Overview





We are an onshore independent oil and natural gas company focused on the
development, production and exploration of large, repeatable resource plays in
North America. Our operations are located in the Eagle Ford formation in south
Texas. Our strategy is to acquire and/or develop assets where we are operator
and have high working interests, positioning us to efficiently control the pace
and scope of our development and the allocation of our capital resources.
Serving as operator allows us to control the drilling, completion, operations,
and marketing of sold volumes.





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Business and Industry Outlook





Through the first nine months of 2020, WTI oil spot prices ranged from a high of
$63.27 in January and briefly dropped below zero in April 2020, primarily due to
drastic price cutting and increased production by Saudi Arabia coupled with a
demand reduction caused by the global COVID-19 pandemic. More recently, WTI oil
spot prices have slowly rebounded and hovered near $40 per barrel. While market
prices for crude oil, natural gas and NGLs are inherently volatile, the increase
in supply and decrease in demand to historic extremes has impacted our entire
industry. Given the dynamic nature of these macroeconomic conditions, we are
unable to reasonably estimate the period of time that these market conditions
will exist and the extent of the impact they will have on our business,
liquidity, results of operations, financial condition, or the timing of any
subsequent recovery.



The sharp decline in commodity prices and lower expectations for near-term
commodity prices, has reduced our revenue and cash flow from operations and
slowed the pace at which we can develop our oil and natural gas assets. As a
result, we were not in compliance with certain financial covenants required by
our credit facilities as of September 30, 2020 and there is substantial risk we
will be unable to comply with such ratios and covenants in the future (described
further under Credit Facilities and in Note 1 under Going Concern). Lower
commodity prices reduces the amount of oil and natural gas that we can produce
economically, which has resulted, and may result, in impairment of our proved
oil and gas properties or undeveloped acreage (such as the impairment discussed
under Results of Operations and in Note 2). We continue to execute a hedging
program to mitigate our exposure to commodity price volatility. We have oil
derivatives in place covering an average of 7,370 Bbls per day for October
through December 2020 at a weighted average floor price of $53.83 and 6,690 Bbls
per day in 2021 at a weighted average floor price of $49.18.

As described below under Recent Developments, our capital expenditures for the
period May 1, 2020 through December 31, 2020 are limited to $11.1 million. We
expect total 2020 capital expenditures to be in the range of $40 - $45 million,
with the expenditures for the period May through December falling under the
required limit. We intend to continue to flexibly manage our operations,
including capital expenditure levels, based on existing and expected market
conditions to protect our balance sheet and retain liquidity.  Our planned
capital program for 2020 is expected to be funded with cash flow generated from
operating activities (which includes proceeds from settlements of derivative
contracts), cash on hand and borrowings on our Revolving Facility. As of the
date of this Quarterly Report, we had $21.7 million of borrowing capacity
undrawn under our Revolving Facility.



Recent Developments




As of September 30, 2020, we were not in compliance with the Leverage Ratio or
the Current Ratio under the Revolving Facility. We are currently in discussions
with the Revolving Facility lenders to waive these defaults arising under our
failure to comply with the Leverage Ratio and the Current Ratio as of September
30, 2020. There can be no assurance that we will receive these waivers. The
failure to be in compliance constitutes an event of default under the Revolving
Facility, and at any time after the occurrence of an event of default under the
Revolving Facility, the lenders thereunder may, among other options, declare any
amounts outstanding under the Revolving Facility immediately due and payable and
the lenders thereunder may terminate any commitment to make further loans under
the Revolving Facility. Any such acceleration of the Revolving Facility will
also constitute an event of default under the Term Loan.

On October 16 and October 30, 2020, we entered into the fourth and fifth amendments to the Term Loan. Collectively, these amendments, among other things:

Extended the delivery date of the July 1, 2020 Reserve Report prepared by a

? petroleum engineering firm selected by our Term Loan lenders to October 30,

2020;

? Limits our capital expenditures (as defined in the Term Loan agreement) for the

period from May 1, 2020 to December 31, 2020 to $11.1 million;

? Limit our general and administrative expense (as defined in the Term Loan


   agreement) for the fourth quarter of 2020 to $3.6 million;




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   Require us to, (a) until December 31, 2020, negotiate with the Term Loan
   lenders in good faith on a potential workout, restructuring or similar

negotiation with respect to the Term Loan, which is expected to include any or

a combination of (i) mutually agreeing to a term sheet that reduces our total

debt and leverage, (ii) exploring additional sources of equity capital for us,

? (iii) exploring potential transfers of our oil and gas properties (through

asset sales or otherwise), and (iv) if necessary, hiring of restructuring

advisors, and (b) enter into a restructuring support agreement with the Term

Loan and the Revolving Facility lenders with respect to a workout or

restructuring of our debt on or prior to November 30, 2020 or such later date

as may be agreed; and

Provide that the Asset Coverage Ratio as of June 30, 2020 will not apply or be

? tested; if the Asset Coverage Ratio as of such date had been tested, it is


   unlikely that we would have been in compliance.




We have retained restructuring and legal advisors to assist us in our
discussions with the lenders under the Term Loan and the Revolving Facility.
There can be no assurance that we will be able to enter into a restructuring
support agreement within such time frame or that the Term Loan lenders will
agree to an extension of the deadline to enter into a restructuring support
agreement. If we are unsuccessful in such efforts, it may be necessary for us to
seek protection from creditors under Chapter 11 of the U.S. Bankruptcy Code, or
an involuntary petition for bankruptcy may be filed against it.



Pursuant to the Fifth Amendment to Amended and Restated Term Loan Agreement, we
are required to deliver on November 30, 2020 (i) a reserve report as of
September 30, 2020 and (ii) a compliance certificate with respect to the Asset
Coverage Ratio as of September 30, 2020. While we have not yet finalized our
reserve report as of such date and, as such, have not yet determined whether we
are in compliance with the Asset Coverage Ratio as of the same date, there is
substantial risk that we will not be in compliance with the Asset Coverage Ratio
as of such date. The failure to be in compliance with the Asset Coverage Ratio
as of any date would constitute an event of default under the Term Loan, and at
any time after the occurrence of an event of default under the Term Loan, the
lenders thereunder may, among other options, declare any amounts outstanding
thereunder immediately due and payable. Such an event of default would also
constitute an event of default under the Revolving Facility. In that case, we
will continue to work with the Term Loan lenders to provide for whatever waivers
or amendments necessary to avoid an event of default thereunder, although there
can be no assurances that we would be able to obtain such a waiver or amendment.



Results of Operations



Revenues and Sales Volume. The following table provides the components of our
revenues for the three and nine months ended September 30, 2020 and 2019, as
well as each period's respective sales volumes:




                   Three months ended                             Nine months ended
                     September 30,              Change              September 30,             Change
Revenue (In
$ '000s):           2020         2019         $          %        2020        2019          $          %
Oil sales        $    17,638   $ 45,683   $ (28,045)     (61)   $  57,830   $ 132,626   $ (74,796)     (56)
Natural gas
sales                  1,743      2,823      (1,080)     (38)       5,121       9,617      (4,496)     (47)
NGL sales              1,542      2,591      (1,049)     (40)       5,445

9,495 (4,050) (43) Total revenue $ 20,923 $ 51,097 $ (30,174) (59) $ 68,396 $ 151,738 $ (83,342) (55)







                    Three months ended                                 Nine months ended
                       September 30,               Change                September 30,                 Change
Net sales
volumes:            2020         2019         Volume        %         2020          2019          Volume         %
Oil (Bbls)          474,806       798,256     (323,450)     (41)     1,626,558     2,265,781       (639,223)     (28)
Natural gas
(Mcf)               870,956     1,537,676     (666,720)     (43)     2,909,449     4,498,227     (1,588,778)     (35)
NGL (Bbls)          153,955       196,609      (42,654)     (22)       426,541       607,566       (181,025)     (30)
Oil equivalent
(Boe)               773,920     1,251,144     (477,224)     (38)     2,538,007     3,623,052     (1,085,045)     (30)
Average daily
production
(Boe/d)               8,412        13,599       (5,187)     (38)         9,263        13,271         (4,008)     (30)






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Sales volumes decreased by 477,224 Boe (5,187 Boe/d) to 773,920 Boe (8,412
Boe/d) for the three months ended September 30, 2020 compared to 1,251,144 Boe
(13,599 Boe/d) for the same prior year period. Sales volumes decreased by
1,085,045 Boe (4,008 Boe/d) to 2,538,007 Boe (9,263 Boe/d) for the nine months
ended September 30, 2020 compared to 3,623,052 Boe (13,271 Boe/d) for the same
prior year period. The lower volumes in both 2020 periods are primarily due to
more wells coming onto production in late 2018 and early 2019 (11.0 new wells
coming online in the fourth quarter of 2018 and 20.0 new operated wells in the
first nine months of 2019) compared to late 2019 and the first half of 2020 (2.0
wells coming online in each of the fourth quarter of 2019 and first quarter of
2020 and 4.0 net wells that came online in late second quarter 2020). This
scaled back 2020 development plan is in a large part due to the decrease in oil
prices beginning in early March 2020 and reflects capital spending limitations
included in our recent credit agreement amendments. The three months and nine
months ended September 30, 2019 also included approximately 1,074 Boe/d and
1,158 Boe/d of production from the Dimmit County assets, which were sold in
October 2019.



Our sales volume is oil­weighted, with oil representing 61% and 64%
of total sales volume for the three and nine months ended September 30, 2020,
respectively, and liquids (oil and NGLs) representing 81% of total sales volumes
for the three and nine months ended September 30, 2020. For the three and nine
months ended September 30, 2019, oil represented 64% and 63% of total sales
volumes, respectively, and liquids represented 80% and 79% of total sales
volumes, respectively. Our oil cut decreased slightly during the three months
ended September 30, 2020 due primarily to a decrease in flared natural gas
volumes and restored production on certain of our gassier wells.



Oil sales. Oil sales decreased by $28.1 million (62%) to $17.6 million for the
three months ended September 30, 2020 from $45.7 million for the same prior year
period. The decrease in oil revenue was driven by lower sales volumes ($18.5
million) and the significant decrease in market prices beginning in March 2020
($9.5 million). Oil sales volumes decreased 41% to 474,806 Bbls for the three
months ended September 30, 2020 compared to 798,256 Bbls for the prior year
period. The average realized price on the sale of our oil decreased by 32% to
$37.15 per Bbl for the three months ended September 30, 2020.



Oil sales decreased by $74.8 million (56%) to $57.8 million for the nine months
ended September 30, 2020 from $132.6 million for the same prior year period, of
which $37.4 million was the result of lower realized oil prices and $37.4
million was the result of lower sales volumes. The average realized price on the
sale of our oil decreased by 39% to $35.56 per Bbl for the nine months ended
September 30, 2020. Oil sales volumes decreased 28% to 1,626,558 Bbls for the
nine months ended September 30, 2020 compared to 2,265,781 Bbls for the prior
year period.



Natural gas sales. Natural gas sales decreased by $1.1 million (38%) to $1.7
million for the three months ended September 30, 2020 from $2.8 million for the
prior year period. The decrease in natural gas revenues was driven by lower
sales volumes ($1.2 million), offset by a slight improvement in pricing. Natural
gas sales volumes decreased 43% to 870,956 Mcf for the three months ended
September 30, 2020 compared to 1,537,676 Mcf for the prior year period. As noted
above, we sold our Dimmit County assets in October 2019, which accounted for
approximately 15% of our gas production for the three months ended September 30,
2019 (but only 3% of our oil production). The average realized price on the sale
of our natural gas increased by 9% to $2.00 per Mcf (net of certain
transportation and marketing costs) for the three months ended September 30,
2020 from $1.84 per Mcf for the prior year period.



Natural gas sales decreased by $4.5 million (47%) to $5.1 million for the nine
months ended September 30, 2020 from $9.6 million for the prior year period, of
which $3.4 million was the result of lower production volume and $1.1 million
was the result of lower product pricing. Natural gas sales volumes decreased 35%
to 2,909,449 Mcf for the nine months ended September 30, 2020 compared to
4,498,227 Mcf for the prior year period. The average realized price on the sale
of our natural gas decreased by 18% to $1.76 per Mcf for the nine months ended
September 30, 2020 from $2.14 per Mcf for the prior year period.



NGL sales. NGL sales decreased by $1.0 million (40%) to $1.5 million for the
three months ended September 30, 2020 from $2.6 million for the prior year
period. The decrease in NGL revenues was the result of lower sales volumes ($0.6
million) and lower product pricing ($0.5 million). NGL sales volumes decreased
42,654 Bbls (22%) to 153,955 Bbls for the three months ended September 30, 2020
compared to 196,609 Bbls for the prior year period. The average realized price
on the sale of our NGLs decreased by 24% to $10.02 per Bbl for the three months
ended September 30, 2020 from $13.18 per Bbl for the prior year period.

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NGL sales decreased by $4.1 million (43%) to $5.4 million for the nine months
ended September 30, 2020 from $9.5 million for the prior year period, of which
$2.8 million was due to lower sales volumes and $1.2 million was the result of
lower product pricing. NGL sales volumes decreased 181,025 Bbls (30%) to 426,741
Bbls for the nine months ended September 30, 2020 compared to 607,566 Bbls for
the prior year period. The average realized price on the sale of our NGLs
decreased by 18% to $12.77 per Bbl for the nine months ended September 30, 2020
from $15.63 per Bbl for the prior year period.



The following table provides a summary of our operating expenses on a per Boe
basis:




                             Three months ended September 30,           Change          Nine months ended September 30,           Change

Selected per Boe
metrics                         2020                 2019              $        %           2020                2019             $        %
Total oil, natural gas
and NGL revenues (price
received)                 $           27.04    $           40.84     (13.80)   (34)   $          26.95    $          41.88     (14.93)   (36)
Effect of commodity
derivatives on average
price                                 13.65                 1.60       12.05    753              14.93                1.54       13.39    869
Total oil, natural gas
and NGL revenues (price
realized)                 $           40.69    $           42.44      (1.75)    (4)   $          41.88    $          43.42      (1.54)    (4)
Lease operating expense
(1)                       $          (6.04)    $          (5.12)      (0.92)   (18)   $         (6.59)    $         (6.08)      (0.51)    (8)
Workover expense (1)      $          (0.75)    $          (0.96)        0.21     22   $         (0.82)    $         (1.13)        0.31     27
Gathering, processing
and transportation
expense                   $          (4.30)    $          (2.67)      (1.63)   (61)   $         (3.81)    $         (2.74)      (1.07)   (39)
Production taxes          $          (3.01)    $          (2.27)      (0.74)   (33)   $         (1.60)    $         (2.51)        0.91     36
Depreciation, depletion
and amortization (2)      $         (29.17)    $         (18.45)     (10.72)   (58)   $        (26.36)    $        (18.57)      (7.79)   (42)
General and
administrative expense    $          (4.99)    $          (4.05)      (0.94)   (23)   $         (5.27)    $         (4.36)      (0.91)   (21)

(1) Lease operating expense and workover expense are included together in lease

operating and workover expenses on the consolidated statement of operations.

(2) Excludes depreciation related to corporate assets.




Lease operating expense. Our LOE decreased by $1.6 million (27%) to $4.7 million
for the three months ended September 30, 2020 from $6.4 million in the prior
year period, but increased $0.92 per Boe to $6.04 per Boe from $5.12 per Boe. In
March 2020, we made field operating changes and renegotiated pricing with a
number of our vendors due to the material drop in market oil prices, which
reduced our costs on an absolute basis. However, a portion of our costs are
fixed, and the per Boe rate was negatively impacted by our lower production
volumes.

LOE decreased by $5.3 million (24%) to $16.7 million for the nine months ended
September 30, 2020 from $22.0 million in the prior period, but increased $0.51
per Boe to $6.59 per Boe from $6.08 per Boe for the reasons described above.

Workover expense. Workover expense decreased by $0.6 million (51%) to $0.6
million ($0.75 per Boe) for the three months ended September 30, 2020 from $1.2
million ($0.96 per Boe) in the prior year period. We have reduced workover
expense through conversion of rod pumps to gas lift and redesign of certain rod
pump wells to reduce our well failure rates and the associated workover expense
going forward.




Workover expense decreased by $2.0 million (49%) to $2.1 million ($0.82 per Boe)
for the nine months ended September 30, 2020 from $4.1 million ($1.13 per Boe)
in the same prior period. As a result of the material drop in oil prices,
beginning April 2020 through July 2020, we deferred workovers for low producing
wells as it was not economic to service the wells which drove down absolute and
per Boe workover expense for the nine months ended September 30, 2020.





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Gathering, processing and transportation expense ("GP&T"). GP&T for the three
months ended September 30, 2020 totaled $3.3 million ($4.30 per Boe), which was
consistent on an absolute basis with the three months ended September 30, 2019.
In 2020, GP&T fees were primarily incurred on production from the properties we
acquired in April 2018. Sales volumes from these assets decreased 24% during the
three months ended September 30, 2020 as compared to the prior year period. The
volume driven decrease was partially offset by additional compression expense
associated with our midstream partner's plant expansion and fees charged for
delivery variances to nominations.



GP&T decreased by $0.2 million (2%) to $9.7 million ($3.81 per Boe) for the nine
months ended September 30, 2020 as compared to $9.9 million ($2.74 per Boe) for
the nine months ended September 30, 2019. Sales volumes from the assets that
generate GP&T decreased 9% during the nine months ended September 30, 2020 as
compared to the prior year period. In addition, in 2019, we incurred $0.4
million of GP&T associated with the Dimmit County assets, which were sold in
October 2019. These decreases were partially offset by additional compression
expense associated with our midstream partner's plant expansion.



Production taxes. Our production taxes decreased by $0.5 million (18%) to $2.3
million for the three months ended September 30, 2020 from $2.8 million for the
prior year period, which was driven by our overall decrease in revenue, offset
by an ad valorem adjustment of $0.9 million for the 2020 period to reflect

our
recent assessment.



Our production taxes decreased by $5.0 million (55%) to $4.1 million for the
nine months ended September 30, 2020 from $9.1 million for the prior year
period, which was also driven by our overall decrease in revenue. In addition,
we recorded a severance tax refund related to prior periods of $1.1 million that
the Company expects to receive. Exclusive of the expected severance tax refund,
production taxes increased to 7.6% of total revenue for the nine months ended
September 30, 2020, as compared to 6.0% of total revenue for the nine months
ended September 30, 2019. Ad valorem taxes are not charged on wells during the
first calendar year of production. As a result of fewer new wells coming on-line
for production in 2020 as compared to the prior year, our overall production tax
rate is higher in 2020.




Depletion, depreciation and amortization expense ("DD&A"). Our DD&A expense
related to proved oil and natural gas properties increased by $0.5 million (2%)
to $22.6 million for the three months ended September 30, 2020 from $23.1
million for the prior year period. On a per Boe basis, DD&A increased to $29.17
per Boe for the three months ended September 30, 2020 compared to $18.45 per Boe
for the prior year period. DD&A per Boe for the three months ended September 30,
2019, was diluted by production from the Dimmit County assets, which were
classified as held for sale and not subject to depletion. The assets were sold
in October 2019. In addition, the number of proved undeveloped reserve locations
has decreased due to changes to our development program.



For the nine months ended September 30, 2020, DD&A expense related to proved oil
and natural gas properties decreased slightly to $66.9 million as compared to
$67.3 million the same prior year period. On a per Boe basis, DD&A increased to
$26.36 per Boe for the nine months ended September 30, 2020 compared to $18.57
per Boe for the prior year period for the reasons noted above.



Impairment expense. During the three and nine months ended September 30, 2020,
we recorded impairment expense related to proved properties totaling $331.9
million. These impairments largely resulted from downward revisions to our oil
and gas reserves and the associated expected future cash flows due to the
continued depressed commodity prices. In addition, as a result of the depressed
commodity price environment and the uncertainty regarding our liquidity, we have
significantly slowed the pace of our future development plans.

During the three and nine months ended September 30, 2019, we recorded impairment expense of $0.9 million and $10.0 million related to our Dimmit County oil and gas properties, which were classified as held for sale as of September 30, 2019 and subsequently divested in October 2019.


Reserve estimates and related impairments of proved and unproved properties are
difficult to predict in a volatile price environment. We may experience
additional proved or unproved property impairments in the future if commodity
prices for the products we produce continue to decline, if we experience
additional changes to our longer term development plans or if there are downward
adjustments to our reserves.



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General and administrative expense ("G&A"). G&A decreased by $1.2 million (24%)
to $3.9 million for the three months ended September 30, 2020 as compared to
$5.1 million for the prior year. During the three months ended September 30,
2020 we incurred legal and advisory fees of $1.5 million ($1.93 per Boe) to
explore transactions to increase our capital and to reduce our total debt and
leverage, as required under the recent amendments to the Term Loan. During the
three months ended September 30, 2019 we incurred legal and accounting fees to
complete our Redomiciliation to the U.S of $0.5 million ($0.40 per Boe). G&A,
excluding the costs associated with these discrete transactions, decreased on an
absolute basis as compared to prior year primarily due to lower salaries and
wages as a result of the expected PPP loan forgiveness of $1.1 million
attributable to the three months ended September 30, 2020 and our workforce
reduction of approximately 18% and also reduced salaries for certain positions,
which occurred in early May 2020.



For the nine months ended September 30, 2020, G&A decreased by $2.4 million
(15%) to $13.4 million as compared to $15.8 million for the same prior year
period. During the nine months ended September 30, 2020 we incurred legal and
advisory fees of $2.1 million ($0.84 per Boe) related to the credit facility
amendments as described above and $0.2 million ($0.08 per Boe) for legal and
accounting fees to complete our Redomiciliation to the U.S. During the nine
months ended September 30, 2019 we incurred legal and accounting fees related to
the Redomiciliation of $1.5 million ($0.42 per Boe). G&A, excluding the costs
associated with these discrete transactions, decreased on an absolute basis as
compared to prior year primarily due to lower salaries and wages as a result of
the expected PPP loan forgiveness of $1.9 million attributable to the nine
months ended September 30, 2020 and our workforce and salary reductions.



As described under Credit Facilities, our G&A for the second and third quarter
of 2020, was limited to $3 million per quarter (as defined in the agreements).
After the adjustments provided for in the agreements, we were in compliance with
the covenant for both periods. Our G&A is limited to $3.6 million for the fourth
quarter of 2020.



Gain/loss on commodity derivative financial instruments. Our commodity
derivative contracts are marked to market at the end of each reporting period
with the changes in fair value being recognized as gain (loss) on commodity
derivative financial instruments, net. Cash flow, however, is only impacted by
the monthly settlements paid to or received by the counterparty, which are also
recorded as gain (loss) on commodity derivative financial instruments, net. The
components of gain (loss) on commodity derivative financial instruments was as
follows (in thousands):




                                  Three months ended                     Nine months ended
                                    September 30,                          September 30,
                                   2020         2019       $ Change      2020         2019       $ Change
Unrealized gains (losses)       $ (17,759)    $ 14,294    $ (32,053)   $ 27,747    $ (12,345)    $  40,092
Realized gains                      10,566       2,007         8,559     37,905         5,590       32,315
Total gain (loss) on
commodity derivative
financial instruments           $  (7,193)    $ 16,301    $ (23,494)   $ 65,652    $  (6,755)    $  72,407

Interest expenses, net of amounts capitalized. The components of interest expense, net of amounts capitalized was as follows (in thousands):




                                   Three months ended September 30,      Change      Nine months ended September 30,      Change
Interest Expense                      2020                  2019           $           2020                 2019             $
Interest expense on Term
Loan, Revolving Facility and
other                                     8,289                 8,400     (111)           23,663                24,574      (911)
Amortization of debt issuance
costs                                       920                   877        43            2,764                 2,474        290
Expense incurred with debt
modification                                  -                     -         -            1,199                     -      1,199
Loss on interest rate swap                   86                   578     (492)            3,170                 4,604    (1,434)
Capitalized interest                      (161)                 (607)       446            (641)               (2,019)      1,378
Total                                     9,134                 9,248     (114)           30,155                29,633        522






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The decrease in interest expense on our Term Loan, Revolving Facility and other
for the three and nine months ended September 30, 2020 as compared to the same
prior year period was driven by the decrease in the average market interest
rates, partially offset by an increase in the amount of outstanding debt and
additional 2% of paid-in-kind ("PIK") interest, which is added to the principal
of the Term Loan.  The PIK interest, effective May 30, 2020, was added as part
of the third amendment to the Term Loan in June 2020, and totaled $1.3 million
and $1.7 million for the three and nine months ended September 30, 2020,
respectively.  Our weighted average debt outstanding during the three and nine
months ended September 30, 2020 was $371.7 million and $367.2 million,
respectively, versus $363.9 million and $346.7 million, respectively, during the
three and nine months ended September 30, 2019.  At September 30, 2020, the
stated weighted average interest rates on the Revolving Facility and the Term
Loan were 3.40% and 11.00% (including 2% PIK interest added to the principal at
each reporting period), respectively, as compared to 5.20% and 10.09%,
respectively, at September 30, 2019.



As described in Note 3, we entered into the fourth amendment to our Revolving
Facility in January 2020, which among other things, appointed Toronto Dominion
(Texas) LLC, as the administrative agent (replacing Natixis). As a result of the
former administrative agent exiting the facility and terminating its
commitments, we wrote-off previously capitalized deferred debt issuance costs of
$1.1 million during the nine months ended September 30, 2020 in accordance with
Accounting Standards Codification 470- Debt. We capitalized new financing and
legal fees of $1.0 million, which will be amortized over the remaining loan
term. In June 2020, we entered into the fifth amendment to our Revolving
Facility, which among other things, reduced our borrowing base from $210 million
and $170 million. As a result, we wrote-off deferred debt issuance costs in
proportion to the decrease in borrowing base of $0.1 million during the nine
months ended September 30, 2020.



We recognized a loss on our interest rate swap of $0.1 million and $0.6 million
for the three months ended September 30, 2020 and 2019, respectively, and $3.2
million and $4.6 million for the nine months ended September 30, 2020 and 2019,
respectively. Our interest rate swaps are marked to market at the end of each
reporting period, with the changes in fair value being recognized as interest
expense. Cash settlements paid to or received by our counterparty are also
recorded as interest expense. In the three months ended September 30, 2020, the
loss on the interest rate swap consisted of $0.6 million of unrealized gains and
$0.7 million of realized cash settlements. In the three months ended September
30, 2019, the loss on the interest rate swap consisted of $0.3 million of
unrealized losses and $0.3 million of realized cash settlements. In the nine
months ended September 30, 2020, the loss on the interest rate swap consisted of
$1.0 million of unrealized losses and $2.2 million of realized cash settlements.
In the nine months ended September 30, 2019, the loss on the interest rate swap
consisted of $4.4 million of unrealized losses and $0.2 million of realized

cash
settlements.



Other income (expense). In the second quarter 2020, we conveyed our non-core
interest in the petroleum exploration license 570 located in the Cooper Basin in
Australia ("PEL570") to the property's operator. At the time of the conveyance,
we had accrued expenses related to exploratory drilling of approximately $3.7
million. As consideration for the property, the operator settled our outstanding
liability for $0.9 million. The property had previously been fully impaired, and
therefore we recognized a gain on the conveyance of $2.8 million during the nine
months ended September 30, 2020, which is recorded in other income (expense) on
the consolidated statement of operations. As a result of the conveyance, we were
also relieved of our commitment to fund any further exploratory drilling for
PEL570.





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Income tax expense (benefit). The components of our provision for income tax expense (benefit) and our effective income tax rates were as follows (in thousands):




                                Three months ended September 30,                      Nine months ended September 30,
Income tax expense
(benefit)                            2020                 2019        Change in $         2020                2019         Change in $
Current tax expense
(benefit)                                  (33)                  -           (33)             (103)                   -          (103)
Deferred tax
expense/(benefit)                       (8,332)              1,573        (9,905)           (6,887)             (2,478)        (4,409)
Total income tax expense
(benefit)                               (8,365)              1,573        (9,938)           (6,990)             (2,478)        (4,512)
Effective tax rate                         2.1%              10.6%                             1.9%               10.4%

Our effective income tax rate, as shown above, differs from the statutory rate (21%) primarily due to changes in our valuation allowance.

Adjusted EBITDAX. Management has historically used both GAAP and certain non-GAAP measures to assess our performance. Adjusted EBITDAX is a supplemental non-GAAP financial measure that is used by our management team for various purposes including as a measure of operating performance and as a basis for strategic planning and forecasting, and certain external users of our consolidated financial statements, such as investors and industry analysts.





We define "Adjusted EBITDAX" as earnings before interest expense, income taxes,
DD&A, property impairments, gain/(loss) on sale of non-current assets,
exploration expense, stock-based compensation, gains and losses on commodity
hedging, net of settlements of commodity hedging and certain other non-cash or
non-recurring income/expense items. Our computation of Adjusted EBITDAX may not
be comparable to other similarly titled measures of other companies.



Management believes Adjusted EBITDAX is useful because it allows us to more
effectively evaluate our operating performance, identify operating trends (which
may otherwise be masked by the excluded items) and compare the results of our
operations from period to period without regard to our financing policies and
capital structure. Adjusted EBITDAX should not be considered as an alternative
to, or more meaningful than, net income as determined in accordance with GAAP,
or as an indicator of our operating performance or liquidity.

Three months ended September 30, Nine months ended September 30, Reconciliation of net income (loss) to Adjusted EBITDAX (in $ 000's)

          2020                   2019               2020                 2019
Net income (loss)                                                       $

(356,574) $ 13,296 $ (332,103) $ (21,270) Add back: Current and deferred income tax expense (benefit)

                                 (8,365)                 1,573             (6,990)             (2,478)
Interest expense                                                                    9,134                 9,248              30,155              29,633
Loss (gain) on commodity derivative financial instruments, net                      7,193              (16,301)            (65,652)               6,755
Settlement of commodity derivatives financial instruments                  

       10,566                 2,007              37,905               5,590
DD&A expense                                                                       22,758                23,273              67,527              67,735
Impairment expense                                                                331,877                   907             331,877               9,990
Exploration expense                                                                    20                   213                 193                 235

Noncash stock-based compensation expense                                              (3)                    57                 192                 334
Transaction-related expenses included in G&A expense (1)                            1,465                   497               2,324               1,511
Reduction-in-force related expenses included in G&A expense                           142                     -                 330                   -
Other expense (income), net (2)                                            

           72                    19             (2,487)                  29
Adjusted EBITDAX                                                        $          18,285      $         34,789   $          63,271    $         98,064




     In 2019 and early 2020, we incurred one-time costs, primarily legal and

accounting fees, to complete our Redomiciliation to the U.S. Additionally, in

(1) 2020, we incurred costs to amend our credit facilities and explore


     transactions to reduce our leverage (as required by the third amendment to
     the Term Loan).




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(2) Other income for the three and nine months ended September 30, 2020 includes


     a $2.8 million gain on the conveyance of PEL570 to the operator.


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Liquidity and Capital Resources





At September 30, 2020, our cash balance totaled $2.6 million and we had working
capital of $11.6 million, which included the net fair value of derivative
positions of $28.5 million. In the fourth quarter 2020, we expect total capital
expenditures to be approximately $6.5 to $7.5 million, which includes completion
of 2.0 net drilled uncompleted wells. We intend to fund the capital expenditures
with cash on hand and cash flow generated from operations.

We and our wholly owned subsidiary, SEI, are parties to a syndicated $250.0 million Term Loan with Morgan Stanley Capital Administrators Inc., as administrative agent, and the Revolving Facility, which is a syndicated reserve-based revolver with Toronto Dominion (Texas) LLC, as administrative agent. We refer to our Revolving Facility and Term Loan collectively as our "credit facilities". At September 30, 2020, the Revolving Facility had a borrowing base of $168.6 million, of which $130.6 million was outstanding as of September 30, 2020, and $21.7 million undrawn (net of $16.4 million of outstanding letters of credit).


The Revolving Facility matures October 23, 2022, and the Term Loan matures on
April 23, 2023. Our Term Loan and Revolving Facility require us to maintain a
variety of financial ratios (described below under "Credit Facilities"). As a
result of the recent sharp decrease in oil prices and the resulting scaled down
development plan, our business is sensitive to these financial covenants,
particularly in the near term. On September 30, 2020, we were not in compliance
with the Leverage Ratio or the Current Ratio under the Revolving Facility. We
are currently in discussions with the Revolving Facility lenders to waive these
defaults arising under our failure to comply with the Leverage Ratio and the
Current Ratio as of September 30, 2020. There can be no assurance that we will
receive these waivers. The failure to be in compliance constitutes an event of
default under the Revolving Facility, and at any time after the occurrence of an
event of default under the Revolving Facility, the lenders thereunder may, among
other options, declare any amounts outstanding under the Revolving Facility
immediately due and payable and the lenders thereunder may terminate any
commitment to make further loans under the Revolving Facility. Any such
acceleration of the Revolving Facility will also constitute an event of default
under the Term Loan.



In addition, we are currently required by the Term Loan facility to negotiate
with the lenders under the credit facilities to enter into a restructuring
support agreement with such lenders with respect to a workout or restructuring
of our debt on or prior to November 30, 2020 or such later date as may be
agreed. There can be no assurance that we will be able to enter into a
restructuring support agreement with such time frame or that the Term Loan
lenders will agree to an extension.



Pursuant to the Fifth Amendment to Amended and Restated Term Loan Agreement, we
are required to deliver on November 30, 2020 (i) a reserve report as of
September 30, 2020 and (ii) a compliance certificate with respect to the Asset
Coverage Ratio as of September 30, 2020. While we have not yet finalized our
reserve report as of such date and, as such, have not yet determined whether we
are in compliance with the Asset Coverage Ratio as of the same date, there is
substantial risk that we will not be in compliance with the Asset Coverage Ratio
as of such date. The failure to be in compliance with the Asset Coverage Ratio
as of any date would constitute an event of default under the Term Loan, and at
any time after the occurrence of an event of default under the Term Loan, the
lenders thereunder may, among other options, declare any amounts outstanding
thereunder immediately due and payable. Such an event of default would also
constitute an event of default under the Revolving Facility. In that case, we
will continue to work with the Term Loan lenders to provide for whatever waivers
or amendments necessary to avoid an event of default thereunder, although there
can be no assurances that we would be able to obtain such a waiver or amendment.



Our liquidity is highly dependent on prices we receive for the sale of oil, gas,
and NGLs we produce. Prices we receive are determined by prevailing market
conditions and greatly influence our revenue, cash flow, profitability, ability
to comply with financial and other covenants in our credit facilities, access to
capital and future rate of growth. We expect that our commodity derivative
positions will help us stabilize a portion of our expected cash flows from
operations despite the recent decline in the price of oil and natural gas. At
times, we may choose to liquidate derivative positions before the contract ends
in order realize the current value of our existing positions, to the extent
permitted by our credit facilities Please see Note 6 to our Consolidated
Financial Statements for a summary of our outstanding derivative positions

as of
September 30, 2020.

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If commodity prices remain depressed for an extended period of time or the capital/credit markets become constrained, the borrowing capacity under our Revolving Facility could be reduced further and we may be required to repay some or all of our indebtedness prior to maturity.





Cash Flows



Our cash flows for the nine months ended September 30, 2020 and 2019 are as
follows:


                                                Nine months ended September 30,
(In $ '000s)                                      2020                 2019

Net cash provided by operating activities    $        23,174     $          75,101
Net cash used in investing activities        $      (47,311)     $       (124,369)
Net cash provided by financing activities    $        14,353     $         

49,650




Cash flows provided by operating activities. Cash provided by operating
activities for the nine months ended September 30, 2020 was $23.2 million, a
decrease of $51.9 million compared to $75.1 million in the prior year period.
This decrease was driven by lower revenues resulting from a decrease in
production volumes and lower product pricing. Including the effect of derivative
settlements, including unwound positions, (as shown on page 30), our realized
price per Boe decreased 4% to $41.88 per Boe as compared to $43.42 per Boe.
During the nine months ended September 30, 2020, we had cash settlements from
our derivative contracts of $37.4 million. In addition, we received $1.9 million
of PPP proceeds, which we expect to be forgiven. Due to payment timing, our cash
flows from operations for the nine months ended September 30, 2020 included
three quarterly interest payments on our Term Loan, whereas, the nine months
ended September 30, 2019 included two quarterly interest payments, which
resulted in lower cash flows in 2020 of $6.5 million.



Cash flows used in investing activities. Cash used in investing activities for
the nine months ended September 30, 2020 decreased to $47.3 million as compared
to $124.3 million in the same prior year period. Cash flows for both periods
were primarily related to payment of drilling and completion costs. We slowed
our pace of development in 2020 as a result of the commodity price environment.
In 2020 and 2019, the cash flows used in investing activities also included a
reduction of the amount of capital expenditures included in accounts payable and
accrued expenditures of $9.4 million and $5.6 million, respectively.



Cash flows provided by financing activities. Cash provided by financing
activities totaled $14.4 million for financing activities during the nine months
ended September 30, 2020, as compared to $49.7 million for the nine months ended
September 30, 2019. We drew $17.0 million on the Revolver in the third quarter
of 2020 to meet our working capital needs. This was partially offset by a $1.4
million required repayment made in early July 2020 after we unwound a derivative
position. In January 2020, we paid lender and legal fees totaling $1.0 million
to amend our Revolving Facility to increase the borrowing base to $210 million
(which was subsequently reduced to $170 million following the industry
downturn). During 2019, we borrowed $50.0 million on our Revolving Facility to
fund a portion of our 2019 drilling program.



Capital Expenditures



During the nine months ended September 30, 2020, our capital additions totaled
$35.9 million, of which $32.8 million were drilling, completions and facility
costs, primarily to complete and equip 6.0 net wells, which were turned to sales
in February 2020 (2.0 net wells) and in late June 2020 (4.0 net wells). We also
drilled 2.0 net wells early in the second quarter 2020, which we plan to
complete in the fourth quarter 2020.



Credit Facilities



Interest on the Revolving Facility accrues at LIBOR plus a margin that ranges
from 2.50% to 3.50% based upon the amount drawn. Interest on the Term Loan
accrues at LIBOR (with a LIBOR floor of 1.0%) plus 10.0%, of which 2% of the
applicable margin is payable-in-kind (effective May 30, 2020).



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Under the Revolving Facility, we are required to maintain the following financial ratios:

a minimum Current Ratio, consisting of consolidated current assets (as defined

? in the Revolving Facility) including undrawn borrowing capacity to consolidated

current liabilities (as defined in the Revolving Facility), of not less than

1.0 to 1.0 as of the last day of any fiscal quarter;

a maximum Leverage Ratio, consisting of consolidated Total Debt to adjusted

? consolidated EBITDAX (as defined in the Revolving Facility), of not greater

than 3.5 to 1.0 as of the last day of any fiscal quarter; and

a minimum Interest Coverage Ratio, consisting of EBITDAX to Consolidated

? Interest Expense (as defined in the Revolving Facility), of not less than 1.5

to 1.0 as of the last day of any fiscal quarter (for such time as there is a


   similar covenant under ours or SEI's subordinated indebtedness).

Under the Term Loan, we are required to maintain the following financial ratios:

a minimum Interest Coverage Ratio, consisting of EBITDAX to Consolidated

? Interest Expense (as defined in the Term Loan), of not less than 1.5 to 1.0 as

of the last day of any fiscal quarter (for such time as there is a similar

covenant under ours or SEI's subordinated indebtedness); and

? an Asset Coverage Ratio, consisting of Total Proved PV9% to Total Debt (as


   defined in the Term Loan agreement), of not less than 1.50 to 1.0.




In addition, the third, fourth and fifth amendments to the Term Loan and fifth
amendment to the Revolving Facility established a cap on maximum capital
expenditures (as defined in the agreements) of $5 million from May 1, 2020
through September 30, 2020, and $11.1 million from May 1, 2020 through December
31, 2020, and general and administrative amounts (as defined in the agreements)
of $3 million for the second and third quarters of 2020, and $3.6 million for
the fourth quarter 2020.



A breach of any covenants in our Term Loan will result in default under both our
Term Loan and cross default on our Revolving Facility, after any applicable
grace period, and a breach of any covenant in our Revolving Facility that
results in an acceleration of such debt will result in a default under our Term
Loan. A default, if not waived, could result in acceleration of the amounts
outstanding under the Credit Facilities. In the event that some or all of the
amounts outstanding under our Credit Facilities are accelerated and become
immediately due and payable, we may not have the funds to repay, or the ability
to refinance, such outstanding amounts and our lenders could foreclose upon our
assets. If we are unable to remain in compliance with our financial and
non-financial covenants, we intend to seek a waiver or covenant relief. However,
no assurances can be given that we will be able to obtain such relief.



As of September 30, 2020, we were in breach of certain of our financial
covenants in our Revolving Facility. As described above, we are required to
maintain an Asset Coverage Ratio of not less than 1.5 to 1.0, which is
calculated as the present value of our Total Proved Reserves (discounted at 9%)
using Nymex pricing and giving consideration to the value of our commodity
derivative instruments, to Total Debt. Pursuant to the Fifth Amendment to
Amended and Restated Term Loan Agreement, we are required to deliver on November
30, 2020 (i) a reserve report as of September 30, 2020 and (ii) a compliance
certificate with respect to the Asset Coverage Ratio as of September 30, 2020.
While we have not yet finalized our reserve report as of such date and, as such,
have not yet determined whether we are in compliance with the Asset Coverage
Ratio as of the same date, there is substantial risk that we will not be in
compliance with the Asset Coverage Ratio as of such date. In that case, we will
continue to work with the Term Loan lenders to provide for whatever waivers or
amendments necessary to avoid an event of default thereunder, although there can
be no assurances that we would be able to obtain such a waiver or amendment.



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The value of our oil and gas reserves, (including "Total Proved Reserves" as
described in the Term Loan agreement) is highly sensitive to future commodity
prices. We regularly enter into commodity derivative contracts to protect the
cash flows associated with our proved developed producing wells and to provide
supplemental liquidity to mitigate decreases in revenue due to reductions in
commodity prices. In addition, we have renegotiated pricing with a number of our
vendors and have realized cost savings on drilling and completion activities in
2020 as compared to the rates in effect in 2019. However, given the recent
decline and continued volatility of commodity prices combined with a scaled back
development program, we believe that it is probable that we will not comply with
the Asset Coverage Ratio, Total Debt to EBITDA Ratio and the Current Ratio and
potentially other covenants at measurement dates during the 12 months following
the date of this Quarterly report and cannot guarantee that we will be able to
obtain waivers if a covenant is breached. We are currently working with our
lenders to address the status of our compliance with the covenants under the
Term Loan and Revolving Facility. If we are unsuccessful in our efforts to
restructure and obtain new financing, it may be necessary for us to seek
protection from creditors under Chapter 11 of the U.S. Bankruptcy Code ("Chapter
11"), or an involuntary petition for bankruptcy may be filed against us. This
raises uncertainty about our ability to continue as a going concern.

Off-Balance Sheet Arrangements



We do not have any off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future effect on our financial statements, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.

Critical Accounting Policies and Estimates

There were no changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

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