Amplify Energy Corp. announced its operating and financial results for the third quarter of 2021.
• During the third quarter of 2021, the Company:
• Achieved average total production of 25.1 MBoepd
• Generated net cash provided by operating activities of $18.9 million
• Delivered Adjusted EBITDA of $27.1 million
• Generated $13.1 million of free cash flow
• Completed the Fall 2021 borrowing base redetermination, which reaffirmed the borrowing base at $245 million through January 2022
• Rescinded full-year 2021 guidance due to the Southern California oil spill
• As of September 30, 2021, net debt was $204 million, inclusive of $26 million of cash on hand
• Net Debt to Last Twelve Months (“LTM”) EBITDA of 2.1x1
Southern California Pipeline Incident and Oil Release
On October 2, 2021, contractors operating under the direction of Beta Operating Company, LLC (“Beta”), a subsidiary of Amplify, observed an oil sheen on the water approximately four miles off the coast of Newport Beach, California (the “Incident”). Beta platform personnel were notified and promptly initiated the Company’s Oil Spill Response Plan, which was reviewed and approved by the Bureau of Safety and Environmental Enforcement’s Oil Spill Preparedness Division within the United States Department of the Interior, and which included the required notifications of specified regulatory agencies. On October 3, 2021, a Unified Command, consisting of the Company, the U.S. Coast Guard and California Department of Fish and Wildlife’s Office of Spill Prevention and Response, was established to respond to the Incident. The Company is and has been fully committed to working cooperatively within the Unified Command and with all relevant agencies to respond to the Incident and supporting all associated ongoing investigations.
On October 5, 2021, the Unified Command announced that reports from its contracted commercial divers and Remotely Operated Vehicle footage indicated that a 4,000-foot section of the Company’s pipeline had been displaced with a maximum lateral movement of approximately 105 feet and that the pipeline had a 13-inch split, running parallel to the pipe. On October 14, 2021, the U.S. Coast Guard announced that it had a high degree of confidence the size of the release was approximately 588 barrels of oil, which is below the previously reported maximum estimate of 3,134 barrels. On October 16, 2021, the U.S. Coast Guard announced that it had identified the Mediterranean Shipping Company (DANIT) as a “vessel of interest” in connection with an anchor-dragging incident, which occurred in close proximity to the Company’s pipeline, and that additional vessels of interest continue to be investigated. The cause, timing and details regarding the Incident are currently under investigation and any information regarding the Incident is preliminary.
Following the Incident, the Company deployed contractors so that at the height of the Incident response there were over 1,800 personnel working under the guidance and at the direction of the Unified Command to aid in cleanup operations. As of October 14, 2021, all beaches that had been closed following the Incident have reopened. On October 15, 2021, the Unified Command announced that reports from trained oil observers and beach cleanup contractors working for the Unified Command showed significant progress in cleanup operations. On October 18, 2021, the Unified Command stated that segments of beach are recommended for no further clean-up activities. While the Unified Command has significantly reduced the number of personnel conducting remediation activities from the height of the effort, remediation efforts remain ongoing at November 15, 2021.
The Company carries customary industry insurance policies, including loss of production income insurance, which it expects will cover a material portion of the total aggregate costs associated with the Incident, including loss of revenue resulting from suspended operations. However, the Company can provide no assurance that its coverage will adequately protect it against liability from all potential consequences, damages and losses related to the Incident.
In response to the Incident, all operations have been suspended and the pipeline has been shut-in until the Company receives the required regulatory approvals to begin operations. At present, given that the pipeline to shore is not operational, no operations are underway in the Beta field.
Key Financial Results
During the third quarter of 2021, Amplify generated $27.1 million of Adjusted EBITDA, an increase of approximately $3.3 million from $23.8 million in the prior quarter. Third quarter Adjusted EBITDA exceeded internal projections as a result of production outperformance and strong price realizations.
Free cash flow, defined as Adjusted EBITDA less cash interest and capital spending, was $13.1 million in the third quarter of 2021, a quarter-over-quarter increase of approximately $3.6 million. The positive change was primarily associated with production outperformance and higher net pricing realizations overall.
Revolving Credit Facility
On November 10, 2021, the Company completed the regularly scheduled semi-annual redetermination of its revolving credit facility borrowing base and entered into an amendment to its credit agreement. The redetermination reaffirmed the borrowing base at $245 million. Beginning in February 2022, the borrowing base will be reduced by $5 million per month until the spring borrowing base redetermination, which is expected to be completed by April 2022.
As of September 30, 2021, Amplify had net debt of $204 million, consisting of $230 million outstanding under its revolving credit facility and $26 million of cash on hand. Net Debt to LTM EBITDA was 2.1x (net debt as of September 30, 2021 and 3Q21 LTM EBITDA).
Corporate Production and Pricing Update
During the third quarter of 2021, average daily production was approximately 25.1 MBoepd, a decrease of 1% from 25.3 MBoepd in the second quarter. Production exceeded internal expectations during the quarter, driven primarily by the low-decline profile of the Company’s East Texas assets and the successful workover program in Oklahoma.
The Company’s commodity product mix for the quarter consisted of 41% crude oil, 16% NGLs, and 43% natural gas. On a quarter-over-quarter basis, Amplify’s oil composition increased by approximately 3%.
Total oil, natural gas and NGL revenues in the third quarter of 2021 were approximately $96.8 million, before the impact of derivatives, compared to $80.3 million in the second quarter. The Company realized a loss on commodity derivatives of $18.5 million during the quarter, compared to a $12.7 million loss during the previous quarter, consisting of $22.6 million in realized losses from active contracts, partially offset by a $4.1 million gain from in-the-money contracts related to the third quarter of 2021 that were monetized in April 2020. The hedging loss experienced during this quarter was primarily attributed to the hedges placed earlier in 2020 when the commodity pricing environment was materially lower and highlights the substantial recovery in prices in 2021.
Costs and Expenses
Lease operating expenses in the third quarter of 2021 were approximately $34.5 million, or $14.92 per Boe, an increase of approximately $5.8 million compared to $28.7 million, or $12.46 per Boe, from the second quarter of 2021. The increase was largely attributable to previously disclosed Level II and Level III platform inspections at Beta, accelerated facility maintenance projects at Bairoil, and increased electricity and fuel costs across all assets. Amplify remains committed to the disciplined management of operating expenses, and the asset teams continue to explore additional methods of reducing costs moving forward.
Severance and Ad Valorem taxes in the third quarter were approximately $6.0 million, an increase of $0.9 million compared to $5.1 million in the second quarter. On a percentage basis, Amplify paid approximately 6.2% of total oil, NGL and natural gas sales revenue in taxes this quarter compared to 6.3% in the previous quarter.
Amplify incurred $5.0 million, or $2.18 per Boe, of gathering, processing and transportation expenses in the third quarter of 2021, compared to $5.1 million, or $2.20 per Boe, in the previous quarter.
Third quarter cash G&A expenses were $5.8 million, an increase of $0.8 million from the second quarter of 2021, primarily due to increased employee-related expenses.
Depreciation, depletion and amortization expense for the third quarter of 2021 totaled $7.0 million, or $3.03 per Boe, compared to $7.4 million, or $3.21 per Boe, in the prior quarter.
Net interest expense was $3.1 million this quarter, held flat from the second quarter of 2021.
Amplify had an effective tax rate of 0% and did not record an income tax expense or benefit for the third quarter of 2021.
Capital Spending Update and Outlook
Cash capital spending during the third quarter of 2021 was approximately $10.5 million, a $0.4 million decrease from $10.9 million in the second quarter. The majority of capital expenditures in the third quarter were primarily attributed to development projects at Beta, the workover program in Oklahoma, and facilities upgrades and workovers at Bairoil.
Asset Operational Update and Statistics
• Production: 614 MBoe; 6.7 MBoepd
• Commodity Mix: 22% oil, 27% NGLs, 51% natural gas
• LOE: $4.2 million; $6.84 per Boe
• Capex: $2.7 million
Amplify’s operating strategy in Oklahoma remains focused on prioritizing a stable free cash flow profile and managing production through an active workover program. The workover program is focused on rod-lift conversions and ESP optimizations, which reduce future operating expenses and downtime while generating attractive returns in the current pricing environment. As of September 30, Amplify has converted approximately 48% of the field to rod lift and anticipates having approximately 51% of the field converted to rod lift by year end.
• Production: 341 MBoe; 3.7 MBoepd
• Commodity Mix: 100% oil
• LOE: $12.0 million; $35.12 per Boe
• Capex: $1.0 million
The Company continued its CO2 injection and water-alternating-gas pattern optimization at Bairoil to improve production performance. The third quarter of 2021 delivered strong operational reliability of the production facilities, and the technical team continued extensive evaluation of the reservoir to facilitate these efforts. Amplify intends to continue using new technologies, along with targeted workover activity, to drive further operational improvements and efficiencies.
Southern California (Beta):
• Production: 337 MBoe; 3.7 MBoepd
• Commodity Mix: 100% oil
• LOE: $12.1 million; $35.94 per Boe
• Capex: $6.5 million
During the third quarter, Amplify completed the first project of its previously announced phased development program, a case hole recompletion, and preliminary results were being evaluated prior to shutting in the field in response to the Incident. Lease operating expenses increased quarter over quarter primarily due to higher fuel and electrical costs associated with rising commodity prices. In addition, the aforementioned Level II and Level III inspections were completed during the quarter ahead of schedule.
East Texas and North Louisiana:
• Production: 5.5 Bcfe; 59.4 MMcfepd (911 MBoe; 9.9 MBoepd)
• Commodity Mix: 5% oil, 20% NGLs, 75% natural gas
• LOE: $4.9 million; $0.90 per Mcfe ($5.37 per Boe)
• Capex: Less than $0.1 million
The East Texas asset remains one of the Company’s highest margin and best cash flowing areas. Amplify’s operating strategy continues to focus on prudent management of production by prioritizing high-return workover opportunities. The Company also anticipates participating in highly accretive non-operated development opportunities beginning in the fourth quarter of 2021, which will provide additional cash flow generation starting in 2022.
Non-Operated Eagle Ford:
• Production: 108 MBoe; 1.2 MBoepd
• Commodity Mix: 77% oil, 13% NGLs, 10% natural gas
• LOE: $1.3 million; $11.95 per Boe
• Capex: $0.3 million
Eagle Ford production outperformed during the third quarter of 2021 as wells placed online earlier in the year generally exceeded their internal type curves. Amplify’s Eagle Ford asset continues to generate substantial margins and free cash flow.
2021 Guidance Update
As previously disclosed, all of the Company’s production and pipeline operations at the Beta Field have been suspended due to the oil spill in Southern California. As a result, Amplify is withdrawing its previously issued full-year 2021 guidance.