UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from______ to______
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices)
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(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
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Securities registered pursuant to Section 12(b) of the Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
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☒ | Smaller reporting company |
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| ☐ | Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
As of May 15, 2023, there were
ALPINE SUMMIT ENERGY PARTNERS, INC.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and the exhibits attached hereto (the "Quarterly Report") contains certain "forward-looking information" and "forward-looking statements" (together, "forward-looking statements"), including management's assessment of Alpine Summit Energy Partner, Inc.'s (the "Company," "Alpine Summit," "we," "our, or "us") future plans and operations specifically in relation to the remainder of 2023 and 2024. Such forward-looking statements are generally identifiable by words such as "anticipate", "believe", "intend", "plan", "expect", "schedule", "indicate", "focus", "outlook", "propose", "target", "objective", "priority", "strategy", "estimate", "budget", "forecast", "would", "could", "will", "may", "future" or other similar words or expressions and include forward-looking statements relating to or associated with individual wells, facilities, regions or projects as well as timing of any future event which may have an effect on the Company's operations and financial position. Forward-looking statements are based on expectations, forecasts, and assumptions made by the Company using information available at the time of the statement and historical trends which includes expectations and assumptions concerning: the accuracy of reserve estimates and valuations; performance characteristics of producing properties; access to third-party infrastructure; government policies and regulation; future production rates; accuracy of estimated capital expenditures; availability and cost of labor and services and owned or third-party infrastructure; royalties; development and execution of projects; the satisfaction by third parties of their obligations to the Company; and the receipt and timing for approvals from regulators and third parties. All statements concerning expectations or projections about the future and statements and information regarding the future business plan or strategy, timing or scheduling, production volumes with splits by commodity, production declines, expected and future activities and capital expenditures, commodity prices, costs, royalties, schedules, operating or financial results, future financing requirements, and the expected effect of future commitments are forward-looking statements.
The forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to:
- changes in general economic, business and political conditions, including commodity price volatility, interest rates and currency exchange, OPEC (as defined below) actions, ongoing global economic concerns, Russia's continuing military invasion of Ukraine, and rising civil unrest and activism globally;
- changes in supply and demand for the Company's oil, natural gas, and natural gas liquids ("NGLs");
- a global public health crisis including the outbreak of the novel coronavirus (COVID-19) in 2020 which has caused volatility and disruptions in the supply, demand and pricing for crude oil, natural gas, and NGLs, global supply chains and financial markets, as well as declining trade and market sentiment and reduced mobility of people;
- volatility of commodity prices and the related effects of changing price differentials;
- ability to access capital from internal and external sources (including the corporate credit facility and the ABS Facility, each as described below);
- the Company's ability to meet foreseeable obligations by actively monitoring its credit facilities through use of loans/notes, asset sales, coordinating payment and revenue cycles each month, and an active commodity hedge program to mitigate commodity price risk and secure cash flows;
- ability to finance planned activities including infrastructure expansions which are required to meet future growth targets;
- access to third-party pipelines and facilities and access to sales markets;
- the ability to obtain regulatory, stakeholder and third-party approvals and satisfy any associated conditions that are not within the Company's control for exploration and development activities and projects;
- the ability of the Company to execute the normal course issuer bid ("NCIB");
- successful and timely implementation of capital expenditures;
- risks related to our ability to operate as a going concern;
- risks associated with the development and execution of major projects;
- risk that projects and opportunities intended to grow cash flow and/or reduce costs may not achieve the expected results in the time anticipated or at all;
- the Company's ability to operate and access to facilities to meet forecast production;
- the ability of the Company to pay dividends to its shareholders;
- the timing of payments in respect of the various development partnerships;
1
- operational risks and uncertainties associated with crude oil, natural gas, and NGLs activities, including unexpected formations or pressures, reservoir performance, fires, blow-outs, equipment failures and other accidents, uncontrollable flows of natural gas and wellbore fluids, pollution and other environmental risks;
- changes in costs including production, royalty, transportation, general and administrative, and finance;
- adverse weather conditions which could disrupt production and affect drilling and completions resulting in increased costs and/or delay adding production;
- actions by government authorities including changes to taxes, fees, duties and government-imposed compliance costs;
- changes to laws and government policies including environmental (and climate change), royalty, and tax laws and policies;
- counter-party risk with third parties to perform their obligations with whom the Company has material relationships;
- unplanned facility maintenance or outages or unavailability of third-party infrastructure which could reduce production or prevent the transportation of products to processing plants and sales markets;
- a major outage or environmental incident or unexpected event such as fires (including forest fires), hurricanes or equipment failures or similar events that would affect the Company's facilities or third-party infrastructure used by the Company;
- environmental risks (including climate change) and the cost of compliance with current and future environmental laws, including climate change laws along with risks relating to increased activism and opposition to fossil fuels;
- the risk that competing business objectives may exceed the Company's capacity to adapt and implement change;
- the potential for security breaches of the Company's information technology systems by malicious persons or entities, and the unavailability or failure of such systems to perform as anticipated as a result of such breaches;
- risks with transactions including closing an asset or property acquisition or disposition and the failure to realize anticipated benefits from any transaction;
- finding new crude oil and natural gas reserves that can be developed economically to replace reserves depleted by production;
- the accuracy of estimating reserves and future production and the future value of reserves;
- risk associated with commodity price hedging activities using derivatives and other financial instruments;
- maintaining debt levels at a reasonable multiple of cash flow;
- risk that the Company may be subject to litigation;
- the accuracy of cost estimates, some of which are provided at an early stage and before detailed engineering has been completed;
- risk associated with partner or joint arrangements to which the Company is a party;
- inability to secure labor, services or equipment on a timely basis or on favorable terms;
- increased competition from other industry participants for, among other things, capital, acquisitions of assets or undeveloped lands, and skilled personnel;
- increased competition from companies that provide alternative sources of energy; and
- force majeure events which may adversely affect our operations.
Statements relating to "reserves" or "resources" are forward-looking statements, including financial measurements such as net present value, as they involve the assessment, based on estimates and assumptions, that the reserves and resources described exist in the quantities predicted or estimated, and can be profitably produced in the future.
Readers are advised that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. The Company disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under applicable securities law.
2
The list of factors above is illustrative and by no means exhaustive. Additional information regarding these risks and other risks and uncertainties we face is contained in our Annual Report on Form 10-K for the year ended December 31, 2022, and in other reports we may file from time to time with the United States Securities and Exchange Commission (the "SEC") and the applicable Canadian securities regulatory authorities (including all amendments to those reports).
We qualify all forward-looking statements contained in this Quarterly Report by the foregoing cautionary statements.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
ALPINE SUMMIT ENERGY PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | |||||||||
| (As at; amounts in U.S. dollars, except share amounts) | Notes | 2023
(unaudited) |
December 31, 2022 |
||||||
| ASSETS | |||||||||
| Current assets: | |||||||||
| Cash and cash equivalents | $ | $ | |||||||
| Restricted cash | |||||||||
| Accounts receivable, net | 3 | ||||||||
| Derivative assets | 18 | ||||||||
| Prepaid expenses | |||||||||
| Total current assets | |||||||||
| Oil and natural gas properties, full-cost method: | |||||||||
| Evaluated | |||||||||
| Unproved and unevaluated | |||||||||
| Less: accumulated depreciation, depletion and amortization | ( |
) | ( |
) | |||||
| Oil and natural gas properties, net | 4 | ||||||||
| Other noncurrent assets: | |||||||||
| Operating lease assets | |||||||||
| Derivative assets | 18 | ||||||||
| Total assets | $ | $ | |||||||
| LIABILITIES AND SHAREHOLDERS' DEFICIENCY | |||||||||
| Current liabilities | |||||||||
| Accounts payable and accrued liabilities | 5 | $ | $ | ||||||
| Corporate credit facility | 6 | ||||||||
| Current portion of operating lease liabilities | |||||||||
| Current portion of long-term debt, net | 6 | ||||||||
| Accrued liability for automatic share purchase plan | 9 | ||||||||
| Total current liabilities | |||||||||
| Long-term debt, net | 6 | ||||||||
| Operating lease liabilities | |||||||||
| Asset retirement obligations | |||||||||
| Total liabilities | $ | $ | |||||||
| Commitments andcontingencies (Note 20) | |||||||||
| Redeemable non-controlling interest | 7 | $ | $ | ||||||
| SHAREHOLDERS' DEFICIENCY | |||||||||
| Share capital - Subordinate Voting Shares | 9 | $ | $ | ||||||
| Issued and outstanding: |
|||||||||
| Share capital - Multiple Voting Shares | 9 | ||||||||
| Issued and outstanding are |
|||||||||
| Share capital - Proportionate Voting Shares | 9 | ||||||||
| Issued and outstanding are |
|||||||||
| Additional paid-in capital | |||||||||
| Accumulated deficit | ( |
) | ( |
) | |||||
| Shareholders' equity (deficit) attributable to the Company | |||||||||
| Non-controlling interest | 8 | ( |
) | ( |
) | ||||
| Total Shareholders' Deficiency | $ | ( |
) | $ | ( |
) | |||
| TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND SHAREHOLDERS' DEFICIENCY |
$ | $ |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
4
ALPINE SUMMIT ENERGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
| Three months ended March 31, | |||||||||
| (unaudited; amounts in U.S. dollars, except share amounts) | Notes | 2023 | 2022 | ||||||
| REVENUES | |||||||||
| Oil and gas revenues | 12 | $ | $ | ||||||
| Gain / (loss) on derivative instruments, net | 19 | ( |
) | ||||||
| Total revenues | |||||||||
| OPERATING EXPENSES | |||||||||
| Production costs and transportation | 13 | ||||||||
| General and administrative | 15 | ||||||||
| Depreciation, depletion, and amortization | |||||||||
| Asset retirement obligation accretion | |||||||||
| Total operating expenses | |||||||||
| OPERATING INCOME (LOSS) | ( |
) | |||||||
| OTHER INCOME (EXPENSE) | |||||||||
|
Finance and interest income (expense), net |
14 | ( |
) | ( |
) | ||||
| Total other income (expense) | ( |
) | ( |
) | |||||
| INCOME (LOSS) BEFORE INCOME TAXES | ( |
) | |||||||
| Income tax provision (benefit) | 16 | ||||||||
| NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) | ( |
) | |||||||
| NET INCOME ATTRIBUTABLE TO REDEEMABLE NON- | |||||||||
| CONTROLLING INTEREST | 7 | ||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTEREST | 8 | ( |
) | ||||||
| NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY |
$ | $ | ( |
) | |||||
| Earnings (loss) per SVS and PVS, and MVS on an as-converted basis: (Note 11) | |||||||||
| Basic | $ | $ | ( |
) | |||||
| Diluted | $ | $ | ( |
) | |||||
| Weighted average number of shares per SVS and PVS, and MVS on an as-converted basis: (Note 11) | |||||||||
| Basic | |||||||||
| Diluted | |||||||||
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
5
ALPINE SUMMIT ENERGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
For the three months ended March 31, 2023:
| Total shareholders' | ||||||||||||||||||||
| Total Share | Additional Paid | Accumulated | equity attributable to | Non-controlling | Total | |||||||||||||||
| (unaudited; amounts in U.S. dollars) | Notes | Capital | In-Capital | Deficit | the Company | interests | Deficiency | |||||||||||||
| Balance as at January 1, 2023 | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||||
| Repurchase of SVS for cancellation | 9 | ( |
) | - | - | ( |
) | - | ( |
) | ||||||||||
| Change in NCI ownership | 8 | - | - | ( |
) | - | ||||||||||||||
| Automatic share purchase plan | 9 | - | - | - | ||||||||||||||||
| Stock based compensation | 10 | - | - | - | ||||||||||||||||
| Development partnership redemption for Origination member units |
7 | - | - | |||||||||||||||||
| Dividends declared and paid | 8, 9 | - | ( |
) | - | ( |
) | ( |
) | ( |
) | |||||||||
| Net income | - | - | ||||||||||||||||||
| Balance as at March 31, 2023 | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||||
| For the three months ended March 31, 2022: | ||||||||||||||||||||
| Total shareholders' | ||||||||||||||||||||
| Total Share | Additional Paid | Accumulated | equity attributable to | Non-controlling | Total | |||||||||||||||
| (unaudited; amounts in U.S. dollars) | Capital | In-Capital | Deficit | the Company | interests | Deficiency | ||||||||||||||
| Balance as at January 1, 2022 | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||||
| Settlement of RSUs | ( |
) | - | - | - | - | ||||||||||||||
| Change in NCI ownership | - | ( |
) | - | ( |
) | - | |||||||||||||
| Stock based compensation | - | - | - | |||||||||||||||||
| Development partnership redemption for Origination member units |
- | - | ||||||||||||||||||
| Dividends declared and paid | - | ( |
) | - | ( |
) | ( |
) | ( |
) | ||||||||||
| Net income (loss) | - | - | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Balance as at March 31, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
6
ALPINE SUMMIT ENERGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three months ended March 31, | ||||||||
| (unaudited; amounts in U.S. dollars) | Notes | 2023 | 2022 | |||||
| Cashflows from operating activities | ||||||||
| Net income (loss) | $ | $ | ( |
|||||
| Adjustments to reconcile net income (loss) to cashflows from operating activities: | ||||||||
| Depreciation, depletion and amortization | ||||||||
| Amortization of operating lease asset | ||||||||
| Asset retirement obligation accretion expense | ||||||||
| Share-based compensation | 10 | |||||||
| Amortization of deferred financing costs and unpaid interest | 6 | |||||||
| Unrealized loss on derivative instruments | 19 | |||||||
| Margin calls on derivative instruments, net | 18 | ( |
) | |||||
| Changes in operating assets and liabilities | 21 | ( |
) | |||||
| Cashflows from (used in) operating activities | $ | $ | ( |
) | ||||
| Cashflows from investing activities | ||||||||
| Capital expenditures on oil and natural gas properties | 4 | ( |
) | ( |
) | |||
| Cashflows used in investing activities | $ | ( |
) | $ | ( |
) | ||
| Cashflows from financing activities | ||||||||
| Proceeds from Redeemable NCI | 7 | |||||||
| Redemption and distributions to Redeemable NCI | 7 | ( |
) | ( |
) | |||
| Proceeds from credit facility draws | 6 | |||||||
| Credit facility restructuring fees | 6 | ( |
) | |||||
| Repayment on credit facility | ( |
) | ||||||
| Repayment of asset backed preferred notes | ( |
) | ||||||
| Payment on ABS Facility | 6 | ( |
) | |||||
| Other long term debt repayment | ( |
) | ||||||
| Dividends on common shares and noncontrolling interest | 8, 9 | ( |
) | ( |
) | |||
| Cash used for common share repurchases | 9 | ( |
) | |||||
| Cashflows from (used in) financing activities | $ | ( |
) | $ | ||||
|
Net (decrease) increase in cash and cash equivalents and restricted cash |
( |
) | ||||||
| Cash, cash equivalents and restricted cash, beginning of period | ||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
Refer to Note 21 for supplementary cash flow information.
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
7
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
Description of Business
Alpine Summit Energy Partners, Inc. (the "Company" or "Alpine Summit") was incorporated on July 30, 2008 under the Business Corporations Act (British Columbia) ("BCBCA"). On April 8, 2021, the Company entered into a Business Combination Agreement ("BCA") pursuant to which it agreed to complete the BCA with HB2 Origination LLC ("Origination") and changed its name to "Alpine Summit Energy Partners, Inc." upon completion of the BCA.
The Company is engaged in oil and natural gas development, production, acquisition, and exploration activities in Texas through its controlled subsidiary Origination. The Company's operating activities are mainly focused in the Austin Chalk and Eagle Ford formations in the Giddings Field, as well as the Hawkville Field.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These interim unaudited condensed consolidated financial statements (the "financial statements") of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC") for interim consolidated financial information. These financial statements do not include all of the information and notes required by the US GAAP for annual consolidated financial statements and should therefore be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 27, 2023 (the "Annual Report").
In the opinion of management, the interim condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods reported. These interim condensed consolidated financial statements follow the same significant accounting policies as those included in the Company’s audited consolidated financial statements for the year ended December 31, 2022, except for the adoption of new accounting standards (below). Amounts are stated in US dollars unless otherwise noted.
The Company's operations and earnings for interim periods can be affected by seasonal fluctuations, as well as other factors such as supply of and demand for oil, natural gas, and natural gas liquids ("NGL") and may not be indicative of annual results.
Basis of Measurement
The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities in the financial statements. In determining these estimates, management makes subjective and complex judgments that may require assumptions about matters that are inherently uncertain. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Estimates and assumptions that, in the opinion of the Company's management, are significant include the estimation of oil and natural gas reserves and depletion, the redemption value of redeemable non-controlling interests, determination of whether long-lived assets are impaired, valuation of asset retirement obligations, and deferred tax assets/liabilities. The Company bases its estimates and judgments on historical experience and on various other assumptions and information believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained, or if the Company's operating environment changes. Actual results may differ from the estimates and assumptions used in the preparation of these financial statements.
8
Going Concern
The financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As at March 31, 2023 the Company had a working capital deficit of $
The Company's ability to continue as a going concern is dependent on its ability to generate sufficient cash flows from operations, as well as its ability to obtain financing via an asset sale and/or the issuances of debt and/or equity in the short term. While the Company believes it will be able to generate sufficient forecasted funds to meet foreseeable obligations via its ongoing operations and the sale of certain oil and gas properties (Note 22), there can be no assurance that the Company will be successful in its efforts to raise additional funds in the short term and its ability to generate sufficient operating cash flows.
Due to these factors, the Company may be unable to continue as a going concern. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern, and such adjustments could be material.
Adoption of New Accounting Standards
Accounting Standards Update ("ASU") 2021-08 - Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, was issued in October 2021. The update, which can be adopted retrospectively or prospectively, requires the application of Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2022. The Company adopted ASU 2021-08 effective January 1, 2023 and has elected to apply this ASU prospectively for future business combinations. There was no impact at the time of adoption.
The Company considers the applicability and the impact of all ASUs. ASUs not discussed above were assessed and determined to be either not applicable, the effects of adoption are not expected to be material or are clarifications of ASUs previously disclosed.
3. ACCOUNTS RECEIVABLE, NET
The accounts receivable, net balances consist of:
| March 31, | December 31, | |||||
| 2023 | 2022 | |||||
| Trade receivables from sales of crude oil and natural gas | $ | $ | ||||
| Joint interest billing receivables and other | ||||||
| Accounts receivable, net | $ | $ | ||||
The Company has not had significant credit losses in the past and believes its accounts receivables are fully collectible. As such, no allowance for expected losses has been made as of March 31, 2023 and December 31, 2022, and no bad debt expense was recognized in the periods presented in these financial statements.
4. OIL AND NATURAL GAS PROPERTIES, NET
The Company uses the full-cost method of accounting for its oil and natural gas properties. Under this method, the Company is required to perform a ceiling test each quarter, that determines a limit, or ceiling, on the net capitalized costs of oil and natural gas properties. For the three months ended March 31, 2023 and 2022, the Company’s full-cost ceiling exceeded the net capitalized costs less related deferred income taxes. As a result, the Company recorded no impairment to its net capitalized costs for those periods.
Further, during the three months ended March 31, 2023 and 2022, no unproved and unevaluated properties were impaired and transferred to be included in the depletion base as part of evaluated properties.
9
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The amount of each significant category of accounts payable and accrued liabilities, are as follows:
| March 31, | December 31, | |||||
| 2023 | 2022 | |||||
| Trade payables | $ | $ | ||||
| Joint interest and royalties payable | ||||||
| Accrued trade payables | ||||||
| Severance and other taxes payable | ||||||
| Payroll related accruals | ||||||
| Other | ||||||
| Total accounts payable and accrued liabilities | $ | $ |
6. DEBT
Asset backed securitization facility (the "ABS Facility")
In 2022, the Company entered into an asset backed securitization of certain producing oil and gas wells (the "ABS Facility"). The ABS Facility is led by an insurance company, and all borrowings under the ABS Facility are secured by working interests in a subset of the Company's producing assets, which are held by a subsidiary of its operating subsidiary, Origination.
The ABS Facility consists of the following tranches:
• On April 27, 2022 the ABS Facility had an initial size of $
• On September 12, 2022 the ABS Facility was increased by $
In March 2023, the ABS Facility was modified to waive certain covenants until July 1, 2023, amend the principal repayment schedules, and extend the Tranche 1 initial maturity date to July 1, 2023. Additionally, part of Tranche 1 was repaid using the proceeds from the early settlement of the commodity derivatives (Note 19).
At the time of entering into Tranche 1 and 2, the Company had anticipated utilizing the term extensions to the ultimate maturity dates. Therefore, as the ABS Facility is an increasing rate debt, interest expense was recognized based on the imputed effective interest rate over the expected two-year term of each tranche, plus the LIBOR interest rate component. As a result, interest expense recognized in the first year of each tranche exceeds interest paid, resulting in an interest accrual. As an accounting policy, the Company does not subsequently revise the amortization schedule for changes to the expected life of the instrument.
Prior to the modification, the imputed effective interest rate of Tranche 1 and Tranche 2 was
The Company also incurred third party transaction costs of $
10
For the three months March 31, 2023, the Company incurred $
As at March 31, 2023, due to uncertainties on the ability to exercise the extension options on Tranche 1 and 2, the full undiscounted principal of $
| March 31, 2023 | Current | Long-term | Total (net) | ||||||
| Principal drawn | $ | $ | |||||||
| Accrued interest | |||||||||
| Unamortized debt issuance costs | ( |
) | ( |
) | |||||
| Total (net) | $ | $ | |||||||
| December 31, 2022 | Current | Long-term | Total (net) | ||||||
| Principal drawn | $ | $ | $ | ||||||
| Accrued interest | |||||||||
| Unamortized debt issuance costs | ( |
) | ( |
) | ( |
) | |||
| Total (net) | $ | $ | $ |
Under the ABS Facility, the Company was also required to maintain an interest reserve account that will hold a cash balance sufficient to cover three months of scheduled interest payments, which is the restricted cash balance. As at March 31, 2023 the restricted cash balance was $
Corporate credit facility
The corporate credit facility is secured by working interests in a subset of the Company's producing assets and charges
In March 2023, the corporate credit facility was modified, where the drawn principal was converted to a term loan due on July 1, 2023. Under the modified terms, the fees and transaction costs of $
The effective interest rate used to amortize the deferred costs and discounts at the time of modification is
The carrying value of the outstanding loan balances is composed of:
| March 31, 2023 | Current | Long-term | Total (net) | ||||||
| Principal drawn | $ | $ | |||||||
| Accrued interest | |||||||||
| Unamortized debt issuance costs | ( |
) | ( |
) | |||||
| Total (net) | $ | $ |
As of December 31, 2022, the Company had drawn $
11
7. REDEEMABLE NON-CONTROLLING INTERESTS
The following table outlines the movement in redeemable non-controlling interests ("Redeemable NCI") in the periods presented.
| For the three months ended | ||||||
| March 31, | ||||||
| 2023 | 2022 | |||||
| Balance as at January 1 | $ | $ | ||||
| Redeemable non-controlling interests issued | ||||||
| Net loss and comprehensive loss attributed | ||||||
| Revaluation to redemption value, net | ( |
) | ||||
| Distributions | ( |
) | ||||
| Settlement | ( |
) | ( |
) | ||
| Balance at March 31 | $ | $ | ||||
The Company has established development partnerships (the "Development Partnerships") as a mechanism to partially finance its development projects and activities. The redeemable non-controlling interest reflects the development partnership units that are not held by the Company either directly or indirectly. These external units consist of: (a) the Flat Payout Units, and (b) the IRR Payout Units.
The Flat Payout Units and the IRR Payout Units are entitled to
(a) For the Flat Payout Units - an amount equal to the invested capital.
(b) For the IRR Payout Units - an amount equal to the greater of (i) the invested capital plus a
Development Partnership 2 ("DP2")
During the third quarter of 2021, the Company formed DP2 with 25 external limited partners and Origination as a limited partner and the general partner. The intention of the DP2 was to partially finance the drilling and completion of five wells, with the external partners funding approximately
In January 2022, on completion of the DP2 program, the Company liquidated DP2 and redeemed the associated redeemable non-controlling interests with a redemption value of $
Development Partnership 3 ("DP3")
During the fourth quarter of 2021, the Company formed DP3 with 23 external limited partners and Origination as a limited partner and the general partner. The intention of the DP3 was to partially finance the drilling and completion of five wells, with the external partners funding approximately
12
In April 2022, on completion of the DP3 program, the Company liquidated DP3 and redeemed the associated redeemable non-controlling interests with a redemption value of $
Development Partnership 4 ("DP4")
During the first quarter of 2022, the Company formed DP4 with 29 external limited partners and Origination as a limited partner and the general partner. The intention of DP4 was to partially finance the drilling and completion of five wells, with the external partners funding approximately
During the year ended December 31, 2022, the Company distributed $
In July 2022, on completion of the DP4 program, the Company liquidated DP4 and redeemed the associated redeemable non-controlling interests with a redemption value of $
Development Partnership Red Dawn 1 ("Red Dawn 1")
During the first quarter of 2022, the Company formed Red Dawn 1 with 37 external limited partners and Origination as a limited partner and the general partner. The intention of Red Dawn 1 is to partially finance the drilling and completion of five wells, with the external partners funding approximately
In November 2022, on completion of the Red Dawn 1 program, the Company liquidated Red Dawn 1 and redeemed the associated redeemable non-controlling interests with a redemption value of $
Development Partnership 5 ("DP5")
During the second quarter of 2022, the Company formed DP5 with 25 external limited partners and Origination as a limited partner and the general partner. The intention of DP5 is to partially finance the drilling and completion of six wells, with the external partners funding approximately
In January 2023, the Company redeemed redeemable non-controlling interests with a redemption value of $
Development Partnership 6 ("DP6")
During the three months ended March 31, 2023, the Company distributed $
13
As at March 31, 2023 both the redemption value and carrying value of the Redeemable NCI in DP6 was $
Development Partnership Red Dawn II ("Red Dawn 2")
Development Partnership 7 ("DP7")
In January 2023, the Company formed DP7 with 24 external limited partners and Origination as a limited partner and the general partner. The intention of the DP7 is to finance the drilling and completion of certain wells, with external partners funding approximately
As at March 31, 2023 both the redemption value and carrying value of the Redeemable NCI in DP7 was $
8. NON-CONTROLLING INTERESTS
The non-controlling interests (“NCI”) reflects the Class B non-voting units of Origination that are not held by the Company either directly or indirectly. There are
2023 Activities
During the three months ended March 31, 2023, Development Partnership units in DP5 were exchanged for
The issuance of these Class B units is reflected as a reduction to Redeemable NCI for the value at which these units were issued, an increase to NCI for the change in the Company's share in Origination's net assets, and an increase to additional paid-in capital for the difference.
During the three months ended March 31, 2023, Origination repurchased and cancelled
The change in these Class A units resulted in a change to the NCI ownership, triggering an adjustment to the carrying value of NCI, with a corresponding offset to additional paid-in capital.
Origination declared and paid dividends to its Class B non-voting units of Origination totaling $
9. EQUITY
Authorized share capital
The Company is authorized to issue an unlimited number of Subordinate Voting Shares ("SVS"), Multiple Voting Shares ("MVS"), and Proportionate Voting Shares ("PVS"), with no par value. Subject to certain restrictions set out in the Company's articles,
14
The following table summarizes the movements in the Company's share capital for the three months ended March 31, 2023:
| Total Share | |||||||||||||||||||||
| SVS Shares | MVS Shares | PVS Shares | Capital | ||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||
| Balance at January 1, 2023 |
$ |
$ |
$ |
$ |
|||||||||||||||||
| Exchange of units for SVS and MVS | ( |
) | ( |
) | - | - | - | ||||||||||||||
| Repurchase of SVS for cancellation | ( |
) | ( |
) | - | - | - | - | ( |
) | |||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | |||||||||||||||||
The following table summarizes the movements in the Company's share capital for the three months ended March 31, 2022:
| Total Share | |||||||||||||||||||||
| SVS Shares | MVS Shares | PVS Shares | Capital | ||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | |||||||||||||||||
| Exchange of units for SVS and MVS | ( |
) | ( |
) | - | - | - | ||||||||||||||
| Settlement of RSUs | - | - | - | - | |||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | |||||||||||||||||
2023 Activity
During the three months ended March 31, 2023, the Company purchased and cancelled
In March 2023, the Company cancelled the automatic share purchase plan ("ASPP") that had been entered into in connection with the NCIB. The cancellation of the ASPP resulted in the reversal of the accrued liability of the remaining balance under the NCIB (December 31, 2022 - liability of $
During the three months ended March 31, 2023
Dividends
The total dividends declared and paid during the three months ended March 31, 2023 by class of shares was $
10. SHARE BASED COMPENSATION
Compensation expense for share-based awards was $
15
Share purchase options
The options outstanding under this plan are as follows:
| Stock options | Weighted- | Weighted average | Aggregate | |||||||||
| outstanding | average | remaining | Intrinsic | |||||||||
| exercise price | contractual term | Value | ||||||||||
| (years) | ||||||||||||
| Outstanding, January 1, 2023 | $ | |||||||||||
| Granted | ||||||||||||
| Forfeited | ||||||||||||
| Expired | ||||||||||||
| Exercised | ||||||||||||
| Outstanding, March 31, 2023 | $ |
|
||||||||||
| Exercisable, March 31, 2023 | $ |
|
||||||||||
The Company incurred share-based compensation expense related to the stock options of $
Restricted Share Units ("RSUs")
As of March 31, 2023, the Company's nonvested RSUs outstanding are as follows:
| Weighted average | Aggregate | |||||||||||
| Weighted- | remaining | Intrinsic | ||||||||||
| Restricted | average grant | contractual term | Value | |||||||||
| Share Units | date fair value | (years) | ||||||||||
| Nonvested, January 1, 2023 |
$ |
|||||||||||
| Granted | ||||||||||||
| Forfeited | ||||||||||||
| Vested and settled | ||||||||||||
| Nonvested, March 31, 2023 | $ |
|
$ | |||||||||
The Company incurred share-based compensation expense related to the RSUs of $
Deferred Share Units ("DSUs")
As of March 31, 2023, the Company's DSUs outstanding are as follows:
| Weighted average | Aggregate | |||||||||||
| Weighted- | remaining | Intrinsic | ||||||||||
| Deferred | average grant | contractual term | Value | |||||||||
| Share Units | date fair value | (years) | ||||||||||
| Outstanding, January 1, 2023 |
$ |
|||||||||||
| Granted | ||||||||||||
| Forfeited | ( |
) | ||||||||||
| Settled | ||||||||||||
| Outstanding, March 31, 2023 | $ |
|
$ | |||||||||
| Vested, March 31, 2023 | $ | N/A | $ | |||||||||
The Company incurred share-based compensation expense related to the DSUs of $
16
11. EARNINGS PER SHARE
The Company's common shares consist of SVS, MVS, and PVS. Subject to certain restrictions set out in the Company's articles, the SVS, MVS, and PVS rank equally and are entitled to equal distributions, except for the MVS which receives 100 times the distribution entitlement.
As all three classes of common shares were determined to individually have the same entitlement to income (loss) per share on a basic and diluted basis, the below summarizes the amounts on an as-converted basis.
Basic EPS
The basic net income (loss) per share attributable to common shareholders for SVS, MVS, and PVS is determined using the two-class method.
The basic income (loss) per share on an as-converted basis to SVS is as follows:
| For the three months ended | ||||||
| March 31, | ||||||
| 2023 | 2022 | |||||
| Net income (loss) attributable to common shareholders | $ | $ | ( |
) | ||
| Weighted average number of common shares outstanding (as-converted) | ||||||
| Income (loss) per share - basic | $ | $ | ( |
) | ||
Diluted EPS
Diluted net income (loss) per share attributable to SVS shareholders is computed using the more dilutive of the if-converted or treasury stock method, whereas diluted net income (loss) per share attributable to MVS and PVS shareholders is computed using the two-class method.
The diluted income (loss) per share on an as-converted basis to SVS is as follows:
| For the three months ended | ||||||
| March 31, | ||||||
| 2023 | 2022 | |||||
| Net income (loss) attributable to common shareholders | $ | $ | ( |
) | ||
| Plus: Effect of dilutive items | ||||||
| $ | $ | ( |
) | |||
| Weighted average number of common shares outstanding (as-converted) | ||||||
| Plus: Effect for conversion of Origination Class B into SVS | ||||||
| Plus: Effect for dilutive share-based compensation awards | ||||||
| Income (loss) per share - diluted | $ | $ | ( |
) | ||
As for the three months ended March 31, 2022 the Company reported a net loss, the potentially dilutive securities are antidilutive and accordingly, basic net loss per share equals diluted net loss per share for this period.
12. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company enters into contracts with customers to sell its oil, natural gas and natural gas liquids. Revenue from these contracts is recognized when the Company's performance obligations are satisfied, which generally occurs with the transfer of the control to the customer, and when collectability is reasonably assured. The transfer of control usually occurs when the product is physically transferred at the delivery point agreed upon in the contract and legal title to the product passes to the customer (often at terminals, pipelines, or other transportation methods). The Company evaluates creditworthiness on an individual customer basis prior to entering into a sales contract and throughout the contract duration (Note 19).
17
The sales contracts range from short term to long term contracts that are variable-priced and based on actual quantities delivered each period. The transaction price includes variable consideration as product pricing is based on published market prices and adjusted for contract specified differentials such as quality, energy content and transportation. Determining the variable consideration does not require significant judgment and the Company engages third party sources to validate the estimates.
The Company does not disclose the value of unsatisfied performance obligations under its contracts with customers as it applies the practical expedient in accordance with ASC 606 - Revenue from Contracts with Customers ("ASC 606"). The expedient applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required.
The Company evaluates its arrangements with third parties and partners to determine if the Company acts as the principal or as an agent. In making this evaluation, the Company considers if it obtains control of the product delivered or services provided, which is indicated by the Company having the primary responsibility for the delivery of the product or rendering of the service, having the ability to establish prices or having inventory risk. If the Company acts in the capacity of an agent rather than as a principal in a transaction, then the revenue is recognized on a net-basis.
Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration the Company expects to receive in exchange for those products.
The amount of each significant category of revenue is as follows:
| For the three months ended | ||||||
| March 31, | ||||||
| 2023 | 2022 | |||||
| Crude oil | $ | $ | ||||
| Natural gas | ||||||
| Natural gas liquids | ||||||
| Total revenue from contracts with customers | $ | $ | ||||
13. PRODUCTION COSTS AND TRANSPORTATION EXPENSE
The amount of each significant category of production costs and transportation expense recognized, are as follows:
| For the three months ended | ||||||
| March 31, | ||||||
| 2023 | 2022 | |||||
| Operating expense | $ | $ | ||||
| Production taxes | ||||||
| Transportation fees | ||||||
| Other | ||||||
| Total production costs and transportation expense | $ | $ | ||||
18
14. FINANCE AND INTEREST EXPENSE, NET
The amount of each significant category of finance and interest expense recognized, are as follows:
| For the three months ended | ||||||
| March 31, | ||||||
| 2023 | 2022 | |||||
| Interest expense on long term debt | $ | $ | ||||
| Interest expense for corporate credit facility | ||||||
| Interest on asset back preferred | ||||||
| Interest rate derivative loss (gain) | ( |
) | ||||
| Interest income | ( |
) | ||||
| Other fees | ||||||
| Total finance and interest expense, net | $ | $ | ||||
15. GENERAL AND ADMINISTRATIVE EXPENSE
The amount of each significant category of general and administrative expense recognized, are as follows:
| For the three months ended | ||||||
| March 31, | ||||||
| 2023 | 2022 | |||||
| Employee salaries and benefits | $ | $ | ||||
| Stock based compensation expense | ||||||
| Professional, legal, and advisory | ||||||
| Travel and accommodation | ||||||
| Software | ||||||
| Operating lease and variable lease costs | ||||||
| Office and administration | ||||||
| Recoveries | ( |
) | ||||
| Total general and administrative expense | $ | $ | ||||
16. INCOME TAX
The Company's effective income tax rates (benefits) for the three months ended March 31, 2023 and 2022 was
The difference in the Company's income tax provision calculated using its effective tax rates (benefits), from the amounts calculated by applying the U.S. federal income tax rate of
17. RELATED PARTY TRANSACTIONS
The Company's related parties consist of directors and officers of the Company, their immediate families, and companies that are controlled or significantly influenced by directors and officers of the Company.
As at March 31, 2023, accounts receivable included $
19
18. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
Hierarchy levels 1, 2 and 3 are terms for the priority of inputs to valuation techniques used to measure fair value. The Company classifies fair values according to the following hierarchy based on the inputs used to value the instruments:
• Level 1: Reflects inputs that are based on unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
• Level 2: Reflects inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.
• Level 3: Reflects inputs that are both significant to the fair value measurement and less observable from objective sources.
Financial Assets and Liabilities
The Company's financial instruments are cash and cash equivalents, restricted cash, account receivable, net, derivative assets and liabilities, accounts payable and accrued liabilities, long term debt, corporate credit facility and the asset backed preferred instrument.
As required, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
The Company classifies its financial assets and liabilities as follows within the hierarchy:
• Derivatives:
Derivatives are financial instruments measured at fair value on a recurring basis.
Commodity derivatives
The fair value of the commodity derivative instruments is determined using observable market data for similar instruments, which resulted in the Company reporting its commodity derivatives as Level 2 on the fair value hierarchy. This observable data includes the forward curves for commodity prices based on quoted market prices and implied volatility factors related to changes in the forward curves. Counterparty statements are utilized to determine the value of the commodity derivative instruments and are reviewed and corroborated using various methodologies and significant observable inputs.
Interest rate derivatives
The fair value of the interest rate derivative instruments is determined using observable market data for forward curves for the benchmark interest rates, as well as time to maturity, contractual notional amounts, amongst other factors. The Company reports its interest rate derivatives as Level 2 on the fair value hierarchy. Counterparty statements are utilized to determine the value of the interest rate derivative instruments and are reviewed and corroborated using various methodologies and significant observable inputs.
• Cash, cash equivalents and restricted cash: The fair value of cash, cash equivalents and restricted cash approximates its carrying value due to the short-term to maturity, and is considered a Level 1 measurement.
• Accounts receivable, net, and accounts payable and accrued liabilities: The fair value of accounts receivable, net, and accounts payable and accrued liabilities approximate their carrying value due to their short term to maturity.
• Long term debt: The fair value of long-term debt approximates its carrying value as it in-part bears a floating rate of interest and is of a shorter duration of up to 2 years.
20
• Corporate credit facility: The recorded value of the corporate credit facility approximates its fair value, due to its floating rate structure based on prime plus a spread, secured interest, and short term to maturity.
There were no transfers between levels of the fair value measurement hierarchy during the periods presented.
The following tables set forth by level within the fair value hierarchy the Company's financial instruments, which were accounted for at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:
| Fair Value Measurements as at | |||||||||
| March 31, 2023 using | |||||||||
| Level 1 | Level 2 | Level 3 | |||||||
| Assets (liabilities): | |||||||||
| Commodity derivatives | |||||||||
| Total | |||||||||
| Fair Value Measurements as at | |||||||||
| December 31, 2022 using | |||||||||
| Level 1 | Level 2 | Level 3 | |||||||
| Assets (liabilities): | |||||||||
| Commodity derivatives | $ | ||||||||
| Total | $ | ||||||||
Non-Financial Assets and Liabilities
Certain non-financial assets and liabilities are subject to fair value measurements. In those cases, the fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two as considered appropriate based on the circumstances.
For the impairment assessment of evaluated oil and gas properties, the ceiling test requires an estimate of the fair value of the unevaluated and unproved properties that are included in costs being amortized. The fair value may be estimated using comparable market data, forecasted cashflows, or a combination of both as considered appropriate based on the circumstances. Given the significance of the unobservable nature of a number of the inputs, these are considered Level 3 on the fair value hierarchy.
Fair values are also estimated in connection with the initial measurement of asset retirement obligations. Given the significance of the unobservable nature of a number of the inputs, this measurement is considered Level 3 on the fair value hierarchy.
While the Company believes the methods used to estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value.
19. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
The future results of the Company's crude oil and natural gas operations will be affected by market prices of crude oil and natural gas which is affected by numerous factors beyond the control of the Company, including weather, imports, marketing of competitive fuels, proximity and capacity of crude oil and natural gas pipelines and other transportation facilities, any oversupply or undersupply of crude oil, natural gas and natural gas liquid products, economic disruptions, the regulatory environment, the economic environment, and other regional and political events, none of which can be predicted with certainty.
The Company's operations are also subject to concentration risk due to the fact that all of its oil and natural gas revenue is sourced from its operations in the United States. Further, two of the Company's customers reflect
21
Credit Risks
Financial instruments which potentially subject the Company to credit risk consist principally of cash balances, accounts receivable, and derivatives.
The Company maintains cash balances at financial institutions, which may at times exceed the federally insured limits. The Company has not experienced any significant losses from such investments, and the Company believes the credit quality of the financial institutions to be high.
The Company's accounts receivables are subject to normal industry credit risk. The accounts receivables are mainly due from participants in the oil and gas industry, who may be affected by periodic downturns in the economy, in general, or in their specific segment of the crude oil or natural gas industry. The Company believes that its level of credit-related losses due to such economic fluctuations have been immaterial.
The Company's derivative contracts are with established financial institutions with investment grade credit ratings which are believed to have minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts; however, the Company does not anticipate such nonperformance.
Commodity Price Risk and Interest Rate Risk
The Company has utilized various commodity price derivative instruments to reduce commodity price risk being the risk that future cash flows will fluctuate as a result of changes in commodity prices. In addition, from time to time the Company utilizes interest rate swaps to mitigate exposure to changes in interest rates on the Company's variable rate indebtedness.
All derivative instruments are recorded in the Company's condensed consolidated balance sheet as either assets or liabilities measured at their fair value. The Company has not designated any derivative instruments as hedges for accounting purposes and does not enter into such instruments for speculative trading purposes. The changes in the fair value are recognized in the Company's condensed consolidated statements of operations and comprehensive income (loss).
The location and amounts of the Company's realized and unrealized gains and losses on derivative contracts in the Company's condensed consolidated statements of operations and comprehensive income (loss) are as follows:
| For the three months ended | |||||||
| March 31 | |||||||
| Statements of Operations Location | 2023 | 2022 | |||||
| Commodity derivative contracts | |||||||
| Unrealized loss | Gain / (loss) on derivative instruments | $ | ( |
) | $ | ( |
) |
| Realized gain (loss) | Gain / (loss) on derivative instruments | ( |
) | ||||
| Total gain (loss), net | $ | $ | ( |
) | |||
| Interest rate derivative contracts | |||||||
| Unrealized loss | Finance and interest expense | $ | $ | ( |
) | ||
| Realized gain | Finance and interest expense | ||||||
| Total gain, net | $ | $ | |||||
Gains and losses on derivative instruments are included in the operating section of the condensed consolidated statements of cash flows.
As at March 31, 2023 the Company had closed out all of its open commodity derivative positions, realizing a net gain of $
Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with the financial liabilities as they become due.
22
At March 31, 2023 the Company had negative working capital of $
The Company may need to conduct asset sales and/or issuances of debt and/or equity if liquidity risk increases in a given period. The Company believes it has sufficient funds to meet foreseeable obligations by actively monitoring its credit facilities through use of the loans, asset sales, and coordinating payment and revenue cycles.
20. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company may be involved in various legal proceedings and subject to claims that arise. Although the results of litigation and claims are inherently unpredictable and uncertain, the Company is not currently a party to any legal proceedings the outcome of which, if determined adversely to the Company, are believed to, either individually or taken together, have a material adverse effect on the Company's business, financial condition or results of operations.
The Company has certain commitments under leases, reflecting undiscounted lease payments of $
21. SUPPLEMENTAL CASH FLOW DISCLOSURES
| For the three months ended March 31, |
||||||
| 2023 | 2022 | |||||
| Supplementary cash flow information | ||||||
| Cash paid for interest | $ | $ | ||||
| Cash paid for income taxes | ||||||
| Non-Cash Investing Activities | ||||||
| Property, plant and equipment non-cash accruals | $ | $ | ||||
| Capitalized asset retirement obligations | ||||||
| $ | $ | |||||
| Non-Cash Financing Activities | ||||||
| Redemption of Redeemable NCI via issuance of Redeemable NCI | $ | $ | ||||
| Redemption of Redeemable NCI via issuance of Origination member units | ||||||
| Redemption of Redeemable NCI via oil and gas property disposition | ||||||
| $ | $ | |||||
| Changes in Operating Assets and Liabilities | ||||||
| Accounts receivable, net | $ | $ | ( |
) | ||
| Prepaid expenses | ( |
) | ||||
| Accounts payable and accrued liabilities | ( |
) | ||||
| Asset backed preferred instrument accrued interest | ||||||
| Operating leases liability | ( |
) | ( |
) | ||
| $ | $ | ( |
) | |||
22. SUBSEQUENT EVENTS
The Company is continuing its strategic review of its assets and is currently pursuing the sale of certain oil and gas properties. The sale of these assets would allow for increased liquidity to continue the development of the Company's other properties and debt reduction.
In May 2023, the Company received notice of a “force majeure” from its major midstream provider in South Texas, which began on April 13, 2023 and continues to restrict production. The force majeure event is attributed to unplanned outages at facilities downstream of the system, with the result that capacity on the system has been limited and the Company's allocated volumes in that area have been reduced by approximately 70%. The notice did not provide a timeline for resolution of this issue. Although the midstream provider anticipates that these downstream matters will be resolved shortly, the prolonged downtime will have a significant impact on the Company's production.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of the Company’s financial condition and results of operations is based on and should be read in conjunction with the interim unaudited condensed consolidated financial statements and the accompanying notes included in Part I. Item 1. Financial Statements of this Quarterly Report (the “Financial Statements”) and our consolidated financial statements and the accompanying notes included in Part II. Item 8. Financial Statements and Supplementary Data of the Company’s annual report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”).
Our discussion and analysis includes forward-looking information that involves risks and uncertainties and should be read in conjunction with “Forward-Looking Statements” within this Quarterly Report, as well as Part 1. Item 1A Risk Factors of the Annual Report and the section for information about the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements.
Amounts are stated in US dollars unless otherwise noted.
OVERVIEW AND HIGHLIGHTS
The Company is a U.S. oil and natural gas development company focused on maximizing return on equity. The Company has focused its drilling activity in two main areas, the Austin Chalk and Eagle Ford formations in the Giddings Field in Austin, Fayette, Lee, Robertson and Washington Counties, TX (the "Giddings Assets") and the Hawkville Field in Webb and LaSalle Counties, TX (the "Hawkville Assets").
For future periods, the Company plans to continue to develop its existing and adjacent footprint over the next several years while also evaluating additional development projects that fit its investment criteria.
Recent developments and highlights for the three months ended March 31, 2023:
-
Oil and natural gas sales (net of royalties) of $30.0 million for the three months ended March 31, 2023 (March 31, 2022 - $35.0 million).
-
Reported net income and comprehensive income of $10.5 million for the three months ended March 31, 2023 (March 31, 2022 – loss of $7.9 million). Adjusted EBITDA (defined below) of $16.6 million for the same period (March 31, 2022 - $26.3 million).
-
Reported net income attributable to the Company's shareholders of $6.5 million for the three months ended March 31, 2023 (March 31, 2022 - loss of $10.0 million).
-
Four new wells were brought onto production.
-
Average net production per day of 14,478 BOE during the three months ended March 31, 2023 an increase of 129.8% year over year due to extensive drilling activity.
-
Completed a restructuring of the Company’s debt, where the corporate credit facility was converted into a term loan and the repayment terms of the ABS Facility were amended.
-
Announced the engagement of Stephens Inc. as its financial advisor to pursue a sale of various strategic assets of the Company.
-
During March 2023, all commodity hedges were monetized, with net proceeds used to pay down first lien indebtedness.
Subsequent Event Highlights
-
Three new wells were brought onto production by in April 2023. Further drilling and development activity will be paused until the sales process is complete.
-
The Company received a “force majeure” notice in May 2023 from the Company’s major midstream provider in South Texas. The prolonged downtime may have a significant impact on the Company’s results in the second quarter of 2023.
OPERATIONAL AND FINANCIAL RESULTS
Net Oil and Gas Revenues
| For the three months ended March 31, | 2023 | 2022 | ||||
| Oil | $ | 14,807,620 | $ | 25,589,855 | ||
| Natural gas | 12,157,116 | 4,222,333 | ||||
| NGLs | 3,081,185 | 5,146,573 | ||||
| Total | $ | 30,045,921 | $ | 34,958,761 | ||
| % of total oil and gas revenue by product type: | ||||||
| Oil weighting | 49.3% | 73.2% | ||||
| Natural gas weighting | 40.5% | 12.1% | ||||
| NGL weighting | 10.2% | 14.7% | ||||
24
Our revenues vary from period to period primarily as a result of changes in commodity prices and production volumes. When comparing the three months ended March 31, 2023 to the same period in 2022, oil and gas revenues decreased by $4,912,840, a decrease of 14.1%, reflecting that while production volumes increased by 129.8% this was offset by a 62.6% decrease in the average per BOE realized selling price, excluding the effect of commodity derivatives as discussed below.
Production volumes:
The higher production in the first three months of 2023 is a result of the addition of 16 wells since the comparable period in 2022, with a primary focus on Hawkville gas wells attributing to the change in sales mix.
The production for the three months ended March 31, 2023 and 2022, reflecting the Company's working interests and net of royalties, are as follows:
| For the three months ended March 31, | 2023 | 2022 | % Change | ||||||
| Production: | |||||||||
| Oil (bbl) | 202,287 | 275,650 | -26.6% | ||||||
| Natural gas (Mcf) | 6,018,353 | 967,418 | 522.1% | ||||||
| NGLs (bbl) | 121,993 | 140,764 | -13.3% | ||||||
| Total BOE1 | 1,327,339 | 577,650 | 129.8% | ||||||
| Average Daily Production: | |||||||||
| Oil (bbl/d) | 2,248 | 3,063 | |||||||
| Natural gas (Mcf/d) | 66,871 | 10,749 | |||||||
| NGLs (bbl/d) | 1,355 | 1,564 | |||||||
| Total BOE1 per day | 14,748 | 6,417 | |||||||
| Production Weighting on a BOE basis: | |||||||||
| Oil | 15.2% | 47.7% | |||||||
| Natural gas | 75.6% | 27.9% | |||||||
| NGL | 9.2% | 24.4% |
1 Natural gas is converted to a barrel of oil equivalent ("BOE") at the rate of one barrel equaling six Mcf (defined as one thousand cubic feet) based upon the approximate relative energy content of oil and natural gas, which is not necessarily indicative of the relationship of oil and natural gas prices.
Average sales price:
On a per-BOE basis, the Company's average realized price for the three months ended March 31, 2023 decreased compared to the same period of 2022 by $37.88 per BOE, reflecting a 62.6% decrease. The decrease in sales prices is primarily due to the decrease in the commodity price indices for oil, natural gas, and NGL. However, the realized average sales price per BOE also reflects the increased production of natural gas and NGL at a lower overall per BOE price.
The average realized sales prices for the three months ended March 31, 2023 and 2022, are as follows:
| For the three months ended March 31, | 2023 | 2022 | % Change | ||||||
| Oil - Bbl | $ | 73.20 | $ | 92.83 | -21.1% | ||||
| Natural gas - Mcf | $ | 2.02 | $ | 4.36 | -53.7% | ||||
| NGLs - Bbl | $ | 25.26 | $ | 36.56 | -30.9% | ||||
| Average sales price per BOE | $ | 22.64 | $ | 60.52 | -62.6% |
Commodity Derivative Instruments
The future results of the Company's oil and natural gas operations will be affected by market prices of oil and natural gas which is affected by numerous factors beyond the control of the Company, including weather, imports, marketing of competitive fuels, proximity and capacity of oil and natural gas pipelines and other transportation facilities, any oversupply or undersupply of oil, natural gas and natural gas liquid products, economic disruptions, the regulatory environment, the economic environment, and other regional and political events, none of which can be predicted with certainty.
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The Company has and may enter into various commodity price derivative instruments to manage the price risk attributable to part of its future production. As the Company's derivatives are not designated for hedge accounting, the changes in fair value of the derivatives are recognized in income (loss) each period, creating earnings volatility in connection with outstanding derivatives. As commodity prices increase or decrease, such changes will have the opposite effect on the fair value of the derivatives.
During the three months ended March 31, 2023 the Company had closed out all of its open commodity derivative positions, realizing a net gain of $18,469,658 (March 31, 2022 - loss of $22,601,045). There were no remaining open derivative positions as at March 31, 2023.
Refer to Note 19 of the Financial Statements for additional details.
Management of cash flow variability is an integral component of the Company's business strategy. Business conditions are monitored regularly and reviewed by the Company to establish risk management guidelines in carrying out the Company's strategic risk management program.
Expenses
The following table summarizes the Company’s operating expenses and other income (expenses) for the periods indicated:
| For the three months ended March 31, | 2023 | 2022 | ||||
|
Operating Expenses: |
||||||
| Production costs and transportation | $ | 10,297,192 | $ | 5,500,322 | ||
| General and administrative | 3,441,595 | 4,476,687 | ||||
|
Depreciation, depletion, and amortization |
18,106,581 | 9,191,057 | ||||
| Asset retirement obligation accretion | 9,227 | 7,976 | ||||
|
Total operating expenses |
31,854,595 | 19,176,042 | ||||
| Operating Income | 16,660,984 | (6,818,326 | ) | |||
| Other income (expenses) | ||||||
| Finance and interest expense, net | (6,137,113 | ) | (1,097,190 | ) | ||
| Income (loss) before income taxes | 10,523,871 | (7,915,516 | ) | |||
| Deferred income tax provision (benefit) | - | - | ||||
| Net income (loss) and comprehensive income (loss) | 10,523,871 | (7,915,516 | ) | |||
| Net income attributable to redeemable non-controlling interest | 283,326 | 7,130,296 | ||||
| Net income (loss) attributable to non-controlling interest | 3,726,852 | (5,066,647 | ) | |||
| Net income (loss) attributable to the Company | $ | 6,513,693 | $ | (9,979,165 | ) | |
| Select Expenses per BOE: | ||||||
| Production costs and transportation | $ | 7.76 | $ | 9.52 | ||
| General and administrative | $ | 2.59 | $ | 7.75 | ||
|
Depreciation, depletion, and amortization |
$ | 13.64 | $ | 15.91 | ||
| Finance and interest expense, net | $ | 4.62 | $ | 1.90 |
Production and Transportation Costs
Total production and transportation costs for the three months ended March 31, 2023, increased by $4,796,870, an increase of 87% when compared to the same period of 2022, primarily due to the overall increased production noted above. On a per BOE basis, the production and transportation costs decreased by $1.76, a decrease of 19%. The decrease is mainly due to the Company receiving an exemption on production taxes for certain wells starting in 2023, partially offset by the higher operating costs for wells brought online. The higher operating costs related to higher water disposal, fuel, and trucking costs, as well as overall market increases for service costs, due to inflation and market availability.
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General and Administrative Costs
General and administrative costs for the three months ended March 31, 2023 decreased by $1,035,092, a decrease of 23% when compared to the same period of 2022. This decrease was primarily due to lower stock-based compensation expense and employee salaries and benefits of $1,870,430, and partially offset by an increase in professional, legal and advisory costs of $433,035, as well as increases in other items such as software, office and administration, and lease expenses. From a per BOE perspective, the general and administrative costs reduced by $5.16 per BOE, a reduction of 67%, as a result of increased production levels noted above.
Depreciation, Depletion, and Amortization
The depreciation, depletion, and amortization expense consist of depletion on the Company's evaluated oil and gas properties. Depletion expense increased for the three months ended March 31, 2023, by $8,915,524, an increase of 97% as compared to the same period of 2022 due to an increase in production, as well as an increase in the evaluated properties that are part of the depletion base. Depletion expense on a BOE basis decreased by $2.27 per BOE, a decrease of 14%, reflecting changes in estimates and change in the reserve base.
Finance and Interest Expense, Net
Finance and interest expense, net for the three months ended March 31, 2023, increased by $5,039,923, an increase of 459%, as compared to the same period of 2022 due to the increase in overall borrowings. The main increase relates to the financing and interest costs on the ABS Facility, as well as the corporate credit facility, as described in the Financial Statements, as well as debt restructuring fees incurred in March 2023. On a per BOE basis, the finance and interest expense has increased by $2.72 per BOE, an increase of 143%.
Income Tax Expense (Benefit)
The Company's effective income tax rates (benefits) for the three months ended March 31, 2023 and 2022 was 0.00%. For the three months ended March 31, 2023, and 2022, the Company recorded income tax expense (benefit) of $nil.
The difference in the Company's income tax provision calculated using its effective tax rates (benefits), from the amounts calculated by applying the U.S. federal income tax rate of 21% to its pretax income (loss) from operations were primarily due to income (loss) not subject to corporate income taxes, non-controlling interests, as well as the valuation allowance.
Additionally, the Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is more likely than not, it does not establish a valuation allowance reserve against the recorded net deferred tax assets. As of March 31, 2023, the Company continued to record a valuation allowance on its net deferred tax assets. Refer to Note 16 in the Financial Statements.
Non-GAAP Financial Measures
Within this Quarterly Report, references are made to terms which are not recognized under GAAP. Specifically, “field operating netbacks”, “adjusted EBITDA”, and measurements “per commodity unit” and “per BOE” do not have any standardized meaning as prescribed by GAAP and are regarded as non-GAAP measures. These non-GAAP measures may not be comparable to the calculation of similar amounts for other entities and readers are cautioned that use of such measures to compare enterprises may not be valid. The Company's management uses these non-GAAP supplemental measures to benchmark operations against prior periods and peer group companies and believes they provide useful supplemental information that can be used by investors, lenders, analysts and other parties to analyze the Company’s performance and financial results.
Field Operating Netbacks
Field operating netbacks are used by management to assess operational performance of assets. Field operating netbacks are calculated by deducting the impact of depreciation, depletion, and amortization, and commodity derivatives from the gross margin and is presented on a per BOE basis.
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The Field Operating Netback for the three months ended March 31, 2023 and 2022 are as follows:
| For the three months ended March 31, | 2023 | 2022 | ||||
| Oil and gas revenues | $ | 30,045,921 | $ | 34,958,761 | ||
| Gain/(loss) on derivative instruments | 18,469,658 | (22,601,045 | ) | |||
| Less: Production costs and transportation | (10,297,192 | ) | (5,500,322 | ) | ||
| Less: Depreciation, depletion, and amortization | (18,106,581 | ) | (9,191,057 | ) | ||
| Gross margin | 20,111,806 | (2,333,663 | ) | |||
| Remove: Gain/(loss) on derivative instruments | (18,469,658 | ) | 22,601,045 | |||
| Remove: Depreciation, depletion, and amortization | 18,106,581 | 9,191,057 | ||||
| Field operating netback - total | $ | 19,748,729 | $ | 29,458,439 | ||
| Field operating netback - per BOE | $ | 14.88 | $ | 51.00 |
For the three months ended March 31, 2023, the Field Operating Netback per BOE decreased by $36.12, a decrease of 71%, when compared with the same period in 2022. This reflects the change in sales mix and the reduction in the average realized sales price per BOE of $37.88, partially offset by a $1.76 per BOE reduction in production costs and transportation.
Adjusted EBITDA
Adjusted earnings before interest, taxes, depletion and amortization (“Adjusted EBITDA”), is a non-GAAP measure that is used to supplement the Company’s reported financial performance or position. The Company believes that Adjusted EBITDA, considered along with net earnings (loss), is a relevant indicator of trends relating to its operating performance and provides management and investors with additional information for comparison of its operating results to the operating results of other companies. All figures presented do not reflect any potential impact of non-controlling interests or redeemable non-controlling interests. The Company’s calculation of Adjusted EBITDA is net income/(loss) adding back finance and interest expense, net, depreciation, depletion and amortization, impairment, gains/losses on commodity derivatives, and non-recurring costs.
The following table provides a reconciliation of net income/(loss) before redeemable non-controlling interests and non-controlling interest to Adjusted EBITDA:
| For the three months ended March 31, | 2023 | 2022 | ||||
| Net income/(loss): | $ | 10,523,871 | $ | (7,915,516 | ) | |
| (+) Depreciation, depletion, and amortization expense | 18,106,581 | 9,191,057 | ||||
| (+) Finance and interest expense, net | 6,137,113 | 1,097,190 | ||||
| (+) Stock based compensation expense | 328,993 | 1,290,143 | ||||
| (+) Derivative commodity contract (gains)/losses | (18,469,658 | ) | 22,601,045 | |||
| Adjusted EBITDA | $ | 16,626,900 | $ | 26,263,919 |
FINANCING, LIQUIDITY AND CAPITAL RESOURCES
Companies operating in the upstream oil and gas industry require sufficient cash in order to fund capital programs that maintain and increase production and reserves, to acquire strategic oil and gas assets, to repay current liabilities and debt and ultimately to provide a return to shareholders. The Company's capital programs are funded by existing working capital, various lending facilities and redeemable non-controlling interests (discussed below) and cash provided from operating activities. Fluctuations in commodity prices, product demand, interest rates and various other risks may impact capital resources and capital expenditures.
During the first quarter of 2023, the main financing related transactions included the following:
- Asset backed securitization facility (the "ABS Facility"):
In 2022, the Company entered into two tranches of borrowings under the ABS Facility, for a total size of $135 million.
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On April 27, 2022, Tranche 1 of the ABS Facility was drawn for $80 million and carries an interest rate of LIBOR+6% (with a 1% LIBOR floor) for the initial year, LIBOR +12% (with a 1% LIBOR floor) for the second year. Tranche 1 had an initial maturity date of one year, with the Company having the option to extend an additional year to an ultimate maturity date of April 2024, if certain conditions are met.
On September 12, 2022, Tranche 2 of the ABS Facility was drawn for an additional $55 million and carries an interest rate of LIBOR+8% (with a 1% LIBOR floor) for the initial year, LIBOR +14% (with a 1% LIBOR floor) for the second year. Tranche 2 has an initial maturity date of one year, with the Company having the option to extend an additional year to an ultimate maturity date of September 2024, if certain conditions are met.
All borrowings under the ABS Facility are secured by working interests in a subset of the Company's producing assets.
In March 2023, the ABS Facility was modified to waive certain covenants until July 1, 2023, amend the principal repayment schedules, and extend the Tranche 1 initial maturity date to July 1, 2023. Additionally, part of Tranche 1 was repaid using the proceeds from the early settlement of the commodity derivatives.
The Company incurred third party transaction costs of $598,986 due to the modification, which were recognized as finance expense.
As at March 31, 2023, the Company had $84,640,028 of principal outstanding under the ABS Facility.
- Corporate credit facility:
During the first quarter of 2022, the Company replaced its previous credit facility, which had a $12,500,000 borrowing capacity. The new corporate credit facility had a borrowing capacity of $30,000,000, which was subsequently increased in October 2022 to $65,000,000, subject to quarterly borrowing base determinations by the lender. The facility charges interest at the greater of 5.00% and prime +1.75% and had a one-year maturity. A subset of certain Company working interests in producing assets have been secured in connection with the corporate credit facility.
In March 2023, the corporate credit facility was modified, where the drawn principal was converted to a term loan due on July 1, 2023. Under the modified terms, the fees and transaction costs of $78,453 were deferred and are amortized over the term of the loan, and the Company will pay an exit fee of $135,000 at the time the loan is repaid.
As at March 31, 2023, the Company had $54,038,462 of principal outstanding under this borrowing.
- Development Partnerships:
The Company utilizes Development Partnerships as a mechanism to partially finance its development projects and activities. As part of the Development Partnerships, investors will provide funding to be used for the development of specific wells, in return, the investors will receive partnership units that provide a specified return, plus participation in the residual of those wells that can be realized via redemption.
Due to the redemption feature, the Development Partnership interests issued to external investors are accounted for as redeemable non-controlling interest.
For the three months ended March 31, 2023, the redeemable non-controlling interests provided cash inflows of $2,573,145 (three months ended March 31, 2022 - $35,701,365), and cash outflows for the distribution and settlement of $3,596,163 (three months March 31, 2022 - $475,000). Of the total redeemable non-controlling interest that received distributions and/or was settled, the remaining non-cash balance related to settlements via the issuance of redeemable non-controlling interests for a new Development Partnership, via non-controlling interest shares, or via oil and gas property dispositions.
As at March 31, 2023, the redemption value of the redeemable non-controlling interest was $104,001,441.
Working Capital and Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with the financial liabilities as they become due.
29
At March 31, 2023 the Company had a working capital deficit of $226,314,535, compared to a deficit of $162,980,101 as at December 31, 2022. Current assets decreased by $14,166,822 compared to December 31, 2022, primarily due to a decrease in accounts receivables, due to a reduction in oil and gas revenues from the preceding three months, which primarily is due to a reduction in the average realized sales prices and continued changes to the sales mix weighting heavier to natural gas, as well as a decrease in restricted cash and derivative assets. Further, current liabilities increased by $49,167,612 primarily due to increases in accounts payable and accrued liabilities, due to increased capital expenditures on oil and natural gas properties, as well as the Company’s borrowings under the ABS Facility being reclassified to current, reflecting expectations that the term extension options may not be exercised.
Due to the working capital deficit, the Company does not currently have the cash resources to meet its current liabilities for the next twelve months. These factors raise substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent on its ability to generate sufficient cash flows from operations, as well as its ability to obtain financing via an asset sale and/or the issuances of debt and/or equity in the short term. While the Company believes it has sufficient forecasted funds to meet foreseeable obligations, there can be no assurance that the Company will be successful in its efforts to raise additional funds in the short term and its ability to generate sufficient operating cash flows.
Due to these factors, the Company may be unable to continue as a going concern. The Financial Statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern, and such adjustments could be material.
In an effort to increase liquidity, the Company has during and subsequent to the three months ended March 31, 2023: (i) continued its drilling program to bring certain wells online and to increase cash flows from operating activities, (ii) ceased additional drilling activities for new wells, (iii) is pursuing a potential sale of certain oil and gas properties, (iv) commenced the suspension of monthly dividends starting March 2023, and (v) restructured the corporate credit facility and the ABS Facility.
Sources and Uses of Cash
The Company's sources and uses of cash are summarized as follows:
| For the three months ended March 31, | 2023 | 2022 | ||||
| Net cash from operating activities | $ | 46,541,379 | $ | (18,221,358 | ) | |
| Net cash used for investing activities | (28,992,460 | ) | (14,778,026 | ) | ||
| Net cash from financing activities | (18,316,294 | ) | 35,853,268 | |||
| Net change in cash and cash equivalents and restricted cash | $ | (767,375 | ) | $ | 2,853,884 |
Cash Flows from Operating Activities
The net cash from operating activities in the three months ended March 31, 2023, increased by $64,762,737 from the same period in 2022. The increase was driven by the increase in production, as well as changes to working capital and timing of cash receipts and disbursements.
Cash Flows used for Investing Activities
During the three months ended March 31, 2023, the Company’s cash flows used for investing activities increased by $14,214,434 when compared to the same period in 2022, due to increased drilling and development of its oil and gas properties. For the evaluated oil and gas properties, the majority of the activity related to the drilling of horizontal wells in the Giddings and Hawkville Fields. The expenditures on unevaluated properties focused on the acquisition, exploration and development of those unevaluated assets.
The cash flows used in investing activities reflects actual cash spending, which can lag several months from when the related costs were incurred. As a result, the Company's actual cash spending is not always reflective of current levels of development activity.
30
Cash Flows from Financing Activities
During the three months ended March 31, 2023, cash used in financing activities increased by $54,169,562 when compared to the cash from financing activities for the same period in 2022, primarily due to the $25,342,648 partial pay down of the ABS Facility, and partially offset by additional borrowings under the corporate credit facility. Further, the cash used in financing activities for the three months ended March 31, 2023 also reflects the payment of dividends of $3,438,638 to both the Company's shareholders and non-controlling interest holders, as well as the use of $972,354 in cash to repurchase and cancel the Company's subordinate voting shares under the Company's normal course issuer bid.
Refer to the condensed consolidated statements of cash flows of the Financial Statements for further details.
Off-Balance-Sheet Arrangements
The Company does not have any special-purpose entities nor is it a party to any arrangements that would be excluded from the interim condensed consolidated balance sheet.
CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND POLICIES
The Company’s Financial Statements require management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain accounting policies are identified as critical because they require management to make judgments and estimates based on conditions and assumptions that are inherently uncertain, and because the estimates are of material magnitude to revenue, expenses, cash flows from operations, income or loss and/or other important financial results. These accounting policies could result in materially different results should the underlying conditions change or the assumptions prove incorrect.
The Company’s most critical accounting policies and estimates, involving significant judgment or estimates, are consistent with those disclosed in the Annual Report, as outlined in Note 2 to the Financial Statements contained in this Form 10-Q.
2023 OBJECTIVES AND OUTLOOK
During 2023, the Company plans on continuing to manage production of its primary assets in the Giddings and Hawkville fields. The Company brought seven wells onto production through April, 2023, with a pause in drilling activity until the sale process is complete.
Concurrently, the Company is pursuing a potential sale of various strategic assets of the Company. The Board has formed a special committee, led by independent directors of the Company, to lead discussions with the various stakeholders of the Company as it assesses alternatives following the conclusion of the sales process.
The Company received a “force majeure” notice in May 2023 from its major midstream provider in South Texas. The prolonged downtime may have a significant impact on the Company’s results in the second quarter of 2023.
SUBSEQUENT EVENTS
On April 21, 2023, the Company announced the departure of Chris Nilan as Senior Managing Director of Capital Markets.
On May 10, 2023, the Company announced that it had received notice of a “force majeure” from its major midstream provider in South Texas, which began on April 13, 2023 and continues to restrict production. The force majeure event is attributed to unplanned outages at facilities downstream of the system, with the result that capacity on the system has been limited and the Company's allocated volumes in that area have been reduced by approximately 70%. The notice did not provide a timeline for resolution of this issue. Although the midstream provider anticipates that these downstream matters will be resolved shortly, the prolonged downtime will have a significant impact on the Company’s production.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures.
Management of the Company, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Quarterly Report. The term "disclosure controls and procedures" means controls and other procedures established by the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
31
Under the supervision and with the participation of our management, including our CEO and CFO, our management conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the quarter ended March 31, 2023, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our CEO and CFO have concluded that during the period covered by this Quarterly Report, our disclosure controls and procedures were effective as of March 31, 2023.
The Company, including its CEO and CFO, does not expect that its internal controls and procedures will prevent or detect all error and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Changes in Internal Control Over Financial Reporting.
There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 1A. RISK FACTORS.
As of the date of this filing, the following are additional risk factors to those previously disclosed in our Annual Report, in response to Item 1A., “Risk Factors,” of Part I of the Annual Report.
Our historical operating results indicate substantial doubt exists related to our ability to operate as a going concern
The unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As at March 31, 2023 the Company had a working capital deficit of $226,314,535, reflecting a significant increase in outstanding accounts payable and accrued liabilities as well as borrowings. As a result, the Company does not currently have the cash resources to meet its current liabilities for the next twelve months. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is dependent on its ability to generate sufficient cash flows from operations, as well as its ability to obtain financing via an asset sale and/or the issuances of debt and/or equity in the short term. While the Company believes it will be able to generate sufficient forecasted funds to meet foreseeable obligations via its ongoing operations and the sale of certain oil and gas properties, there can be no assurance that the Company will be successful in its efforts to raise additional funds in the short term and its ability to generate sufficient operating cash flows.
Due to these factors, the Company may be unable to continue as a going concern. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern, and such adjustments could be material.
Force majeure events may impact production and our financial results
On May 10, 2023, Alpine Summit announced that it had received notice of a "force majeure" event from its major midstream provider in South Texas which began on April 13, 2023, and continues to restrict production. The force majeure event is attributed to unplanned outages at facilities downstream of the system, with the result that capacity on the system has been limited and the Company's allocated volumes in that area have been reduced by approximately 70%. The notice did not provide a timeline for resolution of this issue. Although the midstream provider anticipates that these downstream matters will be resolved shortly, the prolonged downtime may have a significant impact on the Company's results in the second quarter of 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities
On February 2, 2023, 499,794 Class B non-voting units of HB2 Origination, LLC ("HB2 Units") were issued in connection with the exercise by six partners of their put right provided to them by the Company's fifth development partnership that it formed during the second quarter of 2022. The HB2 Units were issued on a private placement basis in accordance with an exemption from the registration requirements of the Securities Act under Rule 506(b), as a transaction not involving any public offering. The sale was made only to "accredited investors" and was not made by any general solicitation or advertising.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers:
| Period | (a) Total number of shares (or units) purchased |
(b) Average price paid per share (or unit) |
(c) Total number of shares (or units) purchased as part of publicly announced plans or programs |
(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs |
| January 1, 2023 - January 31, 2023 |
81,600 | $4.97/share | 81,600 | 767,583 |
| February 1, 2023 - February 28, 2023 |
113,300 | $3.73/share | 113,300 | 654,283 |
| March 1, 2023 - March 31, 2023 |
83,700 | $1.73/share | 83,700 | 570,583 |
| Total | 278,600 | $3.49/share | 278,600 |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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ITEM 6. EXHIBITS.
(a) EXHIBIT INDEX
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| Exhibit No. |
Description of Exhibit |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Filed herewith.
‡ Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company's filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.
♦ Certain identified information has been omitted from this exhibit because it is both (1) not material and (2) the type that the Company treats as private or confidential.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on May 15, 2023.
| ALPINE SUMMIT ENERGY PARTNERS, INC. (Registrant) |
|
| /s/ Craig Perry | |
| Craig Perry Chief Executive Officer (Principal Executive Officer) |
|
|
/s/ Darren Moulds |
| Darren Moulds Chief Financial Officer (Principal Financial and Accounting Officer) |
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