SEC Form 10-Q filed by Vine Energy Inc.
$VEI
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2021
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File
Number: 001-40239
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of incorporation) |
(IRS Employer Identification No.) | |
(Address of principal executive offices) |
(Zip Code) | |
(469 ) 606-0540
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
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.
Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Yes ☒ No ☐
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, 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 | ☐ | |||
| ☒ | Smaller reporting company | |||||
| Emerging growth company | ||||||
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 The number of outstanding shares of the registrant’s common stock, $0.01 par value, as of August 13, 2021 was 41,040,721 .
Vine Energy Inc.
Table of Contents
Item 1. |
5 | |||||
| Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020 | 5 | |||||
| Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 | 6 | |||||
| Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2021 and 2020 | 7 | |||||
| Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2021 and 2020 | 8 | |||||
| Notes to Consolidated Financial Statements | 9 | |||||
Item 2. |
27 | |||||
Item 3. |
40 | |||||
Item 4. |
41 | |||||
Item 1. |
42 | |||||
Item 1A. |
42 | |||||
Item 2. |
42 | |||||
Item 3. |
42 | |||||
Item 4. |
43 | |||||
Item 5. |
43 | |||||
Item 6. |
43 | |||||
45 |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The information in this Quarterly Report on
Form 10-Q
(this “Report”) includes “forward-looking statements.” All statements, other than statements of historical fact included in this Report, regarding our strategy, future operations, financial position, estimated revenue and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under “Risk Factors” in Vine Energy Inc.’s Registration Statement filed pursuant to Rule 424(b)(4) on March 19, 2021 with the Securities and Exchange Commission. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. Forward-looking statements may include statements about:
| • | our business strategy; |
| • | our reserves; |
| • | our financial strategy, liquidity, and capital required for our development program; |
| • | our realized or expected natural gas prices; |
| • | our timing and amount of future production of natural gas; |
| • | our hedging strategy and results; |
| • | our future drilling plans and cost estimates; |
| • | our competition and government regulations; |
| • | our pending legal or environmental matters; |
| • | our ability to make business acquisitions; |
| • | the impact of the COVID-19 pandemic and its effect on our business and financial condition; |
| • | general economic conditions; |
| • | credit markets; |
| • | our future operating results; and |
| • | our future plans, objectives, expectations, and intentions. |
We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the exploration for and development, production and sale of natural gas. These risks include, but are not limited to, commodity price volatility, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating natural gas reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures, and the other risks described under “Risk Factors” in Vine Energy Inc.’s Registration Statement filed pursuant to Rule 424(b)(4) on March 19, 2021 with the Securities and Exchange Commission.
Reserve engineering is a method of estimating underground accumulations of natural gas and oil that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of previous estimates. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of natural gas and oil that are ultimately recovered.
2
Glossary of Oil and Natural Gas Terms
The following are abbreviations and definitions of certain terms used in this document, which are commonly used in the oil and natural gas industry:
| • | “Basin” refers to a geographic area containing specific geologic intervals. |
| • | “Btu” means one British thermal unit, the quantity of heat required to raise the temperature of a one pound mass of water by one degree Fahrenheit. |
| • | “CapEx” means capital expenditures. |
| • | “D&C” means drilling and completion costs. |
| • | “Estimated ultimate recovery” or “EUR” means the sum of reserves remaining as of a given date and cumulative production as of that date. As used in this Quarterly Report, EUR includes only proved reserves and is based on our reserve estimates. |
| • | “Field” means an area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations. |
| • | “Formation” means a layer of rock which has distinct characteristics that differs from nearby rock. |
| • | “Henry Hub” means the distribution hub on the natural gas pipeline system in Erath, Louisiana, owned by Sabine Pipe Line LLC, which serves as the delivery location for gas futures contracts on the NYMEX. |
| • | “Drilling locations” means total gross locations that may be able to be drilled on our existing acreage. A portion of our drilling locations constitute estimated locations based on our acreage and spacing assumptions. |
| • | “LNG” means liquified natural gas. |
| • | “Mcf” means one thousand cubic feet of natural gas. |
| • | “MMBtu” means one million Btu. |
| • | “MMBtud” means one MMBtu per day. |
| • | “MMcf” means one million cubic feet of natural gas. |
| • | “MMcfd” means one MMcf per day. |
| • | “NYMEX” means the New York Mercantile Exchange. |
| • | “Proved reserves” means the reserves which geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions. |
| • | “Reservoir” means a porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock and is separate from other reservoirs. |
| • | “Spacing” means the distance between wells producing from the same reservoir. Spacing is often expressed in terms of acres (e.g., 40-acre spacing) and is often established by regulatory agencies. |
| • | “Unit” means the joining of all or substantially all interests in a specific reservoir or field, rather than a single tract, to provide for development and operation without regard to separate mineral interests. Also, the area covered by a unitization agreement. |
| • | “Wellbore” or “well” means a drilled hole that is equipped for natural gas production. |
| • | “Working interest” means the right granted to the lessee of a property to explore for and to produce and own natural gas or other minerals. The working interest owners bear the exploration, development, and operating costs on either a cash, penalty, or carried basis. |
3
Names of Entities
| • | “Blackstone” refers collectively, to investment funds affiliated with or managed by The Blackstone Group L.P. |
| • | “Brix” refers to Brix Oil & Gas Holdings LP. |
| • | “Brix Companies” refers to Brix and Harvest on a combined basis as acquired by Vine Holdings prior to the initial public offering. |
| • | “Brix GP” refers to Brix Oil & Gas Holdings GP LLC. |
| • | “Brix Investment” refers to Brix Investment LLC. |
| • | “Brix Investment II” refers to Brix Investment II LLC. |
| • | “Harvest” refers to Harvest Royalties Holdings LP. |
| • | “Harvest GP” refers to Harvest Royalties Holdings GP LLC. |
| • | “Harvest Investment” refers to Harvest Investment LLC. |
| • | “Harvest Investment II” refers to Harvest Investment II LLC. |
| • | “Vine,” “Company,” “we,” “our,” “us” or like terms refers to Vine Energy Inc. individually and collectively with its subsidiaries, as the context requires. |
| • | “Vine Holdings” refers to Vine Energy Holdings LLC and its consolidated subsidiaries. |
| • | “Vine Investment” refers to Vine Investment LLC. |
| • | “Vine Investment II” refers to Vine Investment II LLC. |
| • | “Vine Oil & Gas,” “Predecessor” refers to Vine Oil & Gas Parent LP. |
| • | “Vine Oil & Gas GP” refers to Vine Oil & Gas Parent GP LLC. |
4
PART I — FINANCIAL INFORMATION
Item 1. |
Financial Statements |
VINE ENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data - unaudited)
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
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2021 |
2020 |
2021 |
2020 |
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| Revenue: |
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| Natural gas sales |
$ | $ | $ | $ | ||||||||||||
| Realized (loss) gain on commodity derivatives |
( |
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| Unrealized loss on commodity derivatives |
( |
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| Total revenue |
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| Operating Expenses: |
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| Lease operating |
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| Gathering and treating |
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| Production and ad valorem taxes |
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| General and administrative |
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| Monitoring fee |
— | |||||||||||||||
| Stock-based compensation for Existing Management Owne rs |
— | — | ||||||||||||||
| Depletion, depreciation and accretion |
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| Exploration |
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| Strategic |
— | — | ||||||||||||||
| Severance |
— | — | ||||||||||||||
| Write-off of deferred offering costs |
— | — | — | |||||||||||||
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| Total operating expenses |
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| Operating Income |
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| Interest Expense: |
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| Interest |
( |
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| Loss on extinguishment of debt |
( |
) | — | ( |
) | — | ||||||||||
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| Total interest expense |
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| Income before income taxes |
( |
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| Income tax provision |
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| Net income |
$ | ( |
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| Net income attributable to Predecessor |
$ | — | $ | ( |
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| Net income attributable to noncontrolling interest |
$ | ( |
) | $ | ( |
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| Net income attributable to Vine Energy Inc. |
$ | ( |
) | $ | ( |
) | ||||||||||
| Net income per share attributable to Vine Energy Inc.: |
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| Basic |
$ | ( |
) | $ | ( |
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| Diluted |
$ | ( |
) | $ | ( |
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| Weighted average shares outstanding: |
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| Basic |
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| Diluted |
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The accompanying notes are integral to the financial statements.
5
VINE ENERGY INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, expect share data – unaudited)
June 30, 2021 |
December 31, 2020 |
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| Assets |
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| Current assets: |
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| Cash and cash equivalents |
$ | $ | ||||||
| Accounts receivable |
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| Joint interest billing receivables |
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| Prepaid and other |
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| Total current assets |
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| Natural gas properties (successful efforts): |
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| Proved |
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| Unproved |
— | |||||||
| Accumulated depletion |
( |
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| Total natural gas properties, net |
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| Other property and equipment, net |
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| Operating lease right-of-use |
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| Other |
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| Total assets |
$ | $ | ||||||
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| Liabilities and Stockholders’ Equity / Partners’ Capital |
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| Current liabilities: |
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| Accounts payable |
$ | $ | ||||||
| Accrued liabilities |
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| Revenue payable |
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| Operating leases |
— | |||||||
| Derivatives |
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| Total current liabilities |
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| Long-term liabilities: |
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| New RBL |
— | |||||||
| Prior RBL |
— | |||||||
| Second lien credit facility |
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| Unsecured debt |
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| Asset retirement obligations |
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| TRA liability |
— | |||||||
| Operating leases |
— | |||||||
| Derivatives |
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| Other |
— | |||||||
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| Total liabilities |
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| Commitments and contingencies |
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| Stockholders’ Equity / Partners’ Capital |
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| Partners’ capital |
— | |||||||
| Class A common stock, $ |
— | |||||||
| Class B common stock, $ |
— | |||||||
| Additional paid-in capital |
— | |||||||
| Retained earnings |
( |
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| Total stockholders’ equity attributable to Vine Energy Inc. |
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| Non-controlling interest |
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| Total stockholders’ equity / partners’ capital |
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| Total liabilities and stockholders’ equity / partners’ capital |
$ | $ | ||||||
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The accompanying notes are integral to the financial statements.
6
VINE ENERGY INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands - unaudited)
Class A Common Stock |
Class B Common Stock |
Total stockholders’ equity attributable to Vine Energy Inc. |
Total stockholders’ equity / partners’ capital |
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Partners’ Capital |
Shares |
Amount |
Shares |
Amount |
APIC |
Retained Earnings |
Non-controlling Interest |
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| Balance - December 31, 2019 |
$ | — |
$ | — | — |
$ | — | $ | — | $ | ( |
) | $ | $ | — | $ | ||||||||||||||||||||||||
| Net income attributable to Predecessor |
— | — | — | — | — | — | ( |
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| Balance - March 31, 2020 |
— | — | — | — | — | ( |
) | — | ||||||||||||||||||||||||||||||||
| Net income attributable to Predecessor |
— | — | — | — | — | — | ( |
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| Balance – June 30, 2020 |
$ | — |
$ | — | — |
$ | — | $ | — | $ | ( |
) | $ | $ | — | $ | ||||||||||||||||||||||||
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| Balance - December 31, 2020 |
$ | — |
$ | — | — |
$ | — | $ | — | $ | ( |
) | $ | $ | — | $ | ||||||||||||||||||||||||
| Net income attributable to Predecessor |
— | — | — | — | — | — | ( |
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| Balance prior to Corporate Reorganization and Offering |
— | — | — | — | — | ( |
) | ( |
) | — | ( |
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| Equity issued in Brix Companies acquisition |
— | — | — | |||||||||||||||||||||||||||||||||||||
| Reclassification of refundable deposits |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Predecessor conversion for Class A Common Stock and Class B Common Stock |
( |
) | ( |
) | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of Class A Common Stock in Offering, net of fees |
— | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Initial allocation of non-controlling interest in Vine Holdings |
— | — | — | — | — | ( |
) | — | ( |
) | — | |||||||||||||||||||||||||||||
| Net income attributable to shareholders |
— | — | — | — | — | — | ( |
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| Balance - March 31, 2021 |
— | ( |
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| Offering costs |
— | — | — | — | — | ( |
) | — | ( |
) | ( |
) | ( |
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| Distribution to Existing Owners |
— |
— |
— |
— |
— |
— |
— |
— |
( |
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) | ||||||||||||||||||||||||||||
| Stock-based compensation for Existing Management Owners |
— | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Net income attributable to shareholders |
— | — | — | — | — | — | ( |
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| Balance - June 30, 2021 |
$ | — | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||||
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The accompanying notes are integral to the financial statements.
7
VINE ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands - unaudited)
For the Six Months Ended June 30, |
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2021 |
2020 |
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| Operating Activities |
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| Net income |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net income to operating cash flow: |
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| Depletion, depreciation and accretion |
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| Amortization of financing costs and debt discount |
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| Non-cash loss on extinguishment of debt |
— | |||||||
| Cash redemption premiums on extinguishment of debt |
— | |||||||
| Non-cash write-off of deferred offering costs |
— | |||||||
| Non-cash stock-based compensation |
— | |||||||
| Unrealized loss on commodity derivatives |
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| Volumetric and production adjustment to gas gathering liability |
— | ( |
) | |||||
| Other |
( |
) | ||||||
| Changes in assets and liabilities: |
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| Accounts receivable |
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| Joint interest billing receivables |
( |
) | ||||||
| Accounts payable and accrued liabilities |
( |
) | ||||||
| Revenue payable |
( |
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| Other |
( |
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| Operating cash flow |
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| Investing Activities |
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| Cash received in acquisition of the Brix Companies |
— | |||||||
| Capital expenditures |
( |
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| Investing cash flow |
( |
) | ( |
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| Financing Activities |
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| Repayment of Brix Credit Facility |
( |
) | — | |||||
| Proceeds from New RBL |
— | |||||||
| Repayment of New RBL |
( |
) | — | |||||
| (Repayment) proceeds of Prior RBL |
( |
) | ||||||
| Proceeds from 6.75% Notes |
— | |||||||
| Repayment of unsecured notes, including redemption premiums |
( |
) | — | |||||
| Proceeds from issuance of Class A common stock, net of fees |
— | |||||||
| Deferred financing costs |
( |
) | ( |
) | ||||
| Distribution for tax to Existing Owners |
( |
) | — | |||||
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| Financing cash flow |
( |
) | ||||||
| Net increase in cash and cash equivalents |
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
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| Non-cash investing and financing transactions: |
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| Accrued capital expenditures |
$ | $ | ||||||
| Acquisition of the Brix Companies |
$ | $ | — | |||||
The accompanying notes are integral to the financial statements.
8
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization and Nature of Operations
Vine Energy Inc. (the “Company” or “Vine Energy”) is a Delaware corporation that was formed for the purpose of effectuating the Company’s initial public offering (the “Offering”) that closed in March 2021. Following the Offering and the transactions related thereto, the Company became a holding company whose sole material asset consists of membership interests in Vine Energy Holdings LLC (“Vine Holdings”). Vine Holdings owns all of the outstanding limited partnership interests in each of Vine Oil & Gas Parent LP (“Vine Oil & Gas”), Brix Oil and Gas Holdings LP (“Brix”) and Harvest Royalties Holdings LP (“Harvest”), the operating subsidiaries through which we operate our assets, and all of the outstanding equity in each of Vine Oil & Gas Parent GP LLC (“Vine Oil & Gas GP”), Brix Oil & Gas Holdings GP LLC (“Brix GP”) and Harvest Royalties Holdings GP LLC (“Harvest GP”), the general partners of Vine Oil & Gas, Brix and Harvest, respectively. Vine Oil & Gas is the accounting predecessor to the Company for all periods prior to the Offering as discussed herein.
The Company is the managing member of Vine Holdings and controls and is responsible for all operational, management and administrative decisions relating to Vine Holdings’ business and consolidates the financial results of Vine Holdings and its subsidiaries. Through our operating subsidiaries, we are engaged in the development, production and sale of natural gas in the Haynesville and
Mid-Bossier
plays of the Haynesville Basin in Northern Louisiana. Initial Public Offering
In March 2021, we completed the Offering of 24,725,000 shares, including the underwriters’ option to purchase 3,225,000 additional shares, of the Company’s Class A common stock, par value $0.01 per share (“Class A Common Stock”) at a price of $14.00 per share to the public. The sale of the Company’s Class A Common Stock resulted in gross proceeds of $346.2 million to the Company and net proceeds of $321.0 million, after deducting underwriting fees and offering expenses. The material terms of the Offering are described in the Company’s final prospectus, filed with the Securities and Exchange Commission (“SEC”) on March
19
, 2021 pursuant to Rule 424(b)(4) of the Securities Act of 1933, as supplemented. The Company contributed the net proceeds of the Offering to Vine Holdings in exchange for newly issued limited liability interests in Vine Holdings (the “Vine Units”). Vine Holdings utilized the proceeds from the Offering to repay all outstanding borrowings under the Senior Secured Credit Agreement dated as of March 20, 2018 by and among Brix Operating LLC, the lenders from time to time party thereto, and Macquarie Investments US Inc., as administrative agent, as amended from time to time (the “Brix Credit Facility”) and Vine Oil & Gas’s revolving credit facility, dated as of November 25, 2014 (the “Prior RBL”) and to pay fees and expenses related to the Offering and deferred financing costs related to our new reserve-based lending facility (the “New RBL”).
Corporate Reorganization
Immediately prior to the Notice of Effectiveness from the SEC on March 17, 2021, and in conjunction with the Offering, Vine Holdings underwent a corporate reorganization (“Corporate Reorganization”) whereby (a) the existing owners who directly held equity interests in Vine Oil & Gas, Vine Oil & Gas GP, Brix, Brix GP, Harvest and Harvest GP (together, the “Existing Owners”) contributed such equity interests to Vine Holdings in exchange for newly issued equity in Vine Holdings (the “LLC Interests”) to effectuate a merger of such entities into Vine Holdings with Vine Oil & Gas determined as the accounting acquirer, (b) certain of the Existing Owners contributed a portion of their LLC Interests directly, or indirectly by contribution of blocker entities (entities that are taxable as corporations for U.S. federal income tax purposes, the “Blocker Entities”) holding LLC Interests, to Vine Energy in exchange for newly issued Class A Common Stock and contributed such Class A Common Stock received to Vine Investment II LLC, Brix Investment II LLC, Harvest Investment II LLC, Vine Investment LLC, Brix Investment LLC or Harvest Investment LLC, (together, the “Investment Vehicles”), as applicable, (c) certain of the Existing Owners exchanged the remaining portion of their LLC Interests for Vine Units and subscribed for newly issued Class B common stock of the Company (“Class B Common Stock”) with no economic rights or value and contributed such Vine Units and Class B Common Stock to Vine Investment, Brix Investment and Harvest Investment, as applicable, and (d) the Company contributed the net proceeds of the Offering to Vine Holdings in exchange for newly issued Vine Units and a managing member interest in Vine Holdings.
Each share of Class B Common Stock entitles its holder to one vote on all matters to be voted on by Company shareholders. Holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters presented to our shareholders for their vote or approval, except as otherwise required by applicable law or by our certificate of incorporation. The Class B Common Stock is not listed on any stock exchange.
9
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Holders of Vine Units may surrender such units, together with the same number of shares of Class B Common Stock to Vine Holdings in exchange for either (1) a number of shares of Class A Common Stock equal to the product of such number of Vine Units surrendered multiplied by a current exchange rate of one for one, subject to modification under the terms of the Exchange Agreement, or (2) at the Company’s election, cash equal to an amount calculated in accordance with the Exchange Agreement, dated March 17, 2021 (the “Exchange Agreement”). If at any time, a Vine Unit holder surrenders its Vine Units, an equal number of Class B Common Stock shares must be concurrently surrendered.
Upon completion of the Offering, 50,000,000 shares of preferred stock, $0.01 par value per share, were authorized, of which no
Tax Receivable Agreement
In connection with the Offering, we entered into a tax receivable agreement with Vine Investment, Brix Investment, Harvest Investment, Vine Investment II, Brix Investment II and Harvest Investment II (such agreement, the “TRA”). The TRA generally provides for the payment by the Company to Vine Investment, Brix Investment, Harvest Investment, Vine Investment II, Brix Investment II and Harvest Investment II, respectively, of
%
of the net cash savings, if any, in U.S. federal, state and local income tax that the Company (a) actually realizes with respect to taxable periods ending after December 31, 2025 or (b) is deemed to realize in the event of a change of control (as defined under the TRA, which includes certain mergers, asset sales and other forms of business combinations and certain changes to the composition of the Company board) or the TRA terminates early (at our election or as a result of our breach) with respect to any taxable periods ending on or after such change of control or early termination event, in each case, as a result of (i) the tax basis increases resulting from the exchange of Vine Units and the corresponding surrender of an equivalent number of shares of Class B Common Stock by Vine Investment, Brix Investment and Harvest Investment, respectively, for a number of shares of Class A Common Stock on a basis or, at our option, the receipt of an equivalent amount of cash pursuant to the exchange agreement, (ii) certain existing net operating loss carryforwards (“NOLs”), disallowed interest expense carryforwards under Section 163(j) of the Internal Revenue Code, and tax credit carryforwards attributable to the Blocker Entities previously owned by certain of the Existing Owners, and (iii) imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, any payments we make under the TRA.
one-for-one
The Company retains the benefit of the remaining 15 %
of these cash savings, if any. If we experience a change of control or the TRA terminates early, we could be required to make a substantial, immediate
lump-sum
payment. TRA Liability
TRA rights attributable to former owners of the Predecessor
The measurement of the TRA liability attributable to the former owners of the Predecessor is accounted for as a contingent liability. Accordingly, when a payment becomes probable and can be estimated, the estimate of the payment will be recorded to the balance sheets with an offset to the statements of operations. As of June 30, 2021, a TRA liability attributable to the former owners of the Predecessor has not been recorded as the Company determined a payment was not probable or estimable.
The Company evaluates the realizability of the deferred tax assets resulting from the Corporate Reorganization and the Offering, which relate to certain existing NOLs, disallowed interest expense carryforwards and tax credit carryforwards attributable to the Blocker Entities previously owned by certain of the Existing Owners. If the deferred tax assets are determined to be realizable, the Company then assesses whether payment of amounts under the TRA have become probable. If so, the Company will record a TRA liability equal to 85% of such deferred tax assets. In subsequent periods, the Company assesses the realizability of all of our deferred tax assets subject to the TRA. Should it be determined that a deferred tax asset with a valuation allowance is realizable in a subsequent period, the related valuation allowance will be released and consideration of a corresponding TRA liability will be assessed. The realizability of deferred tax assets, including those attributable to the TRA, is dependent upon the generation of future taxable income during the periods in which those deferred tax assets become deductible and consideration of prudent and feasible
tax-planning
strategies.10
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In future periods, we may obtain an increase in our tax basis resulting from the exchange of Vine Units and the corresponding surrender of an equivalent number of shares of Class B Common Stock by Vine Investment for a number of shares of Class A
C
ommonStock
. The Company accounts for the effects of these increases in tax basis and associated payments under the TRA arising from exchanges as follows: | • | the Company records an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal, state and local tax rates at the date of the exchange; |
| • | to the extent the Company estimates that it will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, the Company’s expectation of future taxable income, the Company reduces the deferred tax asset with a valuation allowance; and |
| • | the Company records 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the TRA liability and the remaining 15% of the estimated realizable tax benefit as an increase to additional paid-in capital. |
The effects of changes in estimates after the date of exchange as well as subsequent changes in the enacted tax rates will be included in the statements of operations.
TRA rights attributable to former owners of Brix and Harvest (collectively, the “Brix Companies”)
The TRA 7.0 million were recorded at fair value on the acquisition date, as such rights were deemed to be contingent consideration in the acquisition of the Brix Companies. The fair value of the contingent consideration was determined using an income approach based on underlying estimates of the timing and amount of cash payments expected under the TRA. The income approach is considered a Level 3 fair value estimate and includes significant assumptions of the timing and amount of future taxable income and the weighted average cost of capital for industry peers, which represents the discount factor, and risk adjustment factors based on uncertainty of realizing tax savings and future applicable tax rates.
rights
attributable to the former owners of the Brix Companies of $Changes in
estimates
of the preliminary fair value of the contingent consideration will be recorded as adjustments to the preliminary fair value of the natural gas unproved properties acquired from the Brix Companies. Subsequent to the end of the measurement period, adjustments to the fair value of the contingent consideration will be recorded in the statements of operations at each financial reporting period until the liability is settled. Note 2. Basis of Presentation
The unaudited consolidated financial statements for the three and six months ended June 30, 2021 and 2020 were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the SEC for all periods presented.
As of June 30, 2021, the unaudited financial statements include Vine Energy Inc. and its subsidiaries. For the three and six months ended June 30, 2021, the unaudited financial statements include Vine Oil & Gas LP for the entire period and the Brix Companies from March 17, 2021, the effective date of the acquisition as a result of the Corporate Reorganization.
As of December 31, 2020, and for the three and six months ended June 30, 2020, the unaudited financial statements include Vine Oil & Gas Parent LP (the “Predecessor”), a Delaware partnership organized in 2014, the accounting predecessor of Vine Energy Inc. GP LLC.
11
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the opinion of management, the accompanying unaudited consolidated balance sheets and related unaudited consolidated statements of operations, cash flows and equity include all adjustments, consisting only of normal recurring items necessary for the fair presentation in conformity with U.S. GAAP. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with rules and regulations of the SEC. These unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2020, as included in the Company’s final prospectus, dated March 17, 2021, filed with the SEC pursuant to Rule 424(b)(4) of the Securities Act of 1933, as supplemented
.
Principles of Consolidation
All significant intercompany balances and transactions have been eliminated in consolidation. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the calendar year.
Non-controlling Interest
As a result of the Corporate Reorganization and the Offering, the Company acquired 54.5 % of Vine Holdings, with the Existing Owners retaining ownership of 45.5 % of Vine Holdings. Accordingly, the Company has consolidated the financial position and results of operations of Vine Holdings and reflected the portion retained by the Existing Owners as a
non-controlling interest.
Business Combinations
The Company applies the acquisition method of accounting for business acquisitions. The results of operations of the businesses acquired by the Company are included as of the respective acquisition date. The acquisition-date fair value of the consideration transferred, including the fair value of any contingent consideration, is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the acquisition-date fair value of the consideration transferred exceeds the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill or unproven properties. The Company may adjust the preliminary purchase price allocation, as necessary, as it obtains more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date, which is generally up to one year after the acquisition closing date. Acquisition related expenses are recognized separately from the business combination and are expensed as incurred.
Use of Estimates
The preparation of unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates of reserves are used to determine depletion and to conduct impairment analysis. Estimating reserves is inherently uncertain, including the projection of future rates of production and the timing of development expenditures. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Adopted
The Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-13,
“Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which introduces guidance for estimating credit losses on certain types of financial instruments based on expected losses and the timing of the recognition of such losses. The impact of adopting this standard was not material. 12
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The FASB issued ASU assets and lease liabilities. We adopted this standard as of January 1, 2021 using the modified retrospective transition method. We elected to apply the transition guidance in which ASC 842 is applied at the adoption date, while comparative periods will continue to be reported in accordance with the historical accounting standard. ASC 842 does not apply to leases to explore for or use minerals, oil or gas resources, including the right to explore for those natural resources and rights to use land in which those natural resources are contained.
No. 2016-02,
“Leases (Topic 842)” (“ASC 842”) which requires all leases greater than one year to be recognized as right-of-use
ASC 842 allowed for the election of certain practical expedients to ease the burden of implementation. At implementation, we elected:
| • | the package of practical expedients, which among other things, allowed the Company to carry forward the historical lease classification; |
| • | the land easements practical expedient, which allows the Company to carry forward the accounting treatment for land easements on existing agreements; |
| • | the short-term lease practical expedient, which allows the Company to exclude short-term leases from recognition in the consolidated balance sheets; and |
| • | the bifurcation of lease and non-lease components practical expedient, which does not require the Company to bifurcate lease and non-lease components for all classes of assets. |
The adoption of ASC 842 had no impact on the Company’s statements of stockholders’ equity, the consolidated statements of operations or the consolidated statements of cash flows.
Note 3. Acquisition of the Brix Companies
As part of the Corporate Reorganization, the Existing Owners prior to the Offering contributed all of their equity interests in Vine Oil & Gas, Vine Oil & Gas GP, Brix, Brix GP, Harvest and Harvest GP to Vine Holdings in exchange for LLC Interests in Vine Holdings to effectuate the acquisition. For purposes of effecting the acquisition, Vine Oil & Gas and the Brix Companies were not considered to be entities under common control for financial reporting purposes. Vine Oil & Gas has been identified as the accounting acquirer of the Brix Companies which has been accounted for as a business combination under the acquisition method of accounting under U.S. GAAP.
The fair value of consideration transferred by the Company as a result of the acquisition is as follows (in thousands, except share data):
Preliminary Acquisition Consideration |
||||
| Vine Units issued for acquisition of the Brix Companies |
||||
| Offering price of Class A Common Stock |
$ | |||
| |
|
|||
| Total equity issued in acquisition |
$ | |||
| Contingent consideration (1) |
||||
| |
|
|||
| Total acquisition consideration |
$ | |||
| |
|
|||
(1) |
Represents the preliminary estimate of fair value of contingent consideration related to the TRA liability that will be payable by the Company to the former owners of the Brix Companies. |
The table below reflects the preliminary fair value estimates of the assets acquired and liabilities assumed as of the acquisition date. While the preliminary purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’s natural gas properties, opening deferred income taxes and the TRA liability as of the acquisition date as we await finalization of income tax returns relevant to opening tax basis and contributed attributes subject to the TRA. The contingent consideration related to the TRA liability will be revalued quarterly. These amounts will be finalized within the measurement period of the acquisition which will be no later than one year from the acquisition date. Subsequent to the measurement period, the adjustments for revaluation of the TRA liability will be recorded in our statements of operations.
13
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Measurement period adjustments that the Company determines to be material will be applied retrospectively to the period of acquisition in the Company’s consolidated financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could also be affected.
The preliminary purchase price was allocated as follows (in thousands):
| Assets Acquired: |
||||
| Cash and cash equivalents |
$ | |||
| Accounts receivable |
||||
| Joint interest billing receivables |
||||
| Proved properties |
||||
| Unproved properties |
||||
| |
|
|||
| Total assets to be acquired |
$ | |||
| |
|
|||
| Liabilities Assumed: |
||||
| Accounts payable |
$ | |||
| Accrued liabilities |
||||
| Revenue payable |
||||
| Derivatives |
||||
| Brix Credit Facility (1) |
||||
| Asset retirement obligations |
||||
| Refundable deposits |
||||
| |
|
|||
| Total liabilities to be assumed |
||||
| |
|
|||
| Net assets to be acquired |
$ | |||
| |
|
(1) |
Borrowings under the Brix Credit Facility were determined to approximate fair value, and were subsequently repaid in full, including a $ |
Proved and unproved properties were valued using an income approach based on underlying reserves projections as of the acquisition date. The income approach is considered a Level 3 fair value estimate and includes significant assumptions of future production, commodity prices, operating and capital cost estimates, the weighted average cost of capital for industry peers, which represents the discount factor, and risk adjustment factors based on reserve category. Price assumptions were based on observable market pricing, adjusted for historical differentials, while cost estimates were based on current observable costs inflated based on historical and expected future inflation. Taxes were based on current statutory rates.
Unproved properties primarily relate to future drilling locations that were not included in proved undeveloped reserves. These future drilling locations are located on acreage where the reservoir is known to be productive but have been excluded from proved reserves due to uncertainty on whether the wells will be drilled within the next five years as required by SEC rules in order to be included in proved reserves.
14
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The unaudited pro forma combined financial information of the Company as if the acquisition had occurred on January 1, 2020 is as follows (in thousands):
For the Three Months Ended June 30, 2020 |
For the Six Months Ended June 30, |
|||||||||||
2021 |
2020 |
|||||||||||
| Total revenue |
$ | $ | $ | |||||||||
| Net income attributable to Vine Energy, Inc. |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
The unaudited pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been completed on January 1, 2020 and is not necessarily indicative of future results of operations of the combined company. The unaudited pro forma financial information gives effect to the acquisition, as well as the Offering and the use of net proceeds and borrowings under the New RBL of $28 million, as if the transactions had occurred on January 1, 2020. The unaudited pro forma financial information for the three months ended June 30, 2020 and the six months ended June 30, 2021 and June 30, 2020 is a result of combining the statements of operations of the Company with the
pre-acquisition
results of the Brix Companies, with adjustments for revenues and expenses. The unaudited pro forma financial information excludes any cost savings anticipated as a result of the acquisition and the impact of any acquisition-related costs. The unaudited pro forma financial information includes the following adjustments:
| • | For the six months ended June 30, 2021: Reduced depletion, depreciation and accretion expense of $ |
| • | For the three months ended June 30, 2020: Reduced depletion, depreciation and accretion expense of $ |
| • | For the six months ended June 30, 2020: Reduced depletion, depreciation and accretion expense of $ |
Management believes the estimates and assumptions are reasonable, and the effects of the acquisition are properly reflected.
15
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Accrued Liabilities
The Company’s accrued liabilities consist of the following (in thousands):
June 30, 2021 |
December 31, 2020 |
|||||||
| Capital expenditures |
$ | $ | ||||||
| Operating expenses |
||||||||
| Royalty owner suspense |
||||||||
| Compensation-related |
||||||||
| Interest expense |
||||||||
| IPO and financing costs |
— | |||||||
| Settled derivatives |
||||||||
| Other |
— | |||||||
| |
|
|
|
|||||
| Accrued expenses |
$ | $ | ||||||
| |
|
|
|
|||||
Note 5. Long-Term Debt
The Company’s long-term debt consists of the following (in thousands):
June 30, 2021 |
December 31, 2020 |
|||||||
| Face amount: |
||||||||
| New RBL |
$ | $ | — | |||||
| Prior RBL |
— | |||||||
| Second Lien Term Loan |
||||||||
| 6.75% Senior Notes |
— | |||||||
| 8.75% Senior Notes |
— | |||||||
| 9.75% Senior Notes |
— | |||||||
| |
|
|
|
|||||
| Total face amount |
||||||||
| |
|
|
|
|||||
| Deferred financing costs and discount: |
||||||||
| Prior RBL |
— | ( |
) | |||||
| Second Lien Term Loan |
( |
) | ( |
) | ||||
| 6.75% Senior Notes |
( |
) | — | |||||
| 8.75% Senior Notes |
— | ( |
) | |||||
| 9.75% Senior Notes |
— | ( |
) | |||||
| |
|
|
|
|||||
| Total deferred financing costs |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total debt |
||||||||
| Less: short-term portion |
||||||||
| |
|
|
|
|||||
| Total long-term debt |
$ | $ | ||||||
| |
|
|
|
|||||
Deferred financing costs, net of amortization, associated with our New RBL of $9.5 million are included in Other Assets on our balance sheets as of June 30, 2021.
16
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
New RBL
In March 2021, Vine Holdings entered into the New RBL with a syndicate of financial institutions. The New RBL provides for a total facility size of $750 million and an initial borrowing base of $350 million.
The New RBL bears interest at a rate equal to LIBOR plus an additional margin , based on the percentage of the revolving commitment being utilized, ranging from 3.00 % to 4.00 %, with a LIBOR ‘floor’ of 0.50 % . The New RBL matures on the earlier to occur of (a) 45 months after the closing of the 91 0.50 % on the undrawn borrowing base amounts. The New RBL is secured on a senior basis by substantially all of our assets and stock and guaranteed by the subsidiaries that secure and guarantee the Second Lien Term Loan.
Offering and
(b) days prior to the maturity of the Second Lien Term Loan (as defined below), to the extent specified amounts of such indebtedness remain outstanding. There is a commitment fee of
As of June 30, 2021, we had $35 million drawn and outstanding letters of credit of $13 million, providing for $302 million of available borrowing capacity under the New RBL. As of June 30, 2021, borrowings under the New RBL had an interest rate of 3.5 %. As of June 30, 2021, the fair value of the New RBL approximates carrying value as it bears interest at variable rates over the term of the loan.
Prior RBL
The Prior RBL, as amended in December 2020, was to mature on January 15, 2023 . The outstanding balance on the Prior RBL was repaid in connection with the Offering and the facility was extinguished upon repayment. For the six months ended June 30, 2021, we recognized $4.1 million as a loss on extinguishment to 0.4 million in interest expense to recognize accrued interest and unutilized commitment fees due upon the extinguishment of the Prior RBL.
write-off
unamortized deferred financing costs and $Second Lien Term Loan
On December 30, 2020, we entered into the $150
million second lien term loan (as amended, the “Second Lien Term Loan”) and used the proceeds, along with cash on hand, to repay the aggregate principal amount outstanding under Vine Oil & Gas LP’s superpriority facility, dated as of February 7, 2017.
The Second Lien Term Loan was fully drawn at closing. The Second Lien Term Loan bears interest at a rate equal to LIBOR, with a floor of 0.75 % , plus 8.75 % per annum, payable monthly , and matures June 30, 2022 at par plus 2 %, stepping down to par plus 1 % on June 30, 2023 and at par on June and thereafter.
on December 30, 2025
. The Second Lien Term Loan is redeemable beginning 30, 2024
In June 2021, we entered into the Second Amendment to the Second Lien Term Loan (the “Amendment”), Among other things, the Amendment adjusts the minimum hedging requirement such that we must enter Swap Contracts with respect to 70% of the reasonably anticipated projected production of natural gas from Vine Holding’s and other loan parties’ total Proved Developed Producing Reserves.
The Second Lien Term Loan is secured on a junior lien basis by all our assets and stock and the subsidiaries that secure the New RBL. As of June 30, 2021, the fair value of the Second Lien Term Loan approximates carrying value as it bears interest at variable rates over the term of the loan.
Third Lien Revolving Credit Facility
The Company’s $330 million third lien revolving credit facility (the “Third Lien Facility”) was terminated in connection with the New RBL. The Third Lien Facility was undrawn at the time of its termination. For the six months ended June 30, 2021, we recognized $0.8 million as a loss on extinguishment to 0.3 million of interest expense for unutilized commitment fees due upon termination of the Third Lien Facility.
write-off
unamortized deferred financing costs and $Senior Unsecured 6.75% Notes
In April 2021, we issued $950 million aggregate principal amount of 6.75 % senior notes due 2029 (“6.75% Notes”) at par. Interest is accrued and paid semi-annually on April 15 and October 15, commencing October 15, 2021 . As of June 30, 2021, the fair value of the 6.75 % Notes was $1.0 billion.
The 6.75% Notes are guaranteed on a senior unsecured basis by all of our subsidiaries. Prior to April 15, 2024, we may redeem the 6.75% Notes (i) at par plus the make-whole premium or (ii) with respect to up to 40 % of the principal amount, at 106.750 % of par using the net proceeds from an equity offering. Subsequent to April 15, 2024 , we may redeem the 6.75% Notes at a redemption price (plus accrued and unpaid interest) equal to 103.375 % of par for April 2024 through April 2025, 101.688 % of par from April 2025 through April 2026 and 100 % of par thereafter.
17
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In April 2021, we used the net proceeds from the issuance of the 6.75% Notes of $933 million, along with cash on hand, to fund the redemption of all of the outstanding 8.75% Notes and 9.75% Notes and to pay the premiums, fees and expenses related to the redemption, including accrued interest, and to pay the fees and expenses related to the issuance of the 6.75% Notes.
The redemption of the 8.75% Notes and the 9.75% Notes resulted in a loss on extinguishment of $73.1 million, consisting of $8.2 million to write off unamortized deferred financing costs, $2.3 million to write off unamortized 62.6 million in redemption
premiums
discounts
related to the 8.75% Notes and $premiums
Senior Unsecured 8.75% Notes
In October 2017, we issued $530 million aggregate principal amount of 8.75 % senior notes due 2023 (the “8.75% Notes”) at 99 % of par. Interest is accrued and paid semi-annually on April 15 and October 15.
In April 2021, using the proceeds from the issuance of the 6.75% Notes, we repaid in full the 8.75% Notes, including accrued interest of $22.3 million and redemption premiums of $34.8 million.
Senior Unsecured 9.75% Notes
In October 2018, we issued $380 million aggregate principal amount of 9.75 % senior notes due 2023 (the “9.75% Notes”) at par. Interest is accrued and paid semi-annually on April 15 and October 15.
In April 2021, using the proceeds from the issuance of the 6.75% Notes, we repaid in full the 9.75% Notes, including accrued interest of $17.8 million and redemption premiums of $27.8 million.
Other
All debt agreements include usual and customary covenants for facilities of their type and size. The covenants cover matters such as mandatory reserve reports, the responsible operation and maintenance of properties, certifications of compliance, required disclosures to the lenders, notices under other material instruments, notices of sales of oil and gas properties, incurrence of additional indebtedness, restricted payments and distributions, certain investments outside of the ordinary course of business, limits on the amount of commodity and interest rate hedges that can be put in place and events of default.
18
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6. Derivative Instruments
The gross fair value of the Company’s derivative assets and liabilities and the effect of master netting arrangements are as follows (in thousands):
Balance Sheet Classification |
Fair Value |
Netting Adjustment |
Net Fair Value Presented on the Balance Sheet |
|||||||||||||
June 30, 2021 |
||||||||||||||||
Assets: |
||||||||||||||||
Commodity Derivatives |
Current assets | $ | $ | ( |
) | $ | — | |||||||||
Commodity Derivatives |
Noncurrent assets | $ | $ | ( |
) | $ | — | |||||||||
Liabilities: |
||||||||||||||||
Commodity Derivatives |
Current liabilities | $ | $ | ( |
) | $ | ||||||||||
Commodity Derivatives |
Noncurrent liabilities | $ | $ | ( |
) | $ | ||||||||||
December 31, 2020 |
||||||||||||||||
Assets: |
||||||||||||||||
Commodity Derivatives |
Current assets | $ | $ | ( |
) | $ | — | |||||||||
Commodity Derivatives |
Noncurrent assets | $ | $ | ( |
) | $ | — | |||||||||
Liabilities: |
||||||||||||||||
Commodity Derivatives |
Current liabilities | $ | $ | ( |
) | $ | ||||||||||
Commodity Derivatives |
Noncurrent liabilities | $ | $ | ( |
) | $ | ||||||||||
19
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Commodity Derivatives
The Company’s commodity derivative positions as of June 30, 2021 are as follows:
Natural Gas Swaps |
||||||||
Production Year |
Natural Gas Volumes (MMBtud) |
Weighted Average Swap Price ($ / MMBtu) |
||||||
2021 (July - December) |
$ | |||||||
2022 |
$ | |||||||
2023 |
$ | |||||||
2024 |
$ | |||||||
2025 |
$ | |||||||
Sold Natural Gas Calls |
||||||||
Production Year |
Natural Gas Volumes (MMBtud) |
Weighted Average Call Price ($ / MMBtu) |
||||||
2021 (July - December) |
( |
) | $ | |||||
2022 |
( |
) | $ | |||||
2023 |
( |
) | $ | |||||
Sold Natural Gas Puts |
||||||||
Production Year |
Natural Gas Volumes (MMBtud) |
Weighted Average Put Price ($ / MMBtu) |
||||||
2021 (July - December) |
$ | |||||||
2022 |
$ | |||||||
Basis swaps |
||||||||
Production Year |
Natural Gas Volumes (MMBtud) |
Weighted Average Basis Swap ($ / MMBtu) |
||||||
2022 |
$ | ( |
) | |||||
Note 7. Leases
The Company determines if an arrangement is a lease at inception. A contract is deemed to contain a lease component if the arrangement provides the Company with a right to control the use of an identified asset.
The Company leases drilling rigs, amine facilities and office facilities under operating leases and recognizes minimum lease payments on a straight-line basis over the lease term. Operating lease assets and operating lease liabilities are initially measured based on the present value of the minimum fixed lease payments over the lease term at commencement date. As our leases with third parties do not provide an implicit rate of return, we use a discount rate commensurate with our incremental borrowing rate as of the commencement date of a lease in determining the present value of lease payments. As of June 30, 2021, the weighted-average discount rate used in determining the present value of lease payments was 3.5 %.
right-of-use
20
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 1, 2021, the effective date of the adoption of ASC 842, the Company recognized assets of
$right-of-use
12
months or less (“short-term leases”) are not recorded on the consolidated balance sheet. The changes in operating lease liabilities are as follows (in thousands):
| Balance as of January 1, 2021 |
$ | |||
| Liabilities assumed in exchange for new right-of-use (1) |
||||
| Contract modifications (2) |
||||
| Dispositions (3) |
( |
) | ||
| Liabilities settled |
( |
) | ||
| Accretion of discount (4) |
||||
| |
|
|||
| Balance as of June 30, 2021 |
$ | |
||
| |
|
| (1) | Represents non-cash leasing activity. |
| (2) | Represents non-cash changes in lease liabilities due to modifications of original contract terms. |
| (3) | Represents non-cash termination of a lease liability. |
| (4) | Represents imputed interest on discounted future cash payments. Combined with liabilities settled, it represents our operating lease cost for the six months ended June 30, 2021. |
Maturities of operating lease liabilities are as follows (in thousands):
| 2021 (July - December) |
$ | |||
| 2022 |
||||
| 2023 |
||||
| 2024 and thereafter |
||||
| |
|
|||
| Total operating lease payments |
||||
| Discount |
( |
) | ||
| |
|
|||
| Total operating lease obligations |
$ | |||
| |
|
21
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The components of operating lease cost are as follows (in thousands):
| Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | |||||||
| Operating lease cost (1) |
$ | |
$ | |||||
| Short-term lease cost (2) |
||||||||
| Variable lease cost (3) |
||||||||
| |
|
|
|
|||||
| Total operating lease cost |
$ | $ | |
|||||
| |
|
|
|
|||||
| (1) | Operating lease cost represents the reduction of the operating lease liability as the term is settled and the discount is accreted. |
| (2) | Short-term lease cost are generally associated with drilling rigs with initial terms less than 12 months that are capitalized to natural gas properties or lease operating assets that are included in lease operating expense. |
| (3) | Variable lease cost is primarily comprised of the service component of drilling rig commitments and maintenance on our amine and office facilities above the minimum required payments. Both the minimum required payments and the service component of the drilling rig commitments are capitalized as additions to natural gas properties. |
Cash paid of $1.3 million for operating lease payments was recorded in operating cash flows in the consolidated statement of cash flows for the six months ended June 30, 2021. Cash paid of $11.8 million for operating, short-term and variable lease payments for drilling rigs was capitalized as additions to natural gas properties and is included in investing cash flows in the consolidated statements of cash flows for the six months ended June 30, 2021.
Certain leases contain variable costs above the minimum required payments and are not included in the assets or operating lease liabilities. Leases may include renewal, purchase or termination options that can extend or shorten the term of the lease. The exercise of those options is at the Company’s sole discretion and is evaluated at inception and throughout the contract to determine if a modification of the lease term is required. As of June 30, 2021, the weighted-average remaining lease term of the Company’s operating leases was 1.7 years.
right-of-use
22
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Earnings per Share
As a result of the Offering and Corporate Reorganization, all existing equity interests were converted to new equity interests in Vine Holdings. Accordingly, earnings per share information has not been presented for the Predecessor for the three and six months ended June 30, 2020 as it is not considered meaningful. Basic and diluted w
e
ighted average shares outstanding for the six months ended June 30, 2021 are calculated using shares outstanding from the Offering to June 30, 2021. The Existing Owners have exchange rights that enable the non-controlling interest owners to exchange Vine Units, along with surrendering a corresponding number of Class B Common Stock, for shares of Class A Common Stock on a one for one basis. The non-controlling interest owners exchange rights cause the Vine Units, along with surrendering a corresponding number of Class B Common Stock, to be considered potentially dilutive shares for purposes of dilutive loss per share calculations. For the three and six months ended June 30, 2021, these exchange rights were
Note 9. Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and NOLs, disallowed interest expense carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be taxable or deductible. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period of enactment.
We regularly review our deferred tax assets for recoverability and establish a valuation allowance, if needed, based on historical taxable income, projected future taxable income, applicable tax planning strategies and the expected timing of the reversals of existing temporary differences. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In forming our judgment regarding the recoverability of deferred tax assets related to deductible temporary differences and tax attribute carryforwards, we give weight to all available positive and negative evidence based on the extent to which the forms of evidence can be objectively verified. We consider, among other things, our deferred tax liabilities, the overall business environment, historical earnings and losses, current industry trends and our outlook for future years. After consideration of all the available evidence, we believe that significant uncertainty exists with respect to the future realization of the deferred tax assets. Accordingly, we have established a full valuation allowance.
Vine Energy, Inc43.2 million was recorded to establish a net deferred tax asset for differences between the tax and book basis of Vine Holdings’ assets and liabilities, offset by a full valuation allowance. The acquired income tax attributes primarily consist of U.S. federal and state NOLs of $170.2 million and $55.9 million, respectively, available to offset future taxable income. A portion of these NOLs expire beginning in 2035, whereas the remaining NOLs have an indefinite life. In accordance with Internal Revenue Code Section 382, the Company’s NOLs are subject to an annual limitation as defined under the regulations.
.
is a corporation for U.S. federal and state income tax purposes. Our Predecessor was and is treated as a flow-through entity for U.S. federal income tax purposes, and as such, has generally not been subject to U.S. federal income tax at the entity level. As part of the Corporate Reorganization, certain of the Existing Owners exchanged all or part of their Vine Units for shares of the Company’s Class A Common Stock. On the date of the Corporate Reorganization, a corresponding “first day” tax benefit of $At each interim period, the Company applies an estimated annualized effective tax rate to the current period income or loss before income taxes, which can produce interim effective tax rate fluctuations. The effective combined U.S. federal and state income tax rate for the three and 1.24 1.20
six
months ended June 30, 2021 is (pre-tax
income due primarily to the full valuation allowance established against the net deferred tax assets, net income attributable to non-controlling
ownership interests, as well as non-deductible
stock compensation. The non-deductible
compensation is a discrete item which requires the Company to recognize the expense fully in the period. 23
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Commitments and Contingencies
Litigation
Occasionally, we are subject to legal proceedings and claims that arise in the ordinary course of business. Like other natural gas producers, our operations are subject to extensive and rapidly changing federal and state environmental, health and safety and other laws and regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. We are not currently a party to any material legal proceedings and are not aware of any material legal proceedings threatened to be brought against us.
Environmental Remediation
We may become subject to certain liabilities as they relate to environmental remediation of well sites related to their development or operation. In connection with our acquisition of existing or previously drilled wells, we may not be aware of the environmental safeguards that were taken at the time such wells were drilled or operated by others. Should we determine that a liability exists with respect to any environmental cleanup or restoration, we would be responsible for curing such a violation. No claim has been made, nor are we aware of any liability that exists, as it relates to any environmental cleanup or restoration or the violation of any rules or regulations relating thereto.
Note 11. Stock-Based Compensation
Stock-Based Compensation to Existing Management Owners
Prior to the Offering, the Predecessor, Brix and Harvest authorized the issuance of three series of limited partner equity interests:
| • | Class A Units representing profit interests issued to certain members of management (“Existing Management Owners”); |
| • | Class B Units representing capital interests issued to Blackstone in exchange for contributed capital; and |
| • | Class C Units representing equity interests issued to the Existing Management Owners in exchange for contributed capital. These units were recorded as other long-term liabilities of $ paid-in capital as the Company no longer has the obligation to repay such amounts. |
Each series of such units included rights, privileges, preferences, restrictions, and obligations as provided in the partnership agreements of the Predecessor, Brix and Harvest.
As described in Corporate Reorganization in Note 1, at the time of the Offering, the Class A Units and Class C Units were contributed to the Investment Vehicles through Vine Holdings. On June 15, 2021, the Class A, B and C Units that were previously held at the Predecessor, Brix and Harvest were converted to irrevocable ownership interests in the Investment Vehicles based on a conversion calculation. As a result of this conversion, the Class A and Class C Units held by the Existing Management Owners were deemed modified and fully vested equity-based compensation pursuant to ASC 718, Stock Compensation, as they were issued by the Investment Vehicles reflected as noncontrolling interest in the consolidated financial statements. While no equity of Vine will be issued under such awards, and no cash distributions are required of Vine as a result of this issuance by the Investment Vehicles, we have recognized non-cash compensation expense as the awards are deemed to be compensatory in nature.
We recognized
$million in non-cash compensation expense in the three-month period ended June 30, 2021, which represents the fair value of the awards at the modification date as there are no further vesting conditions associated with the awards. The determination of fair value was based on the stock price of Vine. as of June 15, 2021 and includes a discount for lack of marketability applied to the awards because monetization of the interest by Management Owners is dependent upon the liquidation of the Investment Vehicles investment in Vine Holdings.
24
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock-Based Compensation under the Vine Long-Term Incentive Plan
In July 2021, the Company adopted the Vine Energy Inc. 2021 Long-Term Incentive Plan (the “Vine LTIP”), with an effective date of March 17, 2021. The Vine LTIP enables the compensation committee of our Board of Directors to award incentive and nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units and incentive bonuses, which may be paid in cash or stock or a combination thereof, any of which may be performance-based, with vesting and other award provisions that provide effective incentive to our employees, including officers, 6,020,740 shares.
non-management
directors and other service providers. The aggregate number of Class A Common Stock that may be issued under the Vine LTIP with respect to awards granted may not exceed Stock-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period of the award. Awards under the Vine LTIP may participate in dividends, if any, during the vesting period and generally
vest over
years.
In July 2021, we granted the following awards:
| • | (“RSUs”) to non-management directors that vest over |
| • | |
| • | |
| • | internal safety performance (performance condition) ; and |
| • | market performance targets measured by comparison of the Company’s stock performance versus a defined peer group (market condition). |
The ultimate number of shares of the Company’s Class A Common Stock issued will range from zero to 200 %
of the initial performance-based award, net of shares used to cover personal income taxes withheld.
Note 12. Related Parties
Prior to the Corporate Reorganization,
o
ur Predecessor was a party to transactions in the ordinary course of business with the Brix Companies as affiliated companies. The nature of such transactions included services rendered and administrative costs incurred, capital expenditures and operating expenses related to drilled wells and the allocation of revenue in shared wells. Subsequent to the Corporate Reorganization, the Brix Companies were acquired by Vine Holdings (see Note 3), and therefore, similar transactions are no longer considered transactions with affiliates. The monitoring fee included in the statements of operations is paid under a management and consulting agreement with Blackstone and our Chief Executive Officer, of which, 99 % is attributable to Blackstone. This agreement was eliminated effective with the Offering.
25
VINE ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of December 31, 2020, Blackstone owned $50.0 million aggregate principal of the 8.75 % Notes. In connection with the repayment of the 8.75% Notes in April 2021, Blackstone was paid $53.3 million, including a redemption premium.
For the six months ended June 30, 2021, we recorded $0.3 million as interest expense for unused commitment fees on the Third Lien Facility, for which certain affiliates of Blackstone were the lenders. For the three and six months ended June 30, 2020, we recorded $0.3 million and $0.7 million, respectively, as interest expense for unused commitment fees on the Third Lien Facility. The Third Lien Facility was terminated in connection with the New RBL (see Note 5).
In connection with the Offering, Blackstone Securities Partners L.P. (“Blackstone Partners”), an affiliate of Blackstone, acted as an initial purchaser in the Offering and purchased 2,472,500 shares of Class A Common Stock. Blackstone received $1.4 million for acting as an initial purchaser in the Offering. Additionally, Blackstone and certain members of management purchased 4,285,000 shares of Class A Common Stock in support of the Offering.
In connection with the issuance of the 6.75% Notes in April 2021, Blackstone Partners received
$1.5
million for acting as an initial purchaser in the sale of the 6.75% Notes.
In accordance with the Vine Holdings partnership agreement, Vine Holdings made a distribution of $2.3 million during the three months ended June 30, 2021 to the Existing Owners to cover their pro rata estimated income tax obligation based on the Company’s estimated taxable income for the period from the Offering through June 30, 2021.
Note 13. Subsequent Event
On August 11, 2021, we announced our entry into a definitive agreement pursuant to which Chesapeake Energy Corporation (“Chesapeake”) will acquire Vine in a transaction valued at approximately $2.2 billion, based on an approximate 30-day average exchange ratio as of the close on August 10, 2021, equating to $15.00 per share. Under the terms of the agreement, which was unanimously approved by the Board of Directors of each company, Vine shareholders will receive a fixed exchange ratio of 0.2486 Chesapeake shares of common stock and $1.20 of cash for each share of Vine common stock owned. The transaction, which is subject to customary closing conditions, including certain regulatory approvals, and the approval of Vine shareholders, is expected to close in the fourth quarter of 2021. Funds managed by Blackstone own approximately 70 % of outstanding shares of Vine and have entered into a support agreement to vote in favor of the transaction.
In addition, certain parties to the TRA entered into an amendment which provides for the termination of the TRA immediately prior to the closing of the transaction with Chesapeake for no consideration.
26
Item 2. |
Management’s Discussions and Analysis of Financial Condition and Results of Operations |
The following should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form
10-Q
(“Quarterly Report”). The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expectations. We caution that assumptions, expectations, projections, intentions or beliefs about future events may vary materially from actual results. Some of the key factors that could cause actual results to vary from our expectations include those factors discussed below and elsewhere in this Quarterly Report, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. “Cautionary Statement Regarding Forward- Looking Statements” and “Risk Factors” (included in the Company’s final prospectus, dated March 17, 2021, filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(4) of the Securities Act of 1933, as supplemented, the “Registration Statement”) contain important information. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. Unless otherwise indicated, the historical financial information as of and for the three and six months ended June 30, 2020 presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” speaks only with respect to our Predecessor and does not give pro forma effect to our corporate reorganization described in “Factors That Significantly Affect Comparability of Our Financial Condition and Results of Operations—Corporate Reorganization.” Investors are cautioned that the forward-looking statements contained in this section and other parts of this Quarterly Report involve both risk and uncertainty. Several important factors could cause actual results to differ materially from those anticipated by these statements. Many of these statements are macroeconomic in nature and are, therefore, beyond the control of management. See “Cautionary Statement Regarding Forward-Looking Statements” above and the Company’s Registration Statement.
Overview
We are a pure play natural gas company focused solely on the development of natural gas properties in the stacked Haynesville and
Mid-Bossier
shale plays in the Haynesville Basin of Northwest Louisiana. As of December 31, 2020, on a pro forma basis, we had approximately 125,000 net surface acres centered in what we believe to be the core of the Haynesville and Mid-Bossier
plays. Over 90% of our acreage is held by production, and we operate over 90% of our future drilling locations. As of December 31, 2020, on a pro forma basis, we had approximately 370 net producing wells. Our assets are located almost entirely in Red River, DeSoto and Sabine parishes of Northwest Louisiana, which according to Enverus, have consistently demonstrated higher EURs relative to D&C costs than the Haynesville and Mid-Bossier
plays in Texas and other parishes in Louisiana. Approximately 84% of our acreage is prospective for dual-zone development, providing us with approximately 900 drilling locations. Utilizing an average of 4 gross rigs, we have approximately 25 years of development opportunities. Market Conditions and Operational Trends
The oil and gas industry is cyclical and commodity prices are highly volatile. Spot prices for Henry Hub generally ranged from $1.50 per MMBtu to $4.75 per MMBtu since the Company’s inception in 2014. We expect that this market will continue to be volatile in the future. The prices we receive for our production, and the levels of our production, depend on numerous factors beyond our control. We use our derivative portfolio and firm sales contracts to mitigate the risks of price volatility.
Our new reserve- based lending facility (the “New RBL”) and second lien term loan (as amended, the “Second Lien Term Loan”) require that we hedge 70% of our reasonably anticipated projected production of natural gas from proved developed producing reserves for the next 24 months. By virtue of this hedging requirement, we are impacted less by gas price volatility during this time frame than future periods where a smaller percentage of our production is subject to derivative contracts. We believe our balance sheet and hedge program provide ample liquidity in the event of an adverse commodity price environment to enable us to continue to generate levered free cash flow.
To the extent, however, that natural gas prices decrease, these lower prices not only reduce our revenue and cash flows, but also may limit the amount of natural gas that we can develop economically and therefore potentially lower our proved reserves. Lower commodity prices in the future could also result in impairments of our natural gas properties. The occurrence of any of the foregoing could materially and adversely affect our future business, financial condition, results of operations, operating cash flows, liquidity or ability to fund planned CapEx. Alternatively, natural gas prices may increase, which while increasing revenue and cash flows would result in significant losses being incurred on our derivatives.
We believe domestic gas macro fundamentals are positively disposed in the term as continued lower
near-to-intermediate
oil-focused
drilling activity will lead to lower associated gas production resulting in a tighter market and higher prices than current levels as well as increased LNG feedstock and exports to Mexico. 27
Additionally, the oil and gas industry is subject to a number of operational trends, some of which are particularly prominent in the Haynesville Basin, where companies are increasingly utilizing new techniques to lower D&C costs per lateral foot and enhance new well economics, including using more proppant and water per lateral foot, increasing use of longer laterals and increased automation to reduce drilling time and costs.
Evaluating Our Operations
We use the following metrics to assess the performance of our natural gas operations:
| • | reserve and production levels; |
| • | realized prices on the sale of our production, including derivative effects; |
| • | lease operating expenses; |
| • | Adjusted EBITDAX; and |
| • | D&C costs per well and per lateral foot drilled and overall CapEx levels. |
Production Levels and Sources of Revenue
We derive our revenue from the sale of our natural gas production and sales volumes directly impact our results of operations. As reservoir pressures decline with a well’s age, production from a given well decreases. Growth in our future production and reserves will depend on our continued ability to add proved reserves in excess of our production. Accordingly, we plan to maintain our focus on adding reserves through organic
drill-bit
growth as well as opportunistically through acquisitions. Our ability to add reserves through development projects and acquisitions is dependent on many factors, including our gas prices, capital availability, regulatory approvals and ability to procure equipment, services and personnel and successfully execute the development program or acquisitions. Increases or decreases in our future production, revenue and profitability are highly dependent on the commodity prices we receive. Natural gas prices are market driven and have been historically volatile, and we expect that future prices will continue to fluctuate due to supply and demand factors, seasonality and geopolitical and economic factors. We believe that higher volumes of natural gas will be produced or sold in the Gulf Coast region, but we also expect that higher demand from industrial expansion and export growth will cause the Gulf Coast markets to stabilize and our differentials to NYMEX will remain close to the current range and significantly better than differentials other basins have experienced. To mitigate the variability in differentials, we have entered into multiple physical firm sales contracts at fixed differentials to NYMEX.
Changes in commodity prices are as follows:
For the Three Months Ended June 30, |
For the Six Months Ended June 30 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
($ / MMBtu) |
($ / MMBtu) |
|||||||||||||||
| NYMEX Henry Hub High (1) |
$ | 2.98 | $ | 1.79 | $ | 2.98 | $ | 2.16 | ||||||||
| NYMEX Henry Hub Low (1) |
$ | 2.59 | $ | 1.63 | $ | 2.47 | $ | 1.63 | ||||||||
| Differential to Average NYMEX Henry Hub (2) |
$ | (0.20 | ) | $ | (0.17 | ) | $ | (0.15 | ) | $ | (0.17 | ) | ||||
(1) |
Represents monthly Henry Hub settlement price. |
(2) |
Our differential is calculated by comparing the average NYMEX Henry Hub price to our volume weighted average realized price per MMBtu. |
We utilize an unaffiliated third party to market a portion of our gas production to various purchasers, which consist of credit-worthy counterparties, including utilities, LNG producers, industrial consumers, major corporations and super majors, in our industry. This third party collects directly from the purchasers and remits to us the total of all amounts collected on our behalf less their fee for making such sales. Additionally, we sell the majority of our gas to purchasers who remit directly to us under single month and firm sales contracts. We do not believe the loss of any customer would have a material adverse effect on our business, as other customers or markets are currently accessible to us.
28
Adjusted EBITDAX
We believe Adjusted EBITDAX is useful because it makes for easier comparison of our operating performance, without regard to our financing methods, corporate form or capital structure. We determined our adjustments from net income to arrive at Adjusted EBITDAX to reflect the substantial variance in practice from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDAX should not be considered more meaningful than net income determined in accordance with U.S. GAAP. Certain items excluded from Adjusted EBITDAX are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax burden, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDAX. Our presentation of Adjusted EBITDAX should not be construed as an inference that our results will be unaffected by unusual or
non-recurring
items. Our computations of Adjusted EBITDAX differ from other similarly titled measures of other companies. D&C Costs and CapEx
We evaluate our D&C costs by considering the absolute cost to drill and complete a well and install surface facilities, as well as the cost on a per lateral foot basis. Moreover, we evaluate the level of reserves developed per dollar spent in connection with that development to measure our capital efficiency. So long as these metrics continue to meet our expectations, we expect our overall CapEx levels to support an average
3-4
gross drilling rig program. Our capital efficiency is one of the key metrics we use to manage our business. Factors That Significantly Affect Comparability of Our Financial Condition and Results of Operations
Our historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, for the following reasons:
Initial Public Offering.
The Company contributed the net proceeds of the Offering to Vine Holdings in exchange for newly issued limited liability interests in Vine Holdings (“Vine Units”). Vine Holdings utilized the proceeds from the Offering to repay all outstanding borrowings under that certain Senior Secured Credit Agreement dated as of March 20, 2018 by and among Brix Operating LLC, the lenders from time to time party thereto, and Macquarie Investments US Inc., as administrative agent, as amended from time to time (the “Brix Credit Facility”) and Vine Oil & Gas’s revolving credit facility, dated as of November 25, 2014 (the “Prior RBL”), and to pay fees and expenses related to the Offering and debt issuance costs related to the repayment of a portion of our indebtedness.
Upon completion of the Offering, we have incurred and expect continued incurrence of direct, incremental G&A expenses as a result of being publicly traded, including costs associated with Exchange Act compliance, tax compliance, PCAOB support fees, SOX compliance costs, investor relations activities, listing fees, registrar and transfer agent fees, stock-based compensation, incremental director and officer liability insurance costs and independent director compensation. We estimate these direct, incremental G&A expenses could total approximately $10 million to $12 million per year, which are not included in our historical results of operations. We anticipate these effects will be mitigated by additional recoveries associated with our expanded operated well count and the elimination of the monitoring fee.
Corporate Reorganization.
29
Stock”) with no economic rights or value and contributed such Vine Units and Class B Common Stock to Vine Investment, Brix Investment and Harvest Investment, as applicable, and (d) the Company contributed the net proceeds of the Offering to Vine Holdings in exchange for newly issued Vine Units and a managing member interest in Vine Holdings.
Each share of Class B Common Stock entitles its holder to one vote on all matters to be voted on by shareholders. Holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters presented to our shareholders for their vote or approval, except as otherwise required by applicable law or by our certificate of incorporation. The Class B Common Stock is not listed on any stock exchange.
Holders of Vine Units may surrender such shares, together with the same number of shares of Class B Common Stock to Vine Holdings in exchange for either (1) a number of shares of Class A Common Stock equal to the product of such number of Vine Units surrendered multiplied by a current exchange rate of one for one, subject to modification under the terms of the Exchange Agreement, dated March 17, 2021 (the “Exchange Agreement”), or (2) at the Company’s election, cash equal to an amount calculated in accordance with the Exchange Agreement. If at any time, a Vine Unit holder surrenders its Vine Units, an equal number of Class B Common Stock shares must be concurrently surrendered.
Our historical financial data as of December 31, 2020 and for the three and six months ended June 30, 2020, reflects Vine Oil & Gas LP, the accounting predecessor of Vine Energy Inc. The financial data for the three and six months ended June 30, 2021, includes Vine Oil & Gas LP for the entire period and the Brix Companies from March 17, 2021, the effective date of the acquisition as a result of the Corporate Reorganization. Accordingly, the financial information for the three and six months ended June 30, 2021 may not yield an accurate indication of what our actual results would have been if the Offering and the Corporate Reorganization had been completed at the beginning of the period presented or of what our future results of operations are likely to be in the future.
Monitoring fee.
Interest Expense.
Income Taxes.
30
Results of Operations
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||||||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||||||||||||||||||
(in thousands, except per Mcf) |
(in thousands, except per Mcf) |
|||||||||||||||||||||||||||||||
| Production: |
||||||||||||||||||||||||||||||||
| Total (MMcf) |
95,561 | 59,441 | 160,699 | 116,087 | ||||||||||||||||||||||||||||
| Average Daily (MMcfd) |
1,050 | 653 | 888 | 638 | ||||||||||||||||||||||||||||
Revenue: |
Per Mcf |
Per Mcf |
Per Mcf |
Per Mcf |
||||||||||||||||||||||||||||
| Natural gas sales |
$ | 233,851 | $ | 2.45 | $ | 84,116 | $ | 1.42 | $ | 387,837 | $ | 2.41 | $ | 176,659 | $ | 1.52 | ||||||||||||||||
| Realized gain on commodity derivatives |
(24,022 | ) | (0.25 | ) | 45,686 | 0.77 | (24,782 | ) | (0.15 | ) | 87,730 | 0.76 | ||||||||||||||||||||
| Unrealized (loss) gain on commodity derivatives |
(274,279 | ) | (2.87 | ) | (58,727 | ) | (0.99 | ) | (309,382 | ) | (1.93 | ) | (63,366 | ) | (0.55 | ) | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total revenue |
(64,450 | ) | (0.67 | ) | 71,075 | 1.20 | 53,673 | 0.33 | 201,023 | 1.73 | ||||||||||||||||||||||
| Operating Expenses: |
||||||||||||||||||||||||||||||||
| Lease operating |
16,522 | 0.17 | 11,477 | 0.19 | 31,482 | 0.20 | 24,472 | 0.21 | ||||||||||||||||||||||||
| Gathering and treating |
28,750 | 0.30 | 20,387 | 0.34 | 49,351 | 0.31 | 36,769 | 0.32 | ||||||||||||||||||||||||
| Production and ad valorem taxes |
6,018 | 0.06 | 4,286 | 0.07 | 10,000 | 0.06 | 8,435 | 0.07 | ||||||||||||||||||||||||
| General and administrative |
4,772 | 0.05 | 1,349 | 0.02 | 7,355 | 0.05 | 4,680 | 0.04 | ||||||||||||||||||||||||
| Monitoring fee |
— | — | 1,787 | 0.03 | 2,077 | 0.01 | 3,525 | 0.03 | ||||||||||||||||||||||||
| Stock-based compensation related to Offering |
13,665 | 0.14 | — | — | 13,665 | 0.09 | — | — | ||||||||||||||||||||||||
| Depreciation, depletion and accretion |
125,125 | 1.31 | 85,610 | 1.44 | 222,197 | 1.38 | 167,934 | 1.45 | ||||||||||||||||||||||||
| Exploration |
89 | 0.00 | 60 | 0.00 | 89 | 0.00 | 135 | 0.00 | ||||||||||||||||||||||||
| Strategic |
— | — | 1,551 | 0.03 | — | — | 2,113 | 0.02 | ||||||||||||||||||||||||
| Severance |
— | — | 326 | 0.01 | — | — | 326 | 0.00 | ||||||||||||||||||||||||
| Write-off of deferred offering costs |
— | — | — | — | — | — | 5,787 | 0.05 | ||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total operating expenses |
194,941 | 2.04 | 126,833 | 2.13 | 336,216 | 2.09 | 254,176 | 2.19 | ||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Operating income |
(259,391 | ) | (55,758 | ) | (282,543 | ) | (53,153 | ) | ||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Interest expense |
(96,406 | ) | (28,713 | ) | (131,081 | ) | (58,064 | ) | ||||||||||||||||||||||||
| Income tax provision |
(4,455 | ) | (100 | ) | (4,620 | ) | (250 | ) | ||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Total other expenses |
(100,861 | ) | (28,813 | ) | (135,701 | ) | (58,314 | ) | ||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Net income |
$ | (360,252 | ) | $ | (84,571 | ) | $ | (418,244 | ) | $ | (111,467 | ) | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Interest expense |
96,406 | 28,713 | 131,081 | 58,064 | ||||||||||||||||||||||||||||
| Income tax provision |
4,455 | 100 | 4,620 | 250 | ||||||||||||||||||||||||||||
| Depreciation, depletion and accretion |
125,125 | 85,610 | 222,197 | 167,934 | ||||||||||||||||||||||||||||
| Unrealized loss on commodity derivatives |
274,279 | 58,727 | 309,382 | 63,366 | ||||||||||||||||||||||||||||
| Exploration |
89 | 60 | 89 | 135 | ||||||||||||||||||||||||||||
| Non-cash G&A |
98 | 4 | 97 | (2 | ) | |||||||||||||||||||||||||||
| Non-cash stock compensation to Existing Management Owners |
13,665 | — | 13,665 | — | ||||||||||||||||||||||||||||
| Strategic |
— | 1,551 | — | 2,113 | ||||||||||||||||||||||||||||
| Severance |
— | 326 | — | 326 | ||||||||||||||||||||||||||||
| Non-cash write-off of deferred IPO costs |
— | — | — | 5,787 | ||||||||||||||||||||||||||||
| Non-cash volumetric and production adjustment to gas gathering liability |
— | — | — | (2,567 | ) | |||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Adjusted EBITDAX |
$ | 153,865 | $ | 90,520 | $ | 262,887 | $ | 183,939 | ||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||||||||||
31
Revenue
Natural Gas Sales and Realized Commodity Derivatives
The changes in our natural gas sales and realized derivative effects are as follows (in thousands):
| Three months ended June 30, 2020 |
$ | 129,802 | ||
| Volume |
51,114 | |||
| Price |
98,621 | |||
| Realized derivative |
(69,708 | ) | ||
| |
|
|||
| Three months ended June 30, 2021 |
$ | 209,829 | ||
| |
|
|||
| Six months ended June 30, 2020 |
$ | 264,389 | ||
| Volume |
67,890 | |||
| Price |
143,288 | |||
| Realized derivative |
(112,512 | ) | ||
| |
|
|||
| Six months ended June 30, 2021 |
$ | 363,055 | ||
| |
|
|||
The increase in natural gas volume for the three months and six months ended June 30, 2021 was primarily the result of new wells and additional production attributable to the Brix Companies since the Corporate Reorganization. The price increase for the three months ended June 30, 2021 was driven by the increase in the Henry Hub price upon which our sales price is generally determined.
Since commodity prices were above the weighted average floor prices of our derivative portfolio, we realized a net loss on our natural gas derivatives during the three and six months ended June 30, 2021. Conversely, commodity prices were below the weighted average floor prices of our derivative portfolio for the three and six months ended June 30, 2020, and we realized a net gain on our natural gas derivatives. The average prices of natural gas in our commodity derivative contracts for the three and six months ended June 30, 2021 were approximately $2.52 and $2.62 per MMBtu, respectively. The average prices of natural gas in our commodity derivative contracts for the three and six months ended June 30, 2020 were approximately $2.64 and $2.72 per MMBtu, respectively. Additionally, our total volumes hedged for the three and six months ended June 30, 2021 were approximately 86% and 90% of net gas produced, respectively. Additionally, our total volumes hedged for the three and six months ended June 30, 2020 were approximately 88% and 91% of net gas produced, respectively.
As our production volumes fluctuate, we would expect our revenue to also fluctuate, depending on prevailing natural gas prices and the extent of our hedges.
Unrealized Loss on Commodity Derivatives
We had an unrealized loss on our commodity derivative contracts for all 2021 and 2020 periods presented, which was primarily related to increases in NYMEX natural gas futures relative to December 31, 2020 and 2019, respectively.
Operating Expenses
Lease Operating (“LOE”)
LOE for the three months ended June 30, 2021 increased $5.0 million compared to the three months ended June 20, 2020 but was down $0.02 on a per Mcf basis. The increase in LOE on an absolute basis was primarily due to the addition of the Brix Companies since the Corporate Reorganization as well as new wells brought online. LOE is down on per Mcf basis due to a decline in water disposal costs arising from our comprehensive multi-year water management plan.
LOE for the six months ended June 30, 2021 increased $7.0 million compared to the three months ended June 20, 2020 but was down $0.01 on a per Mcf basis. The increase in LOE on an absolute basis was primarily due to the addition of the Brix Companies since the Corporate Reorganization as well as new wells brought online. LOE is down on per Mcf basis due to reduced water disposal costs offset by an increase in expenses due to winter storm Uri in the first quarter of 2021. The storm caused additional expenses in labor, water disposal and equipment repairs to restore production.
32
We expect that our LOE will increase in the future as additional wells are brought online but may decrease on a unit cost basis as production increases since a portion of our LOE is fixed.
Gathering and Treating
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||||||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||||||||||||||||||
(in thousands) |
Per Mcf |
(in thousands) |
Per Mcf |
(in thousands) |
Per Mcf |
(in thousands) |
Per Mcf |
|||||||||||||||||||||||||
| Gathering - Cash |
$ | 27,674 | $ | 0.29 | $ | 20,195 | $ | 0.34 | $ | 48,009 | $ | 0.30 | $ | 38,923 | $ | 0.34 | ||||||||||||||||
| Gathering - Non-Cash |
— | — | — | — | — | — | (2,567 | ) | (0.02 | ) | ||||||||||||||||||||||
| Other |
1,076 | 0.01 | 192 | 0.00 | 1,342 | 0.01 | 413 | — | ||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 28,750 | $ | 0.30 | $ | 20,387 | $ | 0.34 | $ | 49,351 | $ | 0.31 | $ | 36,769 | $ | 0.32 | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Gathering and treating expense increased in the three months ended June 30, 2021 on an absolute basis but was down $0.04 per Mcf on a unit cost basis due to a contractual gathering rate decrease that occurred in the fourth quarter of 2020 as well as lower gathering rates on the legacy wells of the Brix Companies.
Gathering and treating expense increased in the six months ended June 30, 2021 on an absolute basis but was down $0.01 per Mcf on a unit cost basis due to a contractual gathering rate decrease that occurred in the fourth quarter of 2020 as well as lower gathering rates on the legacy wells of the Brix Companies. Our
non-cash
gathering liability gain decreased as all obligations under the gathering liability were satisfied in 2020 with no payments required in 2020 or 2021 on our minimum volume gathering commitment. We expect gathering and treating expense per Mcf to be in the range of $0.29 to $0.30 per Mcf for the remainder of 2021.
Production and Ad Valorem Taxes
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||||||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||||||||||||||||||
(in thousands) |
Per Mcf |
(in thousands) |
Per Mcf |
(in thousands) |
Per Mcf |
(in thousands) |
Per Mcf |
|||||||||||||||||||||||||
| Production taxes |
$ | 4,211 | $ | 0.04 | $ | 2,871 | $ | 0.05 | $ | 6,576 | $ | 0.04 | $ | 5,604 | $ | 0.05 | ||||||||||||||||
| Ad valorem taxes |
1,807 | 0.02 | 1,415 | 0.02 | 3,424 | 0.02 | 2,831 | 0.02 | ||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 6,018 | $ | 0.06 | $ | 4,286 | $ | 0.07 | $ | 10,000 | $ | 0.06 | $ | 8,435 | $ | 0.07 | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
For the three and six months ended June 30, 2021, production and ad valorem taxes increased on an absolute basis due to the addition of the Brix Companies since the Corporate Reorganization. Although higher natural gas prices have caused our wells to payout faster thereby losing production tax exemptions, production taxes were relatively flat on a unit cost basis because the state of Louisiana dropped the severance tax rate from $0.125 per Mcf to $0.0934 per Mcf in the third quarter of 2020.
We expect our production and ad valorem tax to increase in the future as we develop our assets and increase the number of producing wells on which such taxes are levied. We expect these new wells will continue to qualify for early life production tax exemptions, and we expect our production tax costs will increase in absolute terms as wells meet payout and are no longer production tax exempt. Production taxes are paid on produced natural gas based on rates established annually by the state of Louisiana.
33
G&A
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
(in thousands) |
(in thousands) |
|||||||||||||||
| Wages and benefits |
$ | 7,081 | $ | 5,947 | $ | 13,304 | $ | 13,009 | ||||||||
| Professional services |
1,256 | 660 | 2,347 | 1,689 | ||||||||||||
| Licenses, fees and other |
1,517 | 1,699 | 3,259 | 3,764 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total gross G&A expense |
9,854 | 8,306 | 18,910 | 18,462 | ||||||||||||
| Less: |
||||||||||||||||
| Allocations to affiliates |
— | (2,248 | ) | (1,748 | ) | (4,517 | ) | |||||||||
| Recoveries |
(5,082 | ) | (4,709 | ) | (9,807 | ) | (9,265 | ) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net G&A expense |
$ | 4,772 | $ | 1,349 | $ | 7,355 | $ | 4,680 | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
Gross G&A expense for the three and six months ended June 30, 2021 increased primarily due to increased professional services associated with being a public company. We had lower allocations to affiliates due to the elimination of allocations effective with the date of the Corporate Reorganization. Our net G&A expense was reduced by higher recoveries in the 2021 periods presented attributable to inclusion of the Brix Companies recoveries since the Corporate Reorganization and increased producing well count.
Stock Compensation to Existing Management Owners
On June 15, 2021, Blackstone and management calculated the final conversion of the Class A, B, and C units that were previously held at our Predecessor and the Brix Companies into a single class of equity in Vine Investment, Brix Investment, Harvest Investment, Vine Investment II, Brix Investment II and Harvest Investment II. The Class A and C Units of our Predecessor, Brix and Harvest were deemed modified effective June 15, 2021. As a result, we recorded
non-cash
stock compensation expense of $13.7 million in the second quarter of 2021. Write-off
of Deferred Offering Costs In conjunction with a possible initial public offering, costs incurred related to such an offering, including legal, audit, tax and other professional services are capitalized as deferred equity issuance costs. In the first quarter of 2020, we
wrote-off
deferred offering costs related to years that would no longer be presented in any future potential filings. Beginning in the fourth quarter of 2020, we incurred costs related to the Offering that occurred in the first quarter of 2021 that were offset against Offering proceeds. Monitoring Fee
The management and consulting agreement with Blackstone and our CEO was eliminated effective with the Offering thereby causing the reduction in monitoring fees for the three and six months ended June 30, 2021.
DD&A
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||||||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||||||||||||||||||
(in thousands) |
Per Mcf |
(in thousands) |
Per Mcf |
(in thousands) |
Per Mcf |
(in |
Per Mcf |
|||||||||||||||||||||||||
| Depletion |
$ | 123,402 | $ | 1.29 | $ | 84,008 | $ | 1.41 | $ | 218,918 | $ | 1.36 | $ | 164,067 | $ | 1.41 | ||||||||||||||||
| Depreciation |
1,329 | 0.01 | 1,269 | 0.02 | 2,524 | 0.02 | 2,689 | 0.02 | ||||||||||||||||||||||||
| Accretion |
394 | 0.00 | 333 | 0.01 | 755 | 0.00 | 1,178 | 0.01 | ||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 125,125 | $ | 1.31 | $ | 85,610 | $ | 1.44 | $ | 222,197 | $ | 1.38 | $ | 167,934 | $ | 1.45 | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
34
The increase in DD&A for the three and six months ended June 30, 2021 was due to increased production on new wells along with production added from the Brix Companies since the date of the Corporate Reorganization. The per MCF decrease in depletion expense for the three and six months ended June 30, 2021 is due to a lower depletion rate related to the Corporate Reorganization and fair value of the Brix Companies’ assets acquired. We expect our depletion rate will fluctuate in the future based on levels of CapEx incurred to develop our assets and changes in proved reserve levels.
Depreciation increased for the three months ended June 30, 2021 related to new saltwater disposal wells. The decrease in deprecation for the six months ended June 30, 2021 was primarily associated with some assets becoming fully depreciated offset by an increase for depreciation on new saltwater disposal wells. The decrease in accretion expense for the six months ended June 30, 2021 was related to the elimination of our gas gathering liability in the first quarter of 2021.
Interest Expense
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
(in thousands) |
||||||||||||||||
| Cash interest: |
||||||||||||||||
| Interest costs on debt outstanding |
$ | 20,836 | $ | 23,876 | $ | 47,007 | $ | 48,492 | ||||||||
| Cash premiums on extinguishment of debt |
62,573 | — | 62,573 | — | ||||||||||||
| Letter of credit and other fees |
375 | 396 | 974 | 770 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total cash interest |
83,784 | 24,272 | 110,554 | 49,262 | ||||||||||||
| Non-cash interest: |
||||||||||||||||
| Non-cash interest on debt outstanding |
2,106 | 4,441 | 5,129 | 8,802 | ||||||||||||
| Non-cash loss on extinguishment of debt |
10,516 | — | 15,398 | — | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total non-cash interest |
12,622 | 4,441 | 20,527 | 8,802 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total interest expense |
$ | 96,406 | $ | 28,713 | $ | 131,081 | $ | 58,064 | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
The decrease in cash interest costs on debt outstanding for the three and six months ended June 30, 2021 was associated with lower debt outstanding and overall lower interest rates with our new debt structure.
Non-cash
interest on debt outstanding includes reduced amortization of deferred financing costs due to the debt transactions associated with the Offering and issuance of the 6.75% Notes. The cash redemption premiums on extinguishment of debt was paid for the early termination of the 8.75% Notes and 9.75% Notes in April 2021. The loss on extinguishment of debt was associated with the
write-off
of deferred financing costs and debt discount associated with the termination of the 8.75% Notes, the 9.75% Notes, the Prior RBL and Third Lien facility. Capital Resources and Liquidity
Our development activities require us to make significant operating and capital expenditures. Our primary use of capital has historically been for the development of natural gas properties. In addition, we regularly evaluate our capital structure and opportunities to manage our liabilities, as well as other strategic transactions that we believe to be credit accretive.
Contemporaneously with the closing of the Offering, we entered into the New RBL to repay in full and terminate each of the Prior RBL and the Brix Credit Facility. The New RBL has a total facility size of $750 million and a borrowing base of $350 million. As of June 30, 2021, we had $35 million drawn on our RBL and available capacity of $302 million (after giving effect to $13 million of letters of credit).
In April 2021, Vine Holdings completed its offering of $950 million aggregate principal amount of 6.75% senior unsecured notes due 2029 (the “6.75% Notes”). The net proceeds from the Bond Offering, along with cash on hand, were used to redeem all the 8.75% Notes and 9.75% Notes.
We expect our 2021 pro forma capital program to be in the range of $340 to $350 million. We expect to fund our 2021 CapEx largely through operating cash flow and to a limited extent with borrowings under our New RBL, while maintaining considerable liquidity and financial flexibility.
35
We believe that operating cash flow and our available capacity under our New RBL should be sufficient to fully fund our forecasted CapEx for 2021 and meet our cash requirements, including normal operating needs, debt service obligations and commitments and contingencies. However, we may access the capital markets to raise capital to the extent that we consider market conditions favorable.
Cash Flow Activity
Our financial condition and results of operations, including our liquidity and profitability, are significantly affected by the prices that we realize for our natural gas and the volumes of natural gas that we produce. Natural gas is a commodity for which established trading markets exist. Accordingly, our operating cash flow is sensitive to a number of variables, the most significant of which are the volatility of natural gas prices and production levels both regionally and across North America, the availability and price of alternative fuels, infrastructure capacity to reach markets, costs of operations and other variable factors. We monitor factors that we believe could be likely to influence price movements including new or expanded natural gas markets, gas imports, LNG and other exports and industry CapEx levels.
The Company’s cash flow activity is as follows (in thousands):
For the Six Months Ended June 30, |
||||||||
2021 |
2020 |
|||||||
| Operating cash flow |
206,020 | $ | 136,254 | |||||
| Investing cash flow |
(151,529 | ) | (161,903 | ) | ||||
| Financing cash flow |
(15,020 | ) | 70,780 | |||||
| |
|
|
|
|||||
| Net change in cash |
$ | 39,471 | $ | 45,131 | ||||
| |
|
|
|
|||||
2021 Compared to 2020
Operating Cash Flow
Our cash flow provided by operating activities for the six months ended June 30, 2021 was higher primarily due to higher natural gas sales driven by increased production and price.
Investing Cash Flow
Our cash flow used by investing activities for the six months ended June 30, 2021 decreased due to $19.9 million of cash received from the acquisition of the Brix Companies, partially offset by higher capital expenditures due to the inclusion of the Brix Companies Capex subsequent to the Corporate Reorganization.
Financing Cash Flow
Our financing cash flow for the six months ended June 30, 2021 decreased primarily due to cash redemption premiums paid of $62.6 million to repay the 8.75% Notes and the 9.75% Notes prior to maturity and the payment of $28.7 million of deferring financing costs associated with replacing our RBL and issuing the 6.75% Notes.
36
Derivative Activities
Our commodity derivatives allow us to mitigate the potential effects of the variability in operating cash flow thereby providing increased certainty of cash flows to support our capital program and to service our debt. We believe our New RBL affords us greater flexibility to hedge than similar agreements of our peers because it allows us to hedge a large percentage of our total expected production. Typically, credit documents limit borrowers to hedging only production from already developed reserves. Our New RBL and Second Lien Term Loan require that we hedge 70% of our reasonably anticipated projected production of natural gas from proved developed producing reserves for the next 24 months. Our derivatives provide only partial price protection against declines in natural gas prices and partially limit our potential gains from future increases in prices. Our current derivative portfolio cannot protect us from the risk of a potential widening of differentials between our sales price and NYMEX.
The Company’s outstanding derivative positions as of June 30, 2021 are as follows:
| Natural Gas Swaps |
||||||||
| Period |
Natural Gas Volumes (MMBtud) |
Weighted Average Swap Price ($ / MMBtu) |
||||||
| 2021 |
||||||||
| Third Quarter |
845,333 | $ | 2.53 | |||||
| Fourth Quarter |
848,887 | $ | 2.62 | |||||
| 2022 |
||||||||
| First Quarter |
866,797 | $ | 2.56 | |||||
| Second Quarter |
348,859 | $ | 2.54 | |||||
| Third Quarter |
409,853 | $ | 2.54 | |||||
| Fourth Quarter |
604,935 | $ | 2.53 | |||||
| 2023 |
||||||||
| First Quarter |
528,652 | $ | 2.48 | |||||
| Second Quarter |
65,470 | $ | 2.45 | |||||
| Third Quarter |
45,954 | $ | 2.44 | |||||
| Fourth Quarter |
125,092 | $ | 2.50 | |||||
| 2024 |
||||||||
| First Quarter |
313,512 | $ | 2.53 | |||||
| Second Quarter |
11,957 | $ | 2.31 | |||||
| Third Quarter |
7,366 | $ | 2.31 | |||||
| Fourth Quarter |
70,761 | $ | 2.58 | |||||
| 2025 |
||||||||
| First Quarter |
137,667 | $ | 2.58 | |||||
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| Sold Natural Gas Calls |
||||||||
| Production Year |
Natural Gas Volumes (MMBtud) |
Weighted Average Call Price ($ / MMBtu) |
||||||
| 2021 |
||||||||
| Third Quarter |
(30,000 | ) | $ | 2.85 | ||||
| 2022 |
||||||||
| Second Quarter |
(8,352 | ) | $ | 3.02 | ||||
| 2023 |
||||||||
| First Quarter |
(180,000 | ) | $ | 3.26 | ||||
| Sold Natural Gas Puts |
||||||||
| Production Year |
Natural Gas Volumes (MMBtud) |
Weighted Average Put Price ($ / MMBtu) |
||||||
| 2021 |
||||||||
| Third Quarter |
30,000 | $ | 2.55 | |||||
| 2022 |
||||||||
| Second Quarter |
8,352 | $ | 2.80 | |||||
| Basis swaps |
||||||||
| Production Year |
Natural Gas Volumes (MMBtud) |
Weighted Average Basis Swap ($ / MMBtu) |
||||||
| 2022 |
||||||||
| First Quarter |
62,500 | $ | (0.19 | ) | ||||
| Second Quarter |
62,500 | $ | (0.19 | ) | ||||
| Third Quarter |
62,500 | $ | (0.19 | ) | ||||
| Fourth Quarter |
62,500 | $ | (0.19 | ) | ||||
We expect to continue to use commodity derivatives to hedge our price risk in the future, though the notional and pricing levels will be dependent upon prevailing conditions, including available capacity of our counterparties.
38
Debt Agreements
Summary of Outstanding Debt as of June 30, 2021
(1)
| Highest Priority |
Lowest Priority | |||||
| New RBL |
Second Lien Term Loan |
6.75% (Unsecured) | ||||
| Face amount |
$750 million | $150 million | $950 million | |||
| Amount outstanding |
$35 million | $150 million | $950 million | |||
| Scheduled maturity date |
December 2024, or 91 days prior to the maturity of the Second Lien Term Loan, to the extent any of such indebtedness remains outstanding | December 2025 | April 2029 | |||
| Interest rate |
LIBOR + 3.0 - 4.0% | LIBOR + 8.75% | 6.75% | |||
| Base interest rate options |
ABR and LIBOR (with a floor of 0.50%) + spread | ABR and LIBOR (with a floor of 0.75%) + spread | N/A | |||
| Financial maintenance covenants |
– Maximum consolidated total net leverage ratio of 3.25x effective April 2021 | – Maximum consolidated total net leverage ratio of 4.0x decreasing to 3.5x effective April 2021 – Minimum liquidity of $40 million tested quarterly – Minimum hedging requirements |
N/A | |||
| – Maximum Current Ratio of 1.00x effective April 2021 – Minimum hedging requirements | ||||||
| Significant restrictive covenants |
– Incurrence of debt | – Incurrence of debt | – Incurrence of debt | |||
| – Incurrence of liens | – Incurrence of liens | – Incurrence of liens | ||||
| – Payment of dividends | – Payment of dividends | – Payment of dividends | ||||
| – Equity purchases | – Equity purchases | – Equity purchases | ||||
| – Asset sales | – Asset sales | – Asset sales | ||||
| – Limitations on derivatives & investments | – Limitations on derivatives & investments | – Limitations on ability to make investments | ||||
| – Affiliate transactions | – Affiliate transactions | – Affiliate transactions | ||||
| – Excess cash cap | – Restricted payments – Limitations on Guarantees by Restricted Subsidiaries | |||||
| Optional redemption |
Any time at par | Make-whole through June 2022; 102% through June 2023; 101% through June 2024; thereafter at par | Make-whole through April 2024. After April 2024 through April 2025 at 103.375%; thereafter through April 2026 at 101.688%; thereafter at par. | |||
| Change of control |
Event of default | Event of default | If accompanied by Ratings Decline, Investor put at 101% of par |
| (1) | This information is qualified in all respects by reference to the full text of the covenants, provisions and related definitions contained in the documents governing the various components of our debt. |
39
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to market risk, including the effects of adverse changes in commodity prices as described below. The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risk. The term “market risk” refers to the risk of loss arising from adverse changes in natural gas prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments were entered into for hedging purposes, rather than for speculative trading.
Commodity Price Risk and Hedges
Our major market risk exposure is in the pricing that we receive for our natural gas production. Natural gas is a commodity and, therefore, its price is subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the natural gas market has been volatile. Prices for domestic natural gas began to decline during the third quarter of 2014 and have been pressured since then, despite a modest recovery in oil prices. Spot prices for Henry Hub generally ranged from $1.50 per MMBtu to $4.75 per MMBtu since the Company’s inception in 2014. Our revenue, profitability and future growth are highly dependent on the prices we receive for our natural gas production, and the levels of our production, depend on numerous factors beyond our control.
Due to natural gas volatility, we have historically used, and we expect to continue to use, derivatives, such as swaps and collars, to hedge price risk associated with our anticipated production. This helps reduce potential negative effects of reductions in gas prices but also reduces our ability to benefit from increases in gas prices. These instruments provide only partial price protection against declines in natural gas prices and may partially limit our potential gains from future increases in prices. Moreover, our New RBL and Second Lien Term Loan require us to have 70% of our reasonably anticipated projected production of natural gas from proved developed producing reserves for the next 24 months.
Interest Rate Risk
As of June 30, 2021, we had $185 million of floating interest rate debt outstanding.
We do not currently have any derivative arrangements to protect against fluctuations in interest rates applicable to our variable rate indebtedness but may enter into such derivative arrangements in the future. To the extent we enter into any such interest rate derivative arrangement, we would subject to risk for financial loss.
Counterparty and Customer Credit Risk
Our derivatives expose us to credit risk in the event of nonperformance by counterparties. While we do not require our counterparties to our derivatives to post collateral, our counterparties have principally been lenders under the New RBL, which allows for in the event that they do not perform. We also utilize other counterparties who have investment grade credit ratings and whom we will continue to evaluate creditworthiness over the terms of the derivatives.
right-of-offset
Our principal exposures to credit risk are through receivables resulting from joint interest receivables and receivables from the sale of our natural gas production. The inability or failure of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results. However, we believe the credit quality of our customers is high.
We sell our production to various types of customers, but generally to trading houses and large physical consumers of natural gas. We extend and monitor credit based on an evaluation of their financial conditions and publicly available credit ratings. The future availability of a ready market for natural gas depends on numerous factors outside of our control, none of which can be predicted with certainty. We do not believe the loss of any single purchaser would materially impact our operating results because of gas fungibility, the depth of Gulf Coast markets and presence of numerous purchasers.
Accounts receivable from joint interest billings arise from costs that we incur as operator that are attributable to outside working interests. We generally have the right to offset cash we receive for any production that we market on behalf of such outside working interests in the event they do not pay their portion of the costs we incur on their behalf.
40
Inflation
Inflation in the U.S. has been relatively low in recent years and did not have a material impact on our results of operations during the quarter ended June 30, 2021. Although the impact of inflation has been insignificant in recent years, it could cause upward pressure on the cost of oilfield services, equipment and G&A.
Off-Balance
Sheet Arrangements We have no
off-balance
sheet arrangements. Critical Accounting Policies and Changes
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and tax credit carry forwards. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We regularly review our deferred tax assets for recoverability and establish a valuation allowance, if needed, based on historical taxable income, projected future taxable income, applicable tax planning strategies, and the expected timing of the reversals of existing temporary differences. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In forming our judgment regarding the recoverability of deferred tax assets related to deductible temporary differences and tax attribute carryforwards, we give weight to all available positive and negative evidence based on the extent to which the forms of evidence can be objectively verified. We consider, among other things, our deferred tax liabilities, the overall business environment, historical earnings and losses, current industry trends, and our outlook for future years.
As of June 30, 2021, there were no other significant changes to the methodology applied by management for critical accounting policies previously disclosed in our final prospectus, dated March 17, 2021, filed with the SEC pursuant to Rule 424(b)(4) of the Securities Act of 1933, as supplemented, on March 19, 2021.
Item 4. |
Controls and Procedures |
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e)
and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
41
PART II — OTHER INFORMATION
Item 1. |
Legal Proceedings |
We are party to various legal proceedings and claims in the ordinary course of our business. We believe these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. There have been no significant developments in the “Legal Proceedings” described in our final prospectus, dated March 17, 2021, filed with the SEC pursuant to Rule 424(b)(4) of the Securities Act of 1933, as supplemented.
Item 1A. |
Risk Factors |
There have been no material changes to the Company’s “Risk Factors” described in our final prospectus, dated March 17, 2021, filed with the SEC pursuant to Rule 424(b)(4) of the Securities Act of 1933, as supplemented.
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. |
Defaults Upon Senior Securities |
None.
42
Item 4. |
Mine Safety Disclosures |
None.
Item 5. |
Other Information |
None.
Item 6. |
Exhibits |
43
| Exhibit No. |
Description | |
| 101.INS (a) | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH (a) | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL (a) | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF (a) | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB (a) | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE (a) | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |
| (a) | Filed herewith. |
| (b) | Furnished herewith. |
| † | Management Contract or compensatory plan or agreement. |
| * | Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish to the SEC a copy of any omitted schedule upon request. |
44
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned hereunto duly authorized.
| Vine Energy Inc. | ||||||
| Date: August 13, 2021 | By: | /s/ Brian D. Dutton | ||||
| Name: | Brian D. Dutton | |||||
| Title: | Vice President, Chief Accounting Officer and Principal Accounting Officer | |||||
45