PENN VIRGINIA CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the financial condition and results of operations of Penn Virginia Corporation and its subsidiaries ("Penn Virginia," the "Company," "we," "us" or "our") should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included in Item 1, "Financial Statements." All dollar amounts presented in the tables that follow are in thousands unless otherwise indicated. Also, due to the combination of different units of volumetric measure, the number of decimal places presented and rounding, certain results may not calculate explicitly from the values presented in the tables.
Overview and Executive Summary
We are an independent oil and gas company engaged in the exploration,
development and production of oil, NGLs and natural gas. Our current operations
consist primarily of operating our producing wells in the Eagle Ford Shale, or
the Eagle Ford, in South Texas. We also have less significant operations in
Oklahoma, primarily in the Granite Wash.
As detailed in the discussion of our financial condition that follows, our
liquidity is severely impaired and there exists substantial doubt regarding our
ability to continue as a going concern. Our Condensed Consolidated Financial
Statements do not reflect any adjustments that might result if we are unable to
continue as a going concern or if we seek protection under the bankruptcy laws.
Based on our current circumstances and general financial condition, it is highly
likely that we will file a voluntary petition under Chapter 11 of the United
States Bankruptcy Code, or Chapter 11, in an effort to accomplish a
court-supervised comprehensive restructuring of our balance sheet.
The following table sets forth certain summary operating and financial
statistics for the periods presented:
Three Months Ended
March 31,
2016 2015
Total production (MBOE) 1,394 2,225
Average daily production (BOEPD) 15,323 24,721
Crude oil and NGL production (MBbl) 1,187 1,734
Crude oil and NGL production as a
percent of total 85 % 78 %
Product revenues, as reported $ 30,321 $ 73,135
Product revenues, as adjusted for
derivatives $ 60,880 $ 110,627
Crude oil and NGL revenues as a
percent of total, as reported 92 % 88 %
Realized prices:
Crude oil ($/Bbl) $ 26.69 $ 44.26
NGL ($/Bbl) $ 9.14 $ 13.60
Natural gas ($/Mcf) $ 1.93 $ 2.91
Aggregate ($/BOE) $ 21.75 $ 32.87
Operating costs ($/BOE):
Lease operating $ 4.44 $ 5.20
Gathering, processing and
transportation 2.74 3.37
Production and ad valorem taxes 0.54 2.11
General and administrative 1 4.02 4.75
Total operating costs $ 11.74 $ 15.43
Depreciation, depletion and
amortization ($/BOE) $ 9.91 $ 40.79
Cash provided by operating
activities $ 28,531 $ 45,552
Cash paid for capital expenditures $ 14,005 $ 168,994
Cash and cash equivalents at end of
period $ 26,532 $ 3,859
Principal amount of debt obligations
outstanding at end of period $ 1,222,065 $ 1,237,000
Credit available under revolving
credit facility at end of period 2 $ - $ 286,196
Net development wells drilled and
completed 2.3 14.1
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1 Excludes equity-classified and liability-classified share-based compensation of $(0.44) and $0.62, strategic and financial advisory costs of $7.94 and $0.02 and restructuring expenses of $0.54 and less than $(0.01) for the three months ended March 31, 2016 and 2015. 2 Based on commitments of $148.9 million and $450 million as of March 31, 2016 and 2015, respectively.
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Key Developments
The following general business developments and corporate actions had or may
have a significant impact on the financial reporting and disclosure of our
results of operations, financial position and cash flows:
Ongoing Efforts to Refinance the Company and Improve Liquidity
As of March 31, 2016, the total outstanding principal amount of our debt
obligations was approximately $1.2 billion. We are continuing to actively
explore and evaluate various strategic alternatives to reduce the level of our
long-term debt and lower our future cash interest obligations. In January 2016,
we retained Kirkland & Ellis LLP, or K&E, Jefferies LLC, or Jefferies, and
Alvarez & Marsal North America, or A&M, as well as other consultants and legal
and tax advisers, to provide strategic advice generally and to act as our
advisers in that regard. The timing and outcome of these efforts is highly
uncertain. One or more of these alternatives could potentially be consummated
without the consent of any one or more of our current security holders and, if
consummated, could be dilutive to the holders of our outstanding equity
securities and adversely affect the trading prices and values of our current
debt and equity securities or if we were to seek protection under Chapter 11,
could cause the shares of our common stock to be canceled, with limited
recovery, if any. Furthermore, there can be no assurance that any of these
alternatives will be successful or completed on commercially acceptable terms.
We incurred a total of $11.1 million in professional fees during the three
months ended March 31, 2016 in connection with our ongoing negotiations with our
creditors to refinance the Company. The total includes $7.8 million for our
advisers and $3.3 million incurred by our banks and unsecured noteholders for
which we are responsible. These costs are included as a component of our general
and administrative expenses.
As of December 31, 2015 and March 31, 2016, we were not in compliance with
certain covenants under the Revolver which represents an event of default.
Pursuant to the Eleventh Amendment to the Revolver dated as of March 15, 2016,
or the Eleventh Amendment, we have received an agreement from our lenders that
such defaults will not become events of default under the Revolver until May 10,
2016. If we do not obtain a waiver or other suitable relief from the lenders
under the Revolver before the extension expires, there will exist an event of
default under the Revolver. Even if we obtain such a waiver or other relief, we
still believe we cannot comply with the leverage covenant during the next twelve
months. If we cannot obtain from our lenders a waiver of such potential breach
or an amendment of the leverage covenant, our breach would constitute an event
of default that could result in an acceleration of substantially all of our
outstanding indebtedness. We would not have sufficient capital to satisfy these
obligations.
We elected not to make the $10.9 million interest payment on the 7.25% Senior
Notes due 2019, or 2019 Senior Notes, due April 15, 2016. If we do not make such
interest payment by May 15, 2016, there will be an event of default pursuant to
the indenture governing the 2019 Senior Notes.
Restructuring Actions
In an ongoing effort to reduce our administrative cost burden, we reduced our
total employee headcount by 10 employees in February 2016. We incurred costs for
severance and termination benefits in the amount of $0.8 million in connection
with the release of these employees. These costs are included as a component of
our general and administrative expenses. We paid a total of $0.4 million of
these charges in cash during the three months ended March 31, 2016 leaving $0.4
million outstanding as of March 31, 2016. This amount is included in the
Accounts payable and accrued liabilities caption on our Condensed Consolidated
Balance Sheet.
Termination of Derivative Contracts
In March 2016, we terminated two derivative contracts for $22.9 million of
proceeds that were used to reduce amounts outstanding under the Revolver. In
connection with these transactions, the counterparties to the derivative
contracts, which are also affiliates of participant banks in the Revolver,
transferred the cash proceeds from the transactions directly to the
administrative agent under the Revolver in order to reduce the amount
outstanding thereunder. Accordingly, the transactions have been presented as
non-cash financing activities on our Condensed Consolidated Statement of Cash
Flows for the three months ended March 31, 2016. During April 2016, we
terminated two additional derivative contracts for total proceeds of $22.6
million and applied $16.6 million to further reduce amounts outstanding under
the Revolver in a manner similar to the March transactions.
Suspension of Drilling Program
In response to the recent declines in commodity prices, and given the
uncertainty regarding the timing and magnitude of any price recovery, we
suspended our drilling activities in February 2016. While we intend to resume
drilling in 2016, there can be no assurance that we will have adequate capital
to do so.
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Production and Development in the Eagle Ford Our Eagle Ford production was 14,188 BOEPD during the three months ended March 31, 2016, with oil comprising 10,504 BOPD, or 74 percent, and NGLs and natural gas comprising approximately 14 percent and 12 percent. Our first quarter production represented a 14 percent decrease compared to 16,544 BOEPD during the three months ended December 31, 2016, of which 11,764 BOPD, or 71 percent, was crude oil, 16 percent was NGLs and 13 percent was natural gas. The sequential decline in production was attributable to the suspension of our drilling program and natural declines from existing wells.
Financial Condition
Ability to Continue as a Going Concern
The precipitous decline in oil and natural gas prices during 2015 and into 2016
has had a significant adverse impact on our business, and as a result of our
financial condition, our registered independent public accountants issued an
opinion with an explanatory paragraph on our Consolidated Financial Statements
included in our Annual Report on Form 10-K for the year ended December 31, 2015
expressing substantial doubt as to our ability to continue as a "going concern."
The Revolver requires us to deliver audited, consolidated financial statements
without a "going concern" or like qualification or exception. Furthermore, we
have classified all of our total outstanding debt as short-term as of December
31, 2015, which represents a breach of the current ratio covenant under the
Revolver. Pursuant to the Eleventh Amendment, we have received an agreement from
our lenders that such default, together with certain other defaults, will not
become events of default until May 10, 2016. For additional information
regarding the Eleventh Amendment, please see Note 7 to the Condensed
Consolidated Financial Statements.
Based on the above circumstances and our general financial condition, it is
highly likely that we will file a voluntary petition under Chapter 11 in an
effort to accomplish a court-supervised comprehensive restructuring of our
balance sheet.
Liquidity
Our primary sources of liquidity have historically included cash from operating
activities, borrowings under the Revolver, proceeds from sales of assets and,
from time to time, proceeds from capital market transactions, including the
offering of debt and equity securities. Our cash flows from operating activities
are subject to significant volatility due to changes in commodity prices for our
crude oil, NGL and natural gas products, as well as variations in our
production. The prices for these commodities are driven by a number of factors
beyond our control, including global and regional product supply and demand,
weather, product distribution, refining and processing capacity and other supply
chain dynamics, among other factors. As a result of continued low oil and
natural gas prices during 2015 and into 2016, our liquidity has been
significantly negatively impacted.
As of March 31, 2015, we had an aggregate amount of approximately $1.2 billion
of debt outstanding. We are required to pay interest on our senior notes in the
amount of $87.6 million in 2016, including $10.9 million in April 2016
attributable to our 2019 Senior Notes and $32.9 million in May 2016 attributable
to our 8.5% Senior Notes due 2020, or 2020 Senior Notes. The amount attributable
to the 2019 Senior Notes was due on April 15, 2016 and we elected not to make
that payment, which will result in an event of default if we do not make the
interest payment prior to the expiration of the 30-day grace period. Our ability
to make our interest payments going forward is severely in doubt. As of March
31, 2016, we had only $26.5 million in cash and cash equivalents. Pursuant to
the Eleventh Amendment, the commitments under the Revolver were reduced to
$126.9 million in April 2016, which is equal to our currently outstanding loans
($125.0 million) and issued letters of credit ($1.9 million) under the Revolver.
Because we do not have any unused commitment capacity, we are not able to draw
on the Revolver to pay our second quarter interest payments on our senior notes
or for any other purpose. Furthermore, we are required, at the time of borrowing
and as a condition to borrowing, to make certain representations to our lenders.
We are not currently be able to make these representations, nor is it likely
that we will be able to do so in the future unless we can restructure our debt
obligations. There can be no assurance that we will be able to restructure our
debt obligations. While we will attempt to take appropriate mitigating actions
to refinance any indebtedness prior to its maturity or to otherwise extend the
maturity dates, and to cure any potential defaults under the agreements
governing such debt, there is no assurance that any particular action or actions
with respect to refinancing existing indebtedness, extending the maturity of
existing indebtedness or curing potential defaults in our debt agreements will
be sufficient.
Moreover, our lenders may in the future exercise their right to redetermine our
borrowing base under the Revolver. Pursuant to the Eleventh Amendment, any such
redetermination will not occur until after May 15, 2016. If our borrowing base
is redetermined below the amount of our outstanding borrowings, a deficiency
will result, and any deficiency must be repaid within 60 days.
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Capital Resources
Our business plan for 2016 reflects a temporary suspension of our drilling
program as a result of depressed commodity prices. If we resume a drilling
program, we expect to allocate all of our capital expenditures to the Eagle
Ford. We continually review our drilling and capital expenditure plans and may
change the amount we spend, or the allocations, based on available
opportunities, product pricing, industry conditions, cash from operating
activities and the overall availability of capital. For a detailed analysis of
our historical capital expenditures, see the "Cash Flows" discussion that
follows.
Cash From Operating Activities. In addition to commodity price volatility, as
discussed in detail below, our cash from operating activities is impacted by the
timing of our working capital requirements. The most significant component
thereof is the timing of payments made for drilling and completion capital
expenditures and the related billing and collection of our partners' share
thereof. This component can be substantial to the extent that we are the
operator of lower working interest wells. In certain circumstances, we have and
will continue to utilize capital cash calls to mitigate the burden on our
working capital. In addition, we have been required to make prepayments for
certain oilfield products and services due to our weak credit standing.
Historically, we have actively managed our exposure to commodity price
fluctuations by hedging the commodity price risk for a portion of our expected
production, typically through the use of collar and swap contracts. The level of
our hedging activity and duration of the instruments employed depend on our cash
flow at risk, available hedge prices, the magnitude of our capital program and
our operating strategy. In March 31, 2016, we terminated two derivative
contracts for $22.9 million of proceeds that were used to reduce amounts
outstanding under the Revolver. During April 2016, we terminated two additional
derivative contracts for total proceeds of $22.6 million and applied $16.6
million to further reduce amounts outstanding under the Revolver in a manner
similar to the March transactions. During the three months ended March 31, 2016,
our commodity derivatives portfolio resulted in $30.6 million of net cash
receipts related to lower than anticipated prices received for our crude oil
production. If commodity prices remain depressed, we anticipate that our
derivative portfolio will continue to result in receipts from settlements for
the remainder of 2016.
Subsequent to the aforementioned April termination transactions, we have
remaining hedged positions covering approximately 2,000 barrels of oil per day
at a weighted-average price of $77.70 per barrel for the remainder of 2016. Our
natural gas hedges expired in 2015 and we anticipate remaining unhedged with
respect to natural gas production for the remainder of 2016.
Revolver Borrowings. Pursuant to the Eleventh Amendment, the commitments under
the Revolver were reduced to $126.9 million in April 2016, which is equal to our
currently outstanding loans ($125 million) and issued letters of credit ($1.9
million) under the Revolver. Because we do not have any unused commitment
capacity, we will not be able to draw on the Revolver to pay our second quarter
interest payments on our senior notes or for any other purpose. While we will
attempt to take appropriate mitigating actions to refinance any indebtedness
prior to its maturity or otherwise extend the maturity dates, and to cure any
potential defaults under the agreements governing such debt, there is no
assurance that any particular action or actions with respect to refinancing
existing indebtedness, extending the maturity of existing indebtedness or curing
potential defaults in our debt agreements will be sufficient.
Moreover, our lenders may in the future exercise their right to redetermine our
borrowing base under the Revolver. Pursuant to the Eleventh Amendment, any such
redetermination will not occur until after May 15, 2016. If our borrowing base
is redetermined below the amount of our outstanding borrowings, a deficiency
will result, and any deficiency must be repaid within 60 days.
For additional information regarding the terms and covenants under the Revolver,
see "Capitalization" discussion that follows. The following table summarizes our
borrowing activity under the Revolver during the periods presented:
Borrowings Outstanding
Weighted- Weighted-
Average Maximum Average Rate
Three months ended March 31, 2016$ 165,885 $ 170,000 3.0650 %
Proceeds from Sales of Assets. We continually evaluate potential sales of non-core assets, including certain oil and gas properties and non-strategic undeveloped acreage, among others. Capital Market Transactions. From time-to-time and under market conditions that we believe are favorable to us, we have undertaken capital market transactions, including the offering of debt and equity securities. Historically, we have entered into such transactions to facilitate acquisitions and to pursue opportunities to adjust our total capitalization.
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