ) Oil sales 4,210 10,222 (6,012 ) NGL sales 1,285 9,931 (8,646 ) Total oil, natural gas and NGL sales 10,934 66,757 (55,823 ) Gains (losses) on commodity derivatives (1,358 ) 20,249 (21,607 ) Marketing and other revenues 21,873 58,544 (36,671 ) 31,449 145,550 (114,101 ) Expenses: Lease operating expenses 2,894 23,845 (20,951 ) Transportation expenses 1,209 18,053 (16,844 ) Marketing expenses 16,828 41,811 (24,983 ) General and administrative expenses (1) 11,219 13,489 (2,270 ) Exploration costs - 969 (969 ) Depreciation, depletion and amortization 4,793 23,181 (18,388 ) Impairment of assets held for sale and long-lived assets 14,874 18,390 (3,516 ) Taxes, other than income taxes 1,375 2,599 (1,224 ) (Gains) losses on sale of assets and other, net (2,491 ) 9,885 (12,376 ) 50,701 152,222 (101,521 ) Other income and (expenses) (1,687 ) (1,627 ) (60 ) Reorganization items, net (273 ) (424 ) 151 Loss before income taxes (21,212 ) (8,723 ) (12,489 ) Income tax benefit - (2,047 ) 2,047 Net loss$ (21,212 ) $ (6,676 ) $ (14,536 )
(1) General and administrative expenses for the three months ended
and June 30, 2019 , include approximately $(323,000) and $4 million ,
respectively, of share-based compensation expenses.
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Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Three Months Ended June 30,
2020 2019 Variance
Average daily production:
Natural gas (MMcf/d) 37 236 (84 %)
Oil (MBbls/d) 1.3 1.9 (32 %)
NGL (MBbls/d) 1.1 6.4 (83 %)
Total (MMcfe/d) 52 286 (82 %)
Weighted average prices: (1)
Natural gas (Mcf) $ 1.60 $ 2.17 (26 %)
Oil (Bbl) $ 34.53 $ 58.11 (41 %)
NGL (Bbl) $ 12.36 $ 17.15 (28 %)
Average NYMEX prices:
Natural gas (MMBtu) $ 1.72 $ 2.64 (35 %)
Oil (Bbl) $ 27.85 $ 59.81 (53 %)
Costs per Mcfe of production:
Lease operating expenses $ 0.61 $ 0.92 (34 %)
Transportation expenses $ 0.25 $ 0.69 (64 %)
General and administrative expenses (2)
352 %
Depreciation, depletion and amortization
13 %
Taxes, other than income taxes $ 0.29 $ 0.10 190 %
(1) Does not include the effect of gains (losses) on derivatives.
(2) General and administrative expenses for the three months ended
and June 30, 2019 , include approximately $(323,000) and $4 million ,
respectively, of share-based compensation expenses.
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Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Upstream Reporting Segment
Three Months Ended June 30,
2020 2019 Variance
(in thousands)
Oil, natural gas and NGL sales $ 10,934 $ 66,757 $ (55,823 )
Marketing and other revenues 851 15,900 (15,049 )
11,785 82,657 (70,872 )
Lease operating expenses 2,894 23,845 (20,951 )
Transportation expenses 1,209 18,053 (16,844 )
Marketing expenses 10 7,836 (7,826 )
Taxes, other than income taxes 1,097 1,891 (794 )
Total direct operating expenses 5,210 51,625 (46,415 )
Field level cash flow (1) $ 6,575 $ 31,032 $ (24,457 ) (1) Refer to Note 17 for a reconciliation of field level cash flow to (loss)
income before income taxes.
Oil, Natural Gas and NGL Sales
Oil, natural gas and NGL sales decreased by approximately$56 million or 84% to approximately$11 million for the three months endedJune 30, 2020 , from approximately$67 million for the three months endedJune 30, 2019 , primarily due to lower natural gas and NGL volumes as a result of divestitures completed in 2019 and 2020 and lower commodity prices. Lower natural gas and oil prices resulted in a decrease in revenues of approximately$2 million and$3 million , respectively. Average daily production volumes decreased to approximately 52 MMcfe/d for the three months endedJune 30, 2020 , from 286 MMcfe/d for the three months endedJune 30, 2019 . Lower natural gas, NGL and oil production volumes resulted in a decrease in revenues of approximately$40 million ,$8 million and$3 million , respectively.
The following table sets forth average daily production by region:
Three Months Ended June 30,
2020 2019 Variance
Average daily production (MMcfe/d):
Hugoton Basin - 114 (114 ) (100 %)
Mid-Continent 36 40 (4 ) (10 %)
East Texas - 43 (43 ) (100 %)
North Louisiana 16 43 (27 ) (63 %)
Uinta Basin - 18 (18 ) (100 %)
Michigan/Illinois - 28 (28 ) (100 %)
52 286 (234 ) (82 %)
Production volumes in the Mid-Continent were consistent with the comparable
period of the prior year. The decrease in average daily production in North
Louisiana primarily reflects a reduction in production due to reduced
development drilling and natural decline of 2019 drilling programs, plant
downtime, and the divestiture of non-core assets in 2019. The Company completed
the divestiture of all of its properties located in the East Texas and Uinta
Basin operating regions in 2020. In addition, the Company completed the
divestiture of all of its properties located in the Hugoton Basin and
Michigan /Illinois operating regions in 2019. See Note 3 for additional
information about divestitures.
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Marketing and Other Revenues
Three Months Ended June 30,
2020 2019 Variance
(in thousands)
Jayhawk plant and helium $ - $ 14,141 $ (14,141 )
Other 851 1,759 (908 )
$ 851 $ 15,900 $ (15,049 )
Marketing and other revenues decreased by approximately $15 million or 95% to
approximately $1 million for the three months ended June 30, 2020 , from
approximately $16 million for the three months ended June 30, 2019 . The decrease
was primarily due to the Hugoton Basin Assets Sale, which included sale of the
Jayhawk plant. Other primarily includes revenues from other midstream systems in
the East Texas and North Louisiana operating regions. The Company completed the
divestiture of all of its properties located in the East Texas region in 2020.
Lease Operating Expenses
Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies, and workover expenses. Lease operating expenses decreased by approximately$21 million or 88% to approximately$3 million for the three months endedJune 30, 2020 , from approximately$24 million for the three months endedJune 30, 2019 . The decrease was primarily due to divestitures completed in 2019 and 2020 and lower service costs. Lease operating expenses per Mcfe decreased to$0.61 per Mcfe for the three months endedJune 30, 2020 , from$0.92 per Mcfe for the three months endedJune 30, 2019 , primarily driven by changes in the Company's asset base as a result of divestitures.
Transportation Expenses
Transportation expenses decreased by approximately$17 million or 93% to approximately$1 million for the three months endedJune 30, 2020 , from approximately$18 million for the three months endedJune 30, 2019 . The decrease was primarily due to divestitures completed in 2019 and 2020. Transportation expenses per Mcfe decreased to$0.25 per Mcfe for the three months endedJune 30, 2020 , from$0.69 per Mcfe for the three months endedJune 30, 2019 , primarily driven by changes in the Company's asset base as a result of divestitures.
Marketing Expenses
Three Months Ended June 30,
2020 2019 Variance
(in thousands)
Jayhawk plant $ - $ 7,171 $ (7,171 )
Other 10 665 (655 )
$ 10 $ 7,836 $ (7,826 )
Marketing expenses represent third-party activities associated with
company-owned gathering systems, plants and facilities. Marketing expenses
decreased by approximately $8 million or 100% to approximately $10,000 for the
three months ended June 30, 2020 , from approximately $8 million for the three
months ended June 30, 2019 . The decrease was primarily due to the Hugoton Basin
Assets Sale, which included sale of the Jayhawk plant.
Taxes, Other Than Income Taxes
Three Months Ended June 30,
2020 2019 Variance
(in thousands)
Severance taxes $ 827 $ 2,484 $ (1,657 )
Ad valorem taxes 66 3,662 (3,596 )
Other taxes 204 (4,255 ) 4,459
$ 1,097 $ 1,891 $ (794 )
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Severance taxes, which are a function of revenues generated from production, decreased primarily due to lower production volumes due to divestitures completed in 2019 and 2020. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, decreased primarily due to divestitures completed in 2019 and 2020. Other taxes include a sales tax refund of approximately$4 million during the three months endedJune 30, 2019 .
Field level cash flow decreased by approximately$24 million or 79% to approximately$7 million for the three months endedJune 30, 2020 , from approximately$31 million for the three months endedJune 30, 2019 . The decrease was primarily due to divestitures completed in 2019 and 2020 and lower commodity prices.
Blue Mountain Reporting Segment
Three Months Ended June 30,
2020 2019 Variance
(in thousands)
Marketing revenues $ 21,022 $ 42,644 $ (21,622 )
Marketing expenses 16,818 33,975 (17,157 )
Taxes, other than income taxes 278 708 (430 )
Total direct operating expenses 17,096 34,683 (17,587 )
Field level cash flow (1) $ 3,926 $ 7,961 $ (4,035 ) (1) Refer to Note 17 for a reconciliation of field level cash flow to (loss)
income before income taxes.
Marketing Revenues
Marketing revenues decreased by approximately$22 million or 51% to approximately$21 million for the three months endedJune 30, 2020 , from approximately$43 million for the three months endedJune 30, 2019 . The decrease was primarily due to lower commodity prices, lower volumes, production curtailments and contract disputes during 2020. Average daily throughput volumes decreased to approximately 97 MMcf/d for the three months endedJune 30, 2020 , from 120 MMcf/d for the three months endedJune 30, 2019 .
Marketing Expenses
Marketing expenses decreased by approximately$17 million or 50% to approximately$17 million for the three months endedJune 30, 2020 , from approximately$34 million for the three months endedJune 30, 2019 . The decrease was primarily due to lower commodity prices during 2020. The decrease was partially offset by higher marketing expenses due to discounts on gathering fees offered to producers in the second quarter of 2020.
Field level cash flow decreased by approximately
Indirect Income and Expenses
Gains (Losses) on Commodity Derivatives
Losses on commodity derivatives were approximately$1 million for the three months endedJune 30, 2020 , compared to gains of approximately$20 million for the three months endedJune 30, 2019 . Gains and losses on commodity derivatives were primarily due to changes in fair value of the derivative contracts. The fair value on unsettled derivative contracts changes as future commodity price expectations change compared to the contract prices on the derivatives. If the expected future commodity prices increase compared to the contract prices on the derivatives, losses are recognized; and if the expected future commodity prices decrease compared to the contract prices on the derivatives, gains are recognized. The Company determines the fair value of its commodity derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. See Item 3. "Quantitative and Qualitative Disclosures About Market Risk" and 38
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Note 7 and Note 8 for additional details about the Company's commodity derivatives. For information about the Company's credit risk related to derivative contracts, see "Counterparty Credit Risk" under "Liquidity and Capital Resources" below.
General and Administrative Expenses
General and administrative expenses are costs not directly associated with field operations and reflect the costs of employees including executive officers, related benefits, office leases and professional fees. General and administrative expenses decreased by approximately$2 million or 17% to approximately$11 million for the three months endedJune 30, 2020 , from approximately$13 million for the three months endedJune 30, 2019 . The decrease was primarily due to lower share-based compensation expenses and lower salaries and benefits related expenses resulting from lower headcount. Share-based compensation expenses were a negative expense of approximately$323,000 for the three months endedJune 30, 2020 , based on the fair value of outstanding awards. General and administrative expenses per Mcfe increased to$2.35 per Mcfe for the three months endedJune 30, 2020 , from$0.52 per Mcfe for the three months endedJune 30, 2019 , due to lower production volumes associated with divestitures and increased severance expenses. Severance expenses were approximately$4 million for the three months endedJune 30, 2020 , compared to none for the three months endedJune 30, 2019 .
Exploration Costs
No exploration costs were incurred during the three months ended
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased by approximately$18 million or 79% to approximately$5 million for the three months endedJune 30, 2020 , from approximately$23 million for the three months endedJune 30, 2019 . Depreciation, depletion and amortization per Mcfe increased to$1.01 per Mcfe for the three months endedJune 30, 2020 , from$0.89 per Mcfe for the three months endedJune 30, 2019 .
Impairment of Assets Held for Sale and Long-Lived Assets
During the three months endedJune 30, 2020 , the Company recorded noncash impairment charges of approximately$15 million . Of this, approximately$12 million related to oil and natural gas properties to be divested located inNorth Louisiana and approximately$2 million related to divested properties located inEast Texas . In addition, approximately$1 million related to Blue Mountain Midstream's crude oil gathering system assets. The impairment charges were primarily due to a decline in commodity prices and a decline in expected future volumes. During the three months endedJune 30, 2019 , the Company recorded a noncash impairment charge of approximately$18 million associated withMichigan proved oil and natural gas properties held for sale atJune 30, 2019 . The impairment charge was primarily due to a decline in commodity prices. See Note 1 for additional information about impairment and Note 3 for information about divestitures.
(Gains) Losses on Sale of Assets and Other, Net
During the three months endedJune 30, 2020 , the Company recorded a net gain of approximately$2 million , primarily related to divestitures, partially offset by a loss on disposal of furniture and equipment. During the three months endedJune 30, 2019 , the Company recorded a net loss of approximately$10 million , primarily related to a net loss of approximately$9 million on the sale of its interest in non-operated properties located in theHugoton Basin . See Note 3 for information about divestitures. Other Income and (Expenses) Three Months Ended June 30, 2020 2019 Variance (in thousands) Interest expense, net of amounts capitalized $ (739 )$ (2,103 ) $ 1,364 Other, net (948 ) 476 (1,424 )$ (1,687 ) $ (1,627 ) $ (60 ) Interest expense decreased primarily due to lower outstanding debt during the three months endedJune 30, 2020 , compared to the same period of the prior year. For the three months endedJune 30, 2020 , "other, net" is primarily related to the write-off of a portion of unamortized deferred financing fees of approximately$468,000 and commitment fees for the undrawn 39
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
portion of the Credit Facilities. For the three months ended
Reorganization Items, Net
Reorganization items represent costs directly associated with Chapter 11
proceedings since the petition date. During the three months ended
Income Tax Benefit
The Company recognized no income tax expense for the three months endedJune 30, 2020 , because of a full valuation allowance recorded in the third quarter of 2019, compared to an income tax benefit of approximately$2 million for the three months endedJune 30, 2019 .
Net Loss
A net loss of approximately$21 million was incurred for the three months endedJune 30, 2020 , compared to approximately$7 million for the three months endedJune 30, 2019 . See discussion above for explanations of variances. 40
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Results of Operations
Six Months Ended
Six Months Ended June 30,
2020 2019 Variance
(in thousands)
Revenues and other:
Natural gas sales $ 14,899 $ 103,741 $ (88,842 )
Oil sales 8,580 15,950 (7,370 )
NGL sales 2,253 23,411 (21,158 )
Total oil, natural gas and NGL sales 25,732 143,102 (117,370 )
Gains on commodity derivatives 6,721 7,008 (287 )
Marketing and other revenues 55,826 131,894 (76,068 )
88,279 282,004 (193,725 )
Expenses:
Lease operating expenses 7,845 47,897 (40,052 )
Transportation expenses 3,383 37,203 (33,820 )
Marketing expenses 38,147 95,200 (57,053 )
General and administrative expenses (1) 21,123 32,480 (11,357 )
Exploration costs - 2,207 (2,207 )
Depreciation, depletion and amortization 15,112 44,953 (29,841 )
Impairment of assets held for sale and
long-lived assets 121,658 18,390 103,268
Taxes, other than income taxes 2,590 8,899 (6,309 )
(Gains) losses on sale of assets and
other, net (2,031 ) (17,380 ) 15,349
207,827 269,849 (62,022 )
Other income and (expenses) (2,676 ) (3,187 ) 511
Reorganization items, net (494 ) (472 ) (22 )
(Loss) income before income taxes (122,718 ) 8,496 (131,214 )
Income tax expense - 2,446 (2,446 )
Net (loss) income $ (122,718 ) $ 6,050 $ (128,768 ) (1) General and administrative expenses for the six months ended
and June 30, 2019 , include approximately $(3) million and $10 million ,
respectively, of share-based compensation expenses.
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Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Six Months Ended June 30,
2020 2019 Variance
Average daily production:
Natural gas (MMcf/d) 49 226 (78 %)
Oil (MBbls/d) 1.2 1.6 (25 %)
NGL (MBbls/d) 1.0 6.7 (85 %)
Total (MMcfe/d) 62 275 (77 %)
Weighted average prices: (1)
Natural gas (Mcf) $ 1.68 $ 2.54 (34 %)
Oil (Bbl) $ 39.42 $ 56.25 (30 %)
NGL (Bbl) $ 11.96 $ 19.44 (38 %)
Average NYMEX prices:
Natural gas (MMBtu) $ 1.83 $ 2.89 (37 %)
Oil (Bbl) $ 37.01 $ 57.36 (35 %)
Costs per Mcfe of production:
Lease operating expenses $ 0.69 $ 0.96 (28 %)
Transportation expenses $ 0.30 $ 0.75 (60 %)
General and administrative expenses (2) $ 1.87 $ 0.65 188 %
Depreciation, depletion and amortization $ 1.34 $ 0.90 49 %
Taxes, other than income taxes $ 0.23 $ 0.18 28 %
(1) Does not include the effect of gains (losses) on derivatives.
(2) General and administrative expenses for the six months ended
and June 30, 2019 , include approximately $(3) million and $10 million ,
respectively, of share-based compensation expenses.
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Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Upstream Reporting Segment
Six Months Ended June 30,
2020 2019 Variance
(in thousands)
Oil, natural gas and NGL sales $ 25,732 $ 143,102 $ (117,370 )
Marketing and other revenues 2,738 46,922 (44,184 )
28,470 190,024 (161,554 )
Lease operating expenses 7,845 47,897 (40,052 )
Transportation expenses 3,383 37,203 (33,820 )
Marketing expenses 64 27,620 (27,556 )
Taxes, other than income taxes 1,721 7,516 (5,795 )
Total direct operating expenses 13,013 120,236 (107,223 )
Field level cash flow (1) $ 15,457 $ 69,788 $ (54,331 ) (1) Refer to Note 17 for a reconciliation of field level cash flow to income
(loss) before income taxes.
Oil, Natural Gas and NGL Sales
Oil, natural gas and NGL sales decreased by approximately$117 million or 82% to approximately$26 million for the six months endedJune 30, 2020 , from approximately$143 million for the six months endedJune 30, 2019 , primarily due to lower production volumes as a result of divestitures completed in 2019 and 2020 and lower commodity prices. Lower natural gas, NGL and oil prices resulted in a decrease in revenues of approximately$7 million ,$1 million and$4 million , respectively. Average daily production volumes decreased to approximately 62 MMcfe/d for the six months endedJune 30, 2020 , from 275 MMcfe/d for the six months endedJune 30, 2019 . Lower natural gas, NGL and oil production volumes resulted in a decrease in revenues of approximately$81 million ,$20 million and$4 million , respectively.
The following table sets forth average daily production by region:
Six Months Ended June 30,
2020 2019 Variance
Average daily production (MMcfe/d):
Hugoton Basin - 119 (119 ) (100 %)
Mid-Continent 33 36 (3 ) (8 %)
East Texas 8 44 (36 ) (82 %)
North Louisiana 19 31 (12 ) (39 %)
Uinta Basin 2 17 (15 ) (88 %)
Michigan/Illinois - 28 (28 ) (100 %)
62 275 (213 ) (77 %)
Production volumes in the Mid-Continent were consistent with the comparable
period of the prior year. The decrease in average daily production in North
Louisiana primarily reflects a reduction in production due to reduced
development drilling and natural decline of 2019 drilling programs, plant
downtime, and the divestiture of non-core assets in 2019. The decreases in
average daily production volumes in the Uinta Basin and East Texas operating
regions primarily reflect lower production volumes as a result of divestitures
completed in 2020. In addition, the Company completed the divestiture of all of
its properties located in the Hugoton Basin and Michigan /Illinois operating
regions in 2019. See Note 3 for additional information about divestitures.
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Marketing and Other Revenues
Six Months Ended June 30,
2020 2019 Variance
(in thousands)
Jayhawk plant and helium $ 16 $ 43,310 $ (43,294 )
Other 2,722 3,612 (890 )
$ 2,738 $ 46,922 $ (44,184 )
Marketing and other revenues decreased by approximately $44 million or 94% to
approximately $3 million for the six months ended June 30, 2020 , from
approximately $47 million for the six months ended June 30, 2019 . The decrease
was primarily due to the Hugoton Basin Assets Sale, which included sale of the
Jayhawk plant. Other primarily includes revenues from other midstream systems in
the East Texas and North Louisiana operating regions.
Lease Operating Expenses
Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies, and workover expenses. Lease operating expenses decreased by approximately$40 million or 84% to approximately$8 million for the six months endedJune 30, 2020 , from approximately$48 million for the six months endedJune 30, 2019 . The decrease was primarily due to divestitures completed in 2019 and 2020 and lower service costs. Lease operating expenses per Mcfe decreased to$0.69 per Mcfe for the six months endedJune 30, 2020 , from$0.96 per Mcfe for the six months endedJune 30, 2019 .
Transportation Expenses
Transportation expenses decreased by approximately$34 million or 91% to approximately$3 million for the six months endedJune 30, 2020 , from approximately$37 million for the six months endedJune 30, 2019 . Transportation expenses per Mcfe decreased to$0.30 per Mcfe for the six months endedJune 30, 2020 , from$0.75 per Mcfe for the six months endedJune 30, 2019 , primarily driven by changes in the Company's asset base as a result of divestitures.
Marketing Expenses
Six Months Ended June 30,
2020 2019 Variance
(in thousands)
Jayhawk plant $ (120 ) $ 26,191 $ (26,311 )
Other 184 1,429 (1,245 )
$ 64 $ 27,620 $ (27,556 )
Marketing expenses represent third-party activities associated with
company-owned gathering systems, plants and facilities. Marketing expenses
decreased by approximately $28 million or 100% to approximately $64,000 for the
six months ended June 30, 2020 , from approximately $28 million for the six
months ended June 30, 2019 . The decrease was primarily due to the Hugoton Basin
Assets Sale, which included sale of the Jayhawk plant and a credit to expense
from receipt of an electric co-op refund during the six months ended June 30,
2020 .
Taxes, Other Than Income Taxes
Six Months Ended June 30,
2020 2019 Variance
(in thousands)
Severance taxes $ 1,263 $ 4,645 $ (3,382 )
Ad valorem taxes 111 7,024 (6,913 )
Other taxes 347 (4,153 ) 4,500
$ 1,721 $ 7,516 $ (5,795 )
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Severance taxes, which are a function of revenues generated from production, decreased primarily due to lower production volumes due to divestitures completed in 2019 and 2020. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, decreased primarily due to divestitures completed in 2019 and 2020. Other taxes include a sales tax refund of approximately$4 million during the six months endedJune 30, 2019 .
Field level cash flow decreased by approximately$55 million or 78% to approximately$15 million for the six months endedJune 30, 2020 , from approximately$70 million for the six months endedJune 30, 2019 . The decrease was primarily due to divestitures completed in 2019 and 2020 and lower commodity prices.
Blue Mountain Reporting Segment
Six Months Ended June 30,
2020 2019 Variance
(in thousands)
Marketing revenues $ 53,088 $ 84,972 $ (31,884 )
Marketing expenses 38,083 67,580 (29,497 )
Taxes, other than income taxes 869 1,383 (514 )
Total direct operating expenses 38,952 68,963 (30,011 )
Field level cash flow (1) $ 14,136 $ 16,009 $ (1,873 ) (1) Refer to Note 17 for a reconciliation of field level cash flow to loss before
income taxes.
Marketing Revenues
Marketing revenues decreased by approximately $32 million or 38% to
approximately $53 million for the six months ended June 30, 2020 , from
approximately $85 million for the six months ended June 30, 2019 . The decrease
was primarily due to lower commodity prices, lower volumes, production
curtailments and contract disputes during 2020, partially offset by revenues
from the water service business beginning in the second quarter of 2019. Average
daily throughput volumes decreased to approximately 108 MMcf/d for the six
months ended June 30, 2020 , from 118 MMcf/d for the six months ended June 30,
2019 .
Marketing Expenses
Marketing expenses decreased by approximately $30 million or 44% to
approximately $38 million for the six months ended June 30, 2020 , from
approximately $68 million for the six months ended June 30, 2019 . The decrease
was primarily due to lower commodity prices during 2020, partially offset by
expenses related to the water services business and higher marketing expenses
due to discounts on gathering fees offered to producers in the second quarter of
2020.
Field Level Cash Flow Field level cash flow decreased by approximately
Indirect Income and Expenses Not Allocated to Segments
Gains on Commodity Derivatives
Gains on commodity derivatives were approximately$7 million for both the six months endedJune 30, 2020 , and the six months endedJune 30, 2019 . Gains on commodity derivatives were primarily due to changes in fair value of the derivative contracts. The fair value on unsettled derivative contracts changes as future commodity price expectations change compared to the contract prices on the derivatives. If the expected future commodity prices increase compared to the contract prices on the derivatives, losses are recognized; and if the expected future commodity prices decrease compared to the contract prices on the derivatives, gains are recognized. The Company determines the fair value of its commodity derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. See Item 3. "Quantitative and Qualitative Disclosures About Market Risk" and 45
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Note 7 and Note 8 for additional details about the Company's commodity derivatives. For information about the Company's credit risk related to derivative contracts, see "Counterparty Credit Risk" under "Liquidity and Capital Resources" below.
General and Administrative Expenses
General and administrative expenses are costs not directly associated with field operations and reflect the costs of employees including executive officers, related benefits, office leases and professional fees. General and administrative expenses decreased by approximately$11 million or 35% to approximately$21 million for the six months endedJune 30, 2020 , from approximately$32 million for the six months endedJune 30, 2019 . The decrease was primarily due to lower share-based compensation expenses and lower salaries and benefits related expenses due to lower headcount. Share-based compensation expenses were a negative expense of approximately$3 million for the six months endedJune 30, 2020 , based on the fair value of outstanding awards. General and administrative expenses per Mcfe increased to$1.87 per Mcfe for the six months endedJune 30, 2020 , from$0.65 per Mcfe for the six months endedJune 30, 2019 , due to lower production volumes associated with divestitures and increased severance expenses. Severance expenses were approximately$5 million for the six months endedJune 30, 2020 , compared to none for the six months endedJune 30, 2019 . Exploration Costs
No exploration costs were incurred during the six months ended
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased by approximately$30 million or 66% to approximately$15 million for the six months endedJune 30, 2020 , from approximately$45 million for the six months endedJune 30, 2019 . Depreciation, depletion and amortization per Mcfe increased to$1.34 per Mcfe for the six months endedJune 30, 2020 , from$0.90 per Mcfe for the six months endedJune 30, 2019 .
Impairment of Assets Held for Sale and Long-Lived Assets
During the six months endedJune 30, 2020 , the Company recorded noncash impairment charges of approximately$122 million . Of this, approximately$88 million related to proved and unproved oil and natural gas properties located inOklahoma , approximately$12 million related to properties to be divested located inNorth Louisiana , and approximately$4 million related to divested properties located inEast Texas . In addition, approximately$18 million related to Blue Mountain Midstream's crude oil gathering system assets. The impairment charges were primarily due to a decline in commodity prices and a decline in expected future volumes. During the six months endedJune 30, 2019 , the Company recorded a noncash impairment charge of approximately$18 million associated withMichigan proved oil and natural gas properties held for sale atJune 30, 2019 . The impairment charge was primarily due to a decline in commodity prices. See Note 1 for additional information about impairment and Note 3 for information about divestitures.
Gains (Losses) on Sale of Assets and Other, Net
During the six months endedJune 30, 2020 , the Company recorded a net gain of approximately$2 million , including a net gain of approximately$1 million on the Drunkards Wash Asset Sale. The net gain was partially offset by a loss on disposal of furniture and equipment. During the six months endedJune 30, 2019 , the Company recorded a net gain of approximately$17 million , primarily related to a net gain of approximately$28 million on the Arkoma Assets Sale, partially offset by a net loss of approximately$9 million on the sale of interest in non-operated properties in theHugoton Basin . See Note 3 for information about divestitures. Other Income and (Expenses) Six Months Ended June 30, 2020 2019 Variance (in thousands) Interest expense, net of amounts capitalized$ (1,668 ) $ (3,074 ) $ 1,406 Other, net (1,008 ) (113 ) (895 )$ (2,676 ) $ (3,187 ) $ 511 46
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Interest expense decreased primarily due to lower outstanding debt during the six months endedJune 30, 2020 , compared to the same period of the prior year. For the six months endedJune 30, 2020 , "other, net" is primarily related to the write-off of a portion of unamortized deferred financing fees of approximately$468,000 and commitment fees for the undrawn portion of the Credit Facilities, partially offset by interest income and rental income. For the six months endedJune 30, 2019 , "other, net" is primarily related to commitment fees for the undrawn portion of the Credit Facilities, offset by interest income and rental income. See "Debt" under "Liquidity and Capital Resources" below for additional details.
Reorganization Items, Net
Reorganization items represent costs directly associated with the Chapter 11 proceedings since the petition date. During the six months endedJune 30, 2020 , andJune 30, 2019 , reorganization items were approximately$494,000 and$472,000 , respectively, primarily related to legal and other professional fees.
Income Tax Expense
The Company recognized no income tax expense for the six months endedJune 30, 2020 , because of a full valuation allowance recorded in the third quarter of 2019, compared to income tax expense of approximately$2 million for the six months endedJune 30, 2019 . Net (Loss) Income A net loss of approximately$123 million was incurred for the six months endedJune 30, 2020 , compared to net income of approximately$6 million for the six months endedJune 30, 2019 . See discussion above for explanations of variances.
Liquidity and Capital Resources
The Company's sources of cash have primarily consisted of proceeds from divestitures of oil and natural gas properties, net cash provided by operating activities and borrowings under the Blue Mountain Credit Facility. As a result of divesting certain oil and natural gas properties and selling an office building during the six months endedJune 30, 2020 , the Company received approximately$67 million in net cash proceeds. The Company has used its cash to fund capital expenditures, for distributions to shareholders, and for repurchases of Riviera common stock. Based on current expectations, the Company believes its liquidity and capital resources will be sufficient to conduct its business and operations.
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