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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, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 001-16317 

CONTANGO OIL & GAS COMPANY

(Exact name of registrant as specified in its charter)

TEXAS

 

95-4079863

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)

717 TEXAS AVENUE, SUITE 2900

HOUSTON, TEXAS

77002

(Address of principal executive offices)

(Zip Code)

(713) 236-7400

(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

Common Stock, Par Value $0.04 per share

MCF

NYSE American

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 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).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-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 total number of shares of common stock, par value $0.04 per share, outstanding as of August 14, 2020 was 133,038,930.


Table of Contents

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE SIX MONTHS ENDED JUNE 30, 2020

TABLE OF CONTENTS

    

    

   

Page

PART I—FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

Consolidated Balance Sheets (unaudited) as of June 30, 2020 and December 31, 2019

3

Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2020 and 2019

4

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2020 and 2019

5

Consolidated Statement of Shareholders’ Equity (unaudited) for the six months ended June 30, 2020 and 2019

6

Notes to the Consolidated Financial Statements (unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

40

Item 4.

Controls and Procedures

40

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

Defaults upon Senior Securities

41

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

42

Unless the context requires otherwise or unless otherwise noted, all references in this Quarterly Report on Form 10-Q to the “Company”, “Contango”, “we”, “us” or “our” are to Contango Oil & Gas Company and its subsidiaries.

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Item 1. Consolidated Financial Statements

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except number of shares)

June 30, 

December 31, 

    

2020

    

2019

  

(unaudited)

CURRENT ASSETS:

Cash and cash equivalents

$

404

$

1,624

Accounts receivable, net

25,672

39,567

Prepaid expenses

1,363

1,191

Current derivative asset

16,826

3,819

Inventory

1,710

186

Total current assets

45,975

46,387

PROPERTY, PLANT AND EQUIPMENT:

Oil and natural gas properties, successful efforts method of accounting:

Proved properties

1,315,040

1,306,916

Unproved properties

20,901

27,619

Other property and equipment

1,668

1,655

Accumulated depreciation, depletion and amortization

(1,206,957)

(1,045,070)

Total property, plant and equipment, net

130,652

291,120

OTHER NON-CURRENT ASSETS:

Investments in affiliates

6,879

6,766

Long-term derivative asset

4,395

357

Right-of-use lease assets

5,691

5,885

Debt issuance costs

1,939

3,311

Total other non-current assets

18,904

16,319

TOTAL ASSETS

$

195,531

$

353,826

CURRENT LIABILITIES:

Accounts payable and accrued liabilities

$

77,143

$

104,593

Current derivative liability

908

3,951

Current asset retirement obligations

2,291

2,003

Total current liabilities

80,342

110,547

NON-CURRENT LIABILITIES:

Long-term debt

82,537

72,768

Long-term derivative liability

917

2,020

Asset retirement obligations

45,581

49,662

Lease liabilities

2,156

2,789

Deferred tax liability

376

Total non-current liabilities

131,567

127,239

TOTAL LIABILITIES

211,909

237,786

COMMITMENTS AND CONTINGENCIES (NOTE 12)

SHAREHOLDERS’ EQUITY (DEFICIT):

Series C contingent convertible preferred stock, $0.04 par value, no shares authorized, issued and outstanding at June 30, 2020 and 2,700,000 shares authorized, issued and outstanding at December 31, 2019

108

Common stock, $0.04 par value, 400 million shares authorized, 132,067,369 shares issued and 131,996,757 shares outstanding at June 30, 2020, 128,985,146 shares issued and 128,977,816 shares outstanding at December 31, 2019

5,271

5,148

Additional paid-in capital

472,814

471,778

Treasury shares at cost (70,612 shares at June 30, 2020 and 7,330 shares at December 31, 2019)

(198)

(18)

Accumulated deficit

(494,265)

(360,976)

Total shareholders’ equity (deficit)

(16,378)

116,040

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

$

195,531

$

353,826

The accompanying notes are an integral part of these consolidated financial statements

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CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

2020

    

2019

 

(unaudited)

(unaudited)

REVENUES:

Oil and condensate sales

$

7,930

$

7,439

$

30,712

$

13,845

Natural gas sales

6,618

3,857

14,789

9,499

Natural gas liquids sales

3,294

1,466

6,915

3,429

Total revenues

17,842

12,762

52,416

26,773

EXPENSES:

Operating expenses

17,139

5,694

38,621

10,886

Exploration expenses

11,173

249

11,571

473

Depreciation, depletion and amortization

5,092

7,573

17,946

15,129

Impairment and abandonment of oil and gas properties

1,247

145,878

1,834

General and administrative expenses

5,713

4,456

11,138

9,461

Total expenses

39,117

19,219

225,154

37,783

OTHER INCOME (EXPENSE):

Gain (loss) from investment in affiliates, net of income taxes

(173)

427

113

457

Gain from sale of assets

4,406

421

4,433

409

Interest expense

(2,151)

(1,079)

(3,365)

(2,171)

Gain (loss) on derivatives, net

(8,804)

2,065

37,895

(813)

Other income

332

89

1,136

3

Total other income (expense)

(6,390)

1,923

40,212

(2,115)

NET LOSS BEFORE INCOME TAXES

(27,665)

(4,534)

(132,526)

(13,125)

Income tax provision

(369)

(427)

(763)

(454)

NET LOSS

$

(28,034)

$

(4,961)

$

(133,289)

$

(13,579)

NET LOSS PER SHARE:

Basic

$

(0.21)

$

(0.15)

$

(1.01)

$

(0.40)

Diluted

$

(0.21)

$

(0.15)

$

(1.01)

$

(0.40)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

Basic

131,449

33,909

131,394

33,840

Diluted

131,449

33,909

131,394

33,840

The accompanying notes are an integral part of these consolidated financial statements

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CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Six Months Ended

June 30, 

    

2020

    

2019

 

(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$

(133,289)

$

(13,579)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation, depletion and amortization

17,946

15,129

Impairment of oil and natural gas properties

145,878

1,079

Exploration expenditures - dry hole costs

10,878

Amortization of debt issuance costs

1,372

Deferred income taxes

424

Gain on sale of assets

(4,433)

(409)

Gain from investment in affiliates

(113)

(457)

Stock-based compensation

616

1,637

Unrealized loss (gain) on derivative instruments

(21,192)

2,078

Changes in operating assets and liabilities:

Decrease in accounts receivable & other receivables

13,614

1,530

Decrease (increase) in prepaids

(172)

298

Increase in inventory

(1,560)

Increase (decrease) in accounts payable & advances from joint owners

(17,132)

8,592

Decrease in other accrued liabilities

(4,636)

(350)

Decrease (increase) in income taxes receivable, net

281

(424)

Increase (decrease) in income taxes payable, net

119

(258)

Increase (decrease) in deposits and other

36

(392)

Net cash provided by operating activities

$

8,213

$

14,898

CASH FLOWS FROM INVESTING ACTIVITIES:

Oil and natural gas exploration and development expenditures

$

(19,719)

$

(14,604)

Additions to furniture & equipment

(77)

(17)

Sale of oil & gas properties

339

Net cash used in investing activities

$

(19,457)

$

(14,621)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under credit facility

$

55,000

$

73,548

Repayments under credit facility

(48,600)

(73,548)

PPP loan

3,369

Net proceeds (costs) from equity offering

435

(41)

Purchase of treasury stock

(180)

(236)

Net cash provided by (used in) financing activities

$

10,024

$

(277)

NET CHANGE IN CASH AND CASH EQUIVALENTS

$

(1,220)

$

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

1,624

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

404

$

The accompanying notes are an integral part of these consolidated financial statements

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CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)

For the six months ended June 30, 2020

(in thousands, except number of shares)

Series C

Additional

Total

Preferred Stock

Common Stock

Paid-in

Treasury

Accumulated

Shareholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Stock

    

Deficit

    

Equity (Deficit)

 

(unaudited)

Balance at December 31, 2019

2,700,000

$

108

128,977,816

$

5,148

$

471,778

$

(18)

$

(360,976)

$

116,040

Equity offering costs

(47)

(47)

Treasury shares at cost

(49,474)

(157)

(157)

Restricted shares activity

77,485

3

(3)

Stock-based compensation

350

350

Net loss

(105,255)

(105,255)

Balance at March 31, 2020

2,700,000

$

108

129,005,827

$

5,151

$

472,078

$

(175)

$

(466,231)

$

10,931

Equity offering - common stock

155,029

6

477

483

Conversion of preferred stock to common stock

(2,700,000)

(108)

2,700,000

108

Treasury shares at cost

(13,808)

(23)

(23)

Restricted shares activity

149,709

6

(6)

Stock-based compensation

265

265

Net loss

(28,034)

(28,034)

Balance at June 30, 2020

$

131,996,757

$

5,271

$

472,814

$

(198)

$

(494,265)

$

(16,378)

The accompanying notes are an integral part of these consolidated financial statements

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CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the six months ended June 30, 2019

(in thousands, except number of shares)

Additional

Total

Common Stock

Paid-in

Treasury

Accumulated

Shareholders’

    

Shares

    

Amount

    

Capital

    

Stock

    

Deficit

    

Equity (Deficit)

 

(unaudited)

Balance at December 31, 2018

34,158,492

$

1,573

$

339,981

$

(129,030)

$

(72,135)

$

140,389

Equity offering costs

(86)

(86)

Treasury shares at cost

(49,415)

(186)

(186)

Restricted shares activity

307,650

12

(12)

Stock-based compensation

1,052

1,052

Net loss

(8,618)

(8,618)

Balance at March 31, 2019

34,416,727

$

1,585

$

340,935

$

(129,216)

$

(80,753)

$

132,551

Equity offering proceeds

45

45

Treasury shares at cost

(16,133)

(50)

(50)

Restricted shares activity

42,249

2

(2)

Stock-based compensation

585

585

Net loss

(4,961)

(4,961)

Balance at June 30, 2019

34,442,843

$

1,587

$

341,563

$

(129,266)

$

(85,714)

$

128,170

The accompanying notes are an integral part of these consolidated financial statements

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CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Business

Contango Oil & Gas Company (collectively with its subsidiaries, “Contango” or the “Company”) is a Houston, Texas based independent oil and natural gas company, with regional offices in Oklahoma City and Stillwater, Oklahoma. The Company’s business is to maximize production and cash flow from its offshore properties in the shallow waters of the Gulf of Mexico (“GOM”) and onshore Texas, Oklahoma, Louisiana and Wyoming properties and use that cash flow to explore, develop and acquire oil and natural gas properties across the United States.

The following table lists the Company’s primary producing areas as of June 30, 2020:

Location

    

Formation

Gulf of Mexico

Offshore Louisiana - water depths less than 300 feet

Mid-continent Region of Oklahoma

Mississippian, Woodford, Oswego, Cottage Grove, Chester and Red Fork

Southern Delaware Basin, Pecos County, Texas

Wolfcamp A and B

Madison and Grimes counties, Texas

Woodbine / Upper Lewisville

Zavala and Dimmit counties, Texas

Buda / Eagle Ford / Georgetown

San Augustine County, Texas

Haynesville shale, Mid Bossier shale and James Lime

Other Texas Gulf Coast

Conventional and smaller unconventional formations

Weston County, Wyoming

Muddy Sandstone

Sublette County, Wyoming

Jonah Field (1)


(1)Through a 37% equity investment in Exaro Energy III LLC (“Exaro”). Production associated with this equity investment is not included in the Company’s reported production results for all periods shown in this report.

From the Company’s initial entry into the Southern Delaware Basin in 2016 and through mid-2019, the Company was focused on the development of its Southern Delaware Basin acreage in Pecos County, Texas. In January 2020, the Company brought one West Texas well online but suspended further drilling in the area in response to the dramatic decline in oil prices during the quarter. As of June 30, 2020, the Company was producing from eighteen wells over its approximate 16,200 gross operated (7,500 company net) acre position in West Texas, prospective for the Wolfcamp A, Wolfcamp B and Second Bone Spring formations.

During the fourth quarter of 2019, the Company closed on the acquisitions of certain producing assets and undeveloped acreage of Will Energy Corporation (“Will Energy”) and White Star Petroleum, LLC and certain of its affiliates (collectively, “White Star”), and established an additional core strategic area, located primarily in the Central Oklahoma and Western Anadarko basins. These acquisitions were transformative, as production from these acquisitions represented approximately 70% of the Company’s total net production for the three and six months ended June 30, 2020.

Impact of the COVID-19 Pandemic

A novel strain of the coronavirus (“COVID-19”) surfaced in late 2019 and has spread, and continues to spread, around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The COVID-19 pandemic has significantly affected the global economy, disrupted global supply chains and created significant volatility in the financial markets. In addition, the COVID-19 pandemic has resulted in travel restrictions, business closures and other restrictions that have disrupted the demand for oil throughout the world and, when combined with the oil supply increase attributable to the battle for market share among the Organization of Petroleum Exporting Countries (“OPEC”), Russia and other oil producing nations, resulted in oil prices declining significantly beginning in late February 2020. While there has been a modest recovery in oil prices, the length of this demand disruption is unknown, and there is significant uncertainty regarding the long-term impact to global oil demand, which has negatively impacted the Company’s results of operations and planned 2020 capital activities. Due to the extreme volatility in oil prices, the Company has suspended any further plans for onshore drilling in 2020.

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Management Services Agreement

On June 5, 2020, the Company announced the addition of a new corporate strategy that includes offering a property management service (or a “fee for service”) for oil and gas companies with distressed or stranded assets, or companies with a desire to reduce administrative costs. As part of this service offering, the Company entered into a Management Services Agreement with Mid-Con Energy Partners, LP (“Mid-Con”) (Nasdaq: MCEP), effective July 1, 2020, to provide operational services as operator of record on Mid-Con’s oil and gas properties in exchange for an annual services fee of $4 million, paid ratably over the twelve month period, plus reimbursement of certain costs and expenses, a deferred fee of $166,666 per month for each month that the agreement is in effect (not to exceed $2 million), to be paid in a lump sum upon termination of the agreement, and warrants to purchase a minority equity ownership in Mid-Con (with amount and terms of the warrants to be disclosed upon execution of the Warrant Agreement). Both the Company and Mid-Con and their employees have indemnification rights in this fee for service arrangement. As of June 4, 2020, John C. Goff, Chairman of the Board of Directors of the Company, beneficially owned approximately 56% of the common units in Mid-Con, and Travis Goff, John C. Goff’s son and the President of Goff Capital, Inc., serves on the board of directors of the general partner of Mid-Con.

Authorized Shares of Common Stock and Conversion of Series C Contingent Convertible Preferred Stock

On June 10, 2020, the Company filed an amendment (the “Charter Amendment”) to its Amended and Restated Certificate of Formation with the Secretary of State of the State of Texas to increase the number of authorized shares of common stock, par value of $0.04 per share (the “common stock”), of the Company from 200,000,000 shares to 400,000,000 shares. The Charter Amendment and the conversion of 2,700,000 shares of the Company’s Series C contingent convertible preferred stock, par value $0.04 per share (the “Series C contingent convertible preferred stock”), into 2,700,000 shares of the Company’s common stock were approved by the stockholders of the Company on June 8, 2020, at the Company’s 2020 Annual Meeting of Stockholders. The shares of Series C contingent convertible preferred stock were issued in a private placement completed concurrently with a private placement of common stock in December of 2019. Purchasers of the Series C contingent convertible preferred stock included John Goff, Wilkie Colyer and Farley Dakan, the Company’s current president.

Open Market Sale Agreement

On June 24, 2020, the Company entered into an Open Market Sale Agreement (the “Sale Agreement”) among the Company and Jefferies LLC (the “Sales Agent”). Pursuant to the terms of the Sale Agreement, the Company may sell from time to time through the Sales Agent, shares of the Company’s common stock, having an aggregate public offering price of up to $100,000,000 (the “Shares”). The Company intends to use the net proceeds from the offering, after deducting the Sales Agent’s commission and the Company’s offering expenses, to repay borrowings under its Credit Agreement (as defined below) and for general corporate purposes, including, but not limited to, acquisitions and exploratory drilling. Under the Sale Agreement, the Company sold 155,029 Shares during the three months ended June 30, 2020 for net proceeds of $0.5 million.

2. Summary of Significant Accounting Policies

The accounting policies followed by the Company are set forth in the notes to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”). Please refer to the notes to the financial statements included in the 2019 Form 10-K for additional details of the Company’s financial condition, results of operations and cash flows. No material items included in those notes have changed except as a result of normal transactions in the interim or as disclosed within this interim report.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, pursuant to the rules and regulations of the SEC, including instructions to Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of the unaudited consolidated financial statements have been included. All such adjustments are of a normal recurring nature.

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The consolidated financial statements should be read in conjunction with the 2019 Form 10-K. These unaudited interim consolidated results of operations for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020.

The Company’s consolidated financial statements include the accounts of Contango Oil & Gas Company and its subsidiaries after elimination of all material intercompany balances and transactions. All wholly owned subsidiaries are consolidated. The Company’s investment in Exaro, through its wholly owned subsidiary, Contaro Company, is accounted for using the equity method of accounting, and therefore, the Company does not include its share of individual operating results, production or reserves in those reported for the Company’s consolidated results of operations.

Oil and Gas Properties - Successful Efforts

The Company’s application of the successful efforts method of accounting for its oil and natural gas exploration and production activities requires judgment as to whether particular wells are developmental or exploratory, since exploratory costs and the costs related to exploratory wells that are determined to not have proved reserves must be expensed, whereas developmental costs are capitalized. The results from a drilling operation can take considerable time to analyze, and the determination that commercial reserves have been discovered requires both judgment and application of industry experience. Wells may be completed that are assumed to be productive and actually deliver oil and natural gas in quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. On occasion, wells are drilled which have targeted geologic structures that are both developmental and exploratory in nature, and in such instances an allocation of costs is required to properly account for the results. Delineation seismic costs incurred to select development locations within a productive oil or natural gas field are typically treated as development costs and capitalized, but often these seismic programs extend beyond the proved reserve areas, and therefore, management must estimate the portion of seismic costs to expense as exploratory. During the quarter ended June 30, 2020, the Company drilled an unsuccessful exploratory well in the Gulf of Mexico, resulting in a charge of $10.9 million for drilling and prospect costs included in “Exploration expenses” in the Company’s consolidated statements of operations. The evaluation of oil and natural gas leasehold acquisition costs included in unproved properties requires management’s judgment of exploratory costs related to drilling activity in a given area. Drilling activities in an area by other companies may also effectively condemn leasehold positions.

Impairment of Long-Lived Assets

Pursuant to GAAP, when circumstances indicate that proved properties may be impaired, the Company compares expected undiscounted future cash flows on a region basis to the unamortized capitalized cost of the asset. If the estimated future undiscounted cash flows based on the Company’s estimate of future reserves, oil and natural gas prices, operating costs and production levels from oil and natural gas reserves, are lower than the unamortized capitalized cost, then the capitalized cost is reduced to fair value. The factors used to determine fair value include, but are not limited to, estimates of proved, probable and possible reserves, future commodity prices, the timing of future production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and gas properties. Additionally, the Company may use appropriate market data to determine fair value.

In the first quarter of 2020, the COVID-19 pandemic and the resulting deterioration in the global demand for oil, combined with the failure by OPEC and Russia to reach an agreement on lower production quotas until April 2020, caused a dramatic increase in the supply of oil, a corresponding decrease in commodity prices, and reduced the demand for all commodity products. Consequently, during the three months ended March 31, 2020, the Company recorded a $143.3 million non-cash charge for proved property impairment of its onshore properties related to the dramatic decline in commodity prices, as discussed above, the “PV-10” (present value, discounted at a 10% rate) of its proved reserves, and the associated change in its current development plans for its proved, undeveloped locations. The Company conducted an impairment test for the three months ended June 30, 2020, but no additional impairment was recorded. During the six months ended June 30, 2019, the company recognized $0.2 million in non-cash proved property impairment related to leases in Wyoming and an onshore non-operated property in an area previously impaired due to revised reserve estimates made during the quarter ended December 31, 2018.

Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value of those properties, with any such impairment charged to expense in the period. The Company recorded a $2.6 million non-cash charge for unproved impairment expense during the six months ended June 30, 2020, all of which was recorded during the first quarter of 2020. The impairment primarily related to acquired leases in the Company’s Central Oklahoma and Western Anadarko regions which will be expiring in 2020, and which the Company has no current plans to develop

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as a result of the current commodity price environment. The Company recognized non-cash impairment expense of approximately $0.4 million and approximately $0.9 million for three and six months ended June 30, 2019, respectively, related to impairment of certain unproved properties primarily due to expiring leases.

Net Loss Per Common Share  

Basic net loss per common share is computed by dividing the net loss attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potentially dilutive securities, including unexercised stock options, performance stock units and unvested restricted stock, have not been considered when their effect would be antidilutive. The Company excluded 506,325 shares or units, and 414,383 shares or units of potentially dilutive securities during the three and six months ended June 30, 2020, respectively, as they were antidilutive. For the three and six months ended June 30, 2019, the company excluded 648,170 shares or units and 561,164 shares or units, respectively, of potentially dilutive securities, as they were antidilutive.

Subsidiary Guarantees

Contango Oil & Gas Company, as the parent company of certain subsidiaries (the “Parent Company”), has filed a registration statement on Form S-3 with the SEC to register, among other securities, debt securities that the Parent Company may issue from time to time. Any such debt securities would likely be guaranteed on a joint and several and full and unconditional basis by each of the Parent Company’s current subsidiaries and any future subsidiaries specified in any future prospectus supplement (each a “Subsidiary Guarantor”). Each of the current Subsidiary Guarantors is wholly owned by the Parent Company, either directly or indirectly. The Parent Company has no assets or operations independent of the Subsidiary Guarantors, and there are no significant restrictions upon the ability of the Subsidiary Guarantors to distribute funds to the Parent Company. The Parent Company’s wholly owned subsidiaries do not have restricted assets that exceed 25% of net assets as of the most recent fiscal year end that may not be transferred to the Parent Company in the form of loans, advances or cash dividends by such subsidiary without the consent of a third party.

Revenue Recognition

Sales of oil, condensate, natural gas and natural gas liquids (“NGLs”) are recognized at the time control of the products are transferred to the customer. Generally, the Company’s gas processing and purchase agreements indicate that the processors take control of the Company’s gas at the inlet of the plant and that control of residue gas is returned to the Company at the outlet of the plant. The midstream processing entity gathers and processes the natural gas and remits proceeds to the Company for the resulting sales of NGLs. The Company delivers oil and condensate to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title and risk of loss of the product.  

Generally, the Company’s contracts have an initial term of one year or longer but continue month to month unless written notification of termination in a specified time period is provided by either party to the contract. The Company receives purchaser statements from the majority of its customers, but there are a few contracts where the Company prepares the invoice. Payment is unconditional upon receipt of the statement or invoice.

The Company records revenue in the month production is delivered to the purchaser. Settlement statements may not be received for 30 to 90 days after the date production is delivered, and therefore the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. Differences between the Company’s estimates and the actual amounts received for product sales are generally recorded in the month that payment is received. Any differences between the Company’s revenue estimates and actual revenue received historically have not been significant. The Company has internal controls in place for its revenue estimation accrual process. The Company will continue to review all new or modified revenue contracts on a quarterly basis for proper treatment.

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Leases

The Company recognizes a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term on the Company’s consolidated balance sheet. The Company does not include leases with an initial term of twelve months or less on the balance sheet. The Company recognizes payments on these leases within “Operating expenses” on its consolidated statement of operations. The Company has modified procedures to its existing internal controls to review any new contracts which contain a physical asset on a quarterly basis and determine if an arrangement is, or contains, a lease at inception. The Company will continue to review all new or modified contracts on a quarterly basis for proper treatment. See Note 7 – “Leases” for additional information.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13 – Financial Instruments – Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) related to the calculation of credit losses on financial instruments. All financial instruments not accounted for at fair value will be impacted, including the Company’s trade and joint interest billing receivables. Allowances are to be measured using a current expected credit loss model as of the reporting date that is based on historical experience, current conditions and reasonable and supportable forecasts. This is significantly different from the current model that increases the allowance when losses are probable. Initially, ASU 2016-13 was effective for all public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and will be applied with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The FASB subsequently issued ASU 2019-04 (“ASU 2019-04”): Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives, and Topic 825, Financial Instruments and ASU 2019-05 (“ASU 2019-05”): Financial Instruments-Credit Losses (Topic 326) – Targeted Transition Relief. ASU 2019-04 and ASU 2019-05 provide certain codification improvements related to implementation of ASU 2016-13 and targeted transition relief consisting of an option to irrevocably elect the fair value option for eligible instruments. In November 2019, the FASB issued ASU 2019-10 – Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. This amendment deferred the effective date of ASU 2016-13 from January 1, 2020 to January 1, 2023 for calendar year-end smaller reporting companies, which includes the Company. The Company plans to defer the implementation of ASU 2016-13, and the related updates.

In November 2019, the FASB issued ASU 2019-12 – Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 are part of an initiative to reduce complexity in accounting standards and simplify the accounting for income taxes by removing certain exceptions from Topic 740 and making minor improvements to the codification. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The provisions of this update are not expected to have a material impact on the Company’s financial position or results of operations.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. ASU 2020-04 will be in effect through December 31, 2022. We are currently assessing the potential impact of ASU 2020-04 on our consolidated financial statements.

3. Dispositions  

On June 1, 2020, the Company closed on the sale of certain producing and non-producing properties located in its Central Oklahoma and Western Anadarko regions. These properties were acquired in the Will Energy acquisition and were sold in exchange for the buyer’s assumption of the plugging and abandonment liabilities of these properties and revenue held in suspense. The Company recorded a gain of $4.2 million as a result of the buyer’s assumption of the asset retirement obligations associated with the sold properties.

On April 1, 2020, the Company closed on the sale of certain non-producing properties located in its Central Oklahoma region. These properties were acquired in the White Star acquisition and were sold for approximately $0.5 million. The Company recorded a gain of $0.2 million as a result of the buyer’s assumption of the asset retirement obligations associated with the sold properties.

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On June 10, 2019, the Company sold certain minor, non-core operated assets located in Lavaca and Wharton counties, Texas in exchange for the buyer’s assumption of the plugging and abandonment liabilities of the properties. The Company recorded a gain of $0.4 million as a result of the buyer’s assumption of the asset retirement obligations associated with the sold properties.

4. Fair Value Measurements

The Company's determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company's consolidated balance sheets, but also the impact of the Company's nonperformance risk on its own liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). A fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value as of June 30, 2020. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There have been no transfers between Level 1, Level 2 or Level 3.

Fair value information for financial assets and liabilities was as follows as of June 30, 2020 (in thousands):

Total

Fair Value Measurements Using

    

Carrying Value

    

Level 1

    

Level 2

    

Level 3

 

Derivatives

Commodity price contracts - assets

$

21,221

$

$

21,221

$

Commodity price contracts - liabilities

$

(1,825)

$

$

(1,825)

$

Derivatives listed above are recorded in “Current derivative asset or liability” and “Long-term derivative asset or liability” on the Company’s consolidated balance sheet and include swaps and costless collars that are carried at fair value. The Company records the net change in the fair value of these positions in “Gain (loss) on derivatives, net” in its consolidated statements of operations. The Company is able to value the assets and liabilities based on observable market data for similar instruments, which resulted in reporting its derivatives as Level 2. This observable data includes the forward curves for commodity prices based on quoted market prices and implied volatility factors related to changes in the forward curves. See Note 5 – “Derivative Instruments” for additional discussion of derivatives.

As of June 30, 2020, the Company’s derivative contracts were all with major institutions with investment grade credit ratings which are believed to have minimal credit risk, which primarily are lenders within the Company’s bank group. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above; however, the Company does not anticipate such nonperformance.

Estimates of the fair value of financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying value due to their short-term nature. The estimated fair value of the Company’s Credit Agreement approximates carrying value because the facility interest rate approximates current market rates and is reset at least every quarter. See Note 10 – “Long-Term Debt” for further information.

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Impairments

The Company tests proved oil and natural gas properties for impairment when events and circumstances indicate a decline in the recoverability of the carrying value of such properties, such as a downward revision of the reserve estimates or lower commodity prices. The Company estimates the undiscounted future cash flows expected in connection with the oil and gas properties on a region basis and compares such future cash flows to the unamortized capitalized costs of the properties. If the estimated future undiscounted cash flows are lower than the unamortized capitalized cost, the capitalized cost is reduced to its fair value. The factors used to determine fair value include, but are not limited to, estimates of proved, probable and possible reserves, future commodity prices, the timing of future production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and gas properties. Additionally, the Company may use appropriate market data to determine fair value. Because these significant fair value inputs are typically not observable, impairments of long-lived assets are classified as a Level 3 fair value measure.

Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period.

Asset Retirement Obligations

The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. The factors used to determine fair value include, but are not limited to, estimated future plugging and abandonment costs and expected lives of the related reserves. As there is no corroborating market activity to support the assumptions used, the Company has designated these liabilities as Level 3.

5. Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk. Derivative contracts are typically utilized to hedge the Company’s exposure to price fluctuations and reduce the variability in the Company’s cash flows associated with anticipated sales of future oil and natural gas production. The Company typically hedges a substantial, but varying, portion of anticipated oil and natural gas production for future periods. The Company believes that these derivative arrangements, although not free of risk, allow it to achieve a more predictable cash flow and to reduce exposure to commodity price fluctuations. However, derivative arrangements limit the benefit of increases in the prices of oil, natural gas and natural gas liquids sales. Moreover, because its derivative arrangements apply only to a portion of its production, the Company’s strategy provides only partial protection against declines in commodity prices. Such arrangements may expose the Company to risk of financial loss in certain circumstances. The Company continuously reevaluates its hedging programs in light of changes in production, market conditions and commodity price forecasts.

As of June 30, 2020, the Company’s oil and natural gas derivative positions consisted of swaps and costless collars. Swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for oil and natural gas. A costless collar consists of a purchased put option and a sold call option, which establishes a minimum and maximum price, respectively, that the Company will receive for the volumes under the contract.

It is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy institutions deemed by management as competent and competitive market makers. The Company does not post collateral, nor is it exposed to potential margin calls, under any of these contracts, as they are secured under the Credit Agreement (as defined below) or under unsecured lines of credit with non-bank counterparties. See Note 10 – “Long-Term Debt” for further information regarding the Credit Agreement.

The Company has elected not to designate any of its derivative contracts for hedge accounting. Accordingly, derivatives are carried at fair value on the consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the consolidated statements of operations for the period in which the change occurs. The Company records the net change in the mark-to-market valuation of these derivative contracts, as well as all payments and receipts on settled derivative contracts, in “Gain (loss) on derivatives, net” on the consolidated statements of operations.

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As of June 30, 2020, the following financial derivative instruments were in place (fair value in thousands):

Commodity

    

Period

    

Derivative

    

Volume/Month

    

Price/Unit

    

Fair Value

 

Oil

July 2020 - Oct 2020

Collar

3,442

Bbls

$

52.00

-

65.70

(1)

$

176

Oil

July 2020 - Dec 2020

Swap

15,000

Bbls

$

57.74

(1)

$

1,635

Oil

July 2020

Swap

5,500

Bbls

$

54.33

(1)

$

83

Oil

Aug 2020 - Oct 2020

Swap

2,500

Bbls

$

54.33

(1)

$

111

Oil

Nov 2020 - Dec 2020

Swap

3,500

Bbls

$

54.33

(1)

$

102

Oil

July 2020

Swap

37,500

Bbls

$

54.70

(1)

$

576

Oil

Aug 2020 - Dec 2020

Swap

35,000

Bbls

$

54.70

(1)

$

2,637

Oil

July 2020

Swap

37,500

Bbls

$

54.58

(1)

$

573

Oil

Aug 2020 - Dec 2020

Swap

35,000

Bbls

$

54.58

(1)

$

2,617

Oil

Jan 2021 - March 2021

Swap

19,000

Bbls

$

50.00

(1)

$

568

Oil

April 2021 - July 2021

Swap

12,000

Bbls

$

50.00

(1)

$

462

Oil

Aug 2021 - Sept 2021

Swap

10,000

Bbls

$

50.00

(1)

$

187

Oil

Jan 2021 - July 2021

Swap

62,000

Bbls

$

52.00

(1)

$

5,106

Oil

Aug 2021 - Sept 2021

Swap

55,000

Bbls

$

52.00

(1)

$

1,248

Oil

Oct 2021 - Dec 2021

Swap

64,000

Bbls

$

52.00

(1)

$

2,136

Natural Gas

Aug 2020 - Oct 2020

Swap

40,000

Mmbtus

$

2.532

(2)

$

87

Natural Gas

Nov 2020 - Dec 2020

Swap

375,000

Mmbtus

$

2.696

(2)

$

136

Natural Gas

July 2020

Swap

400,000

Mmbtus

$

2.53

(2)

$

828

Natural Gas

Aug 2020 - Dec 2020

Swap

350,000

Mmbtus

$

2.53

(2)

$

768

Natural Gas

July 2020

Swap

400,000

Mmbtus

$

2.532

(2)

$

415

Natural Gas

Aug 2020 - Dec 2020

Swap

350,000

Mmbtus

$

2.532

(2)

$

770

Natural Gas

Jan 2021 - March 2021

Swap

185,000

Mmbtus

$

2.505

(2)

$

(176)

Natural Gas

April 2021 - July 2021

Swap

120,000

Mmbtus

$

2.505

(2)

$

11

Natural Gas

Aug 2021 - Sept 2021

Swap

10,000

Mmbtus

$

2.505

(2)

$

(1)

Natural Gas

Jan 2021 - March 2021

Swap

185,000

Mmbtus

$

2.508

(2)

$

(174)

Natural Gas

April 2021 - July 2021

Swap

120,000

Mmbtus

$

2.508

(2)

$

13

Natural Gas

Aug 2021 - Sept 2021

Swap

10,000

Mmbtus

$

2.508

(2)

$

(1)

Natural Gas

Jan 2021 - March 2021

Swap

650,000

Mmbtus

$

2.508

(1)

$

(612)

Natural Gas

April 2021 - Oct 2021

Swap

400,000

Mmbtus

$

2.508

(1)

$

4

Natural Gas

Nov 2021 - Dec 2021

Swap

580,000

Mmbtus

$

2.508

(2)

$

(178)

Natural Gas

April 2021 - Nov 2021

Swap

70,000

Mmbtus

$

2.36

(2)

$

(92)

Natural Gas

Dec 2021

Swap

350,000

Mmbtus

$

2.36

(2)

$

(130)

Natural Gas

Jan 2022 - March 2022

Swap

780,000

Mmbtus

$

2.542

(2)

$

(489)

Total net fair value of derivative instruments

$

19,396


(1)    Based on West Texas Intermediate oil prices.

(2)    Based on Henry Hub NYMEX natural gas prices.

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Table of Contents

In addition to the above financial derivative instruments, the Company also had a costless swap agreement with a Midland WTI – Cushing oil differential swap price of $0.05 per barrel of oil. The agreement fixes the Company’s exposure to that differential on 10,000 barrels per month for July 2020 through December 2020. The fair value of this costless swap agreement was zero as of June 30, 2020.

The following summarizes the fair value of commodity derivatives outstanding on a gross and net basis as of June 30, 2020 (in thousands):

    

Gross

    

Netting (1)

    

Total

 

Assets

$

21,221

$

$

21,221

Liabilities

$

(1,825)

$

$

(1,825)


(1) Represents counterparty netting under agreements governing such derivatives.

The following summarizes the fair value of commodity derivatives outstanding on a gross and net basis as of December 31, 2019 (in thousands):

    

Gross

    

Netting (1)

    

Total

Assets

$

4,176

$

$

4,176

Liabilities

$

(5,971)

$

$

(5,971)


(1) Represents counterparty netting under agreements governing such derivatives.

The following table summarizes the effect of derivative contracts on the consolidated statements of operations for the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

 

Oil contracts

$

8,461

$

286

$

11,258

$

941

Natural gas contracts

2,933

211

5,445

324

Realized gain

$

11,394

$

497

$

16,703

$

1,265

Oil contracts

$

(16,557)

$

365

$

24,170

$

(3,077)

Natural gas contracts

(3,641)

1,203

(2,978)

999

Unrealized gain (loss)

$

(20,198)

$

1,568

$

21,192

$

(2,078)

Gain (loss) on derivatives, net

$

(8,804)

$

2,065

$

37,895

$

(813)

6. Stock-Based Compensation

Amended and Restated 2009 Incentive Compensation Plan

On June 8, 2020, the stockholders of the Company approved the third amendment to the Amended and Restated 2009 Incentive Compensation Plan (as amended, the “Plan”) in the form of an amendment and restatement of the Plan that, among other things, increases the number of shares of the Company’s common stock authorized for issuance pursuant to the Plan by 9,000,000 shares and increases the maximum aggregate number of shares of common stock that may be granted to any individual during any calendar year from 250,000 to 1,000,000. The Plan allows for stock options, restricted stock or performance stock units to be awarded to officers, directors and employees as a performance-based award.

Restricted Stock      

During the six months ended June 30, 2020, the Company granted 152,248 shares of restricted common stock, which vest over one year, to directors pursuant to the Company’s Director Compensation Plan. The weighted average fair value of the restricted shares granted during the six months ended June 30, 2020, was $2.42 per share, with a total fair value of approximately $0.4 million and no adjustment for an estimated weighted average forfeiture rate. There were 2,539 forfeitures of restricted stock during the six months ended June 30, 2020. The aggregate intrinsic value of restricted shares forfeited during the six months ended June 30, 2020 was approximately $10 thousand. In July 2020, the Company granted 1,037,969 shares of restricted common stock, which vest ratably over three years, to employees as part of their overall compensation package. The weighted average fair value of the restricted shares granted in July 2020, was $2.24 per share,

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with a total fair value of approximately $2.3 million and no adjustment for an estimated weighted average forfeiture rate. The Company recognized approximately $0.4 million in restricted stock compensation expense during the six months ended June 30, 2020 related to restricted stock previously granted to its officers, employees and directors. As of June 30, 2020, an additional $0.8 million of compensation expense related to restricted stock remained to be recognized over the remaining weighted-average vesting period of 1.3 years. Approximately 10.1 million shares remained available for grant under the Amended and Restated 2009 Incentive Compensation Plan as of June 30, 2020, assuming PSUs (as defined below) are settled at 100% of target.

During the six months ended June 30, 2019, the Company granted 307,650 shares of restricted common stock, which vest ratably over three years, to employees and executive officers as part of their overall compensation package. Additionally, during the six months ended June 30, 2019, the Company granted 80,410 shares of restricted common stock, which vest over one year, to directors pursuant to the Company’s Director Compensation Plan. The weighted average fair value of the restricted shares granted during the six months ended June 30, 2019, was $2.91 per share, with a total fair value of approximately $1.1 million and no adjustment for an estimated weighted average forfeiture rate. During the six months ended June 30, 2019, 38,161 restricted shares were forfeited by former employees. The aggregate intrinsic value of restricted shares forfeited during the six months ended June 30, 2019 was approximately $0.2 million. The Company recognized approximately $1.4 million in restricted stock compensation expense during the six months ended June 30, 2019 related to restricted stock granted to its officers, employees and directors.

Performance Stock Units

Performance stock units (“PSUs”) represent the opportunity to receive shares of the Company’s common stock at the time of settlement. The number of shares to be awarded upon settlement of these PSUs may range from 0% to 300% of the targeted number of PSUs stated in the agreement, contingent upon the achievement of certain share price appreciation targets as compared to a peer group index over a three year performance period. The PSUs vest at the end of the three year performance period, with the final number of shares to be granted determined at that time, based on the Company’s share performance during the period compared to the average performance of the peer group.

Compensation expense associated with PSUs is based on the grant date fair value of a single PSU as determined using the Monte Carlo simulation model which utilizes a stochastic process to create a range of potential future outcomes given a variety of inputs. As it is contemplated that the PSUs will be settled with shares of the Company’s common stock after three years, the PSU awards are accounted for as equity awards, and the fair value is calculated on the grant date. The simulation model calculates the payout percentage based on the stock price performance over the performance period. The concluded fair value is based on the average achievement percentage over all the iterations. The resulting fair value expense is amortized over the life of the PSU award.

There were no grants or forfeitures of PSUs during the six months ended June 30, 2020. In July 2020, Company granted 2,608,640 PSUs to its executive officers and certain employees as part of their overall compensation package. The performance period will be measured between January 1, 2020 and December 31, 2022. These granted PSUs were valued at a weighted average fair value of $4.90 per unit. In January 2020, 77,485 shares of the PSUs granted in 2017 vested, of which 22,972 PSUs were withheld for taxes, and are included with the restricted stock activity in the consolidated statement of shareholders’ equity. No PSUs were forfeited during the six months ended June 30, 2020. The Company recognized approximately $0.2 million in stock compensation expense related to PSUs during the six months ended June 30, 2020. As of June 30, 2020, an additional $0.5 million of compensation expense related to PSUs remained to be recognized over the remaining weighted-average vesting period of 1.4 years.

During the six months ended June 30, 2019, the Company granted 117,105 PSUs to executive officers and certain employees as part of their overall compensation package, which will be measured between January 1, 2019 and December 31, 2021, and were valued at a weighted average fair value of $6.42 per unit. All fair value prices were determined using the Monte Carlo simulation model. During the six months ended June 30, 2019, 49,773 PSUs were forfeited due to the resignations of the Company’s former Senior Vice President of Exploration and Senior Vice President of Operations and Engineering in February 2019. The Company recognized approximately $0.3 million in stock compensation expense related to PSUs during the six months ended June 30, 2019.

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Table of Contents

Stock Options

Under the fair value method of accounting for stock options, cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) are classified as financing cash flows. For the six months ended June 30, 2020 and 2019, there was no excess tax benefit recognized.

Compensation expense related to stock option grants are recognized over the stock option’s vesting period based on the fair value at the date the options are granted. The fair value of each option is estimated as of the date of grant using the Black-Scholes options-pricing model. No stock options were granted during the six months ended June 30, 2020 or 2019.

During the six months ended June 30, 2020, no stock options were exercised and stock options for 411 shares were forfeited by former employees. During the six months ended June 30, 2019, no stock options were exercised and stock options for 12,052 shares were forfeited by former employees.

7. Leases

During the six months ended June 30, 2020, the Company entered into new compressor contracts with lease terms of twelve months or more, which qualify as operating leases. The Company also entered into new contracts for vehicles and office equipment with lease terms of twelve months or more, which qualify as finance leases. As of June 30, 2020, the Company’s operating leases were for compressors and office space at its two corporate offices and three field offices, while the Company’s finance leases were for vehicles and office equipment.

The Company also has compressor contracts which are on a month-to-month basis, and while it is probable the contracts will be renewed on a monthly basis, the compressors can be easily substituted or cancelled by either party, with minimal penalties. Leases with these terms are not included on the Company’s balance sheet and are recognized on the statement of operations on a straight-line basis over the lease term.

The following table summarizes the balance sheet information related to the Company’s leases as of June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020

    

December 31, 2019

Operating lease right of use asset (1)

$

3,993

$

4,316

Operating lease liability - current (2)

$

(2,897)

$

(2,597)

Operating lease liability - long-term (3)

(1,045)

(1,738)

Total operating lease liability

$

(3,942)

$

(4,335)

Financing lease right of use asset (1)

$

1,698

$

1,569

Financing lease liability - current (2)

$

(605)

$

(524)

Financing lease liability - long-term (3)

(1,111)

(1,051)

Total financing lease liability

$

(1,716)

$

(1,575)


(1)Included in “Right-of-use lease assets” on the consolidated balance sheet.
(2)Included in “Accounts payable and accrued liabilities” on the consolidated balance sheet.
(3)Included in “Lease liabilities” on the consolidated balance sheet.

The Company’s leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating and financing lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. For leases existing prior to January 1, 2019, the incremental borrowing rate as of January 1, 2019 was used for the remaining lease term.

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The table below presents the weighted average remaining lease terms and weighted average discount rates for the Company’s leases as of June 30, 2020 and December 31, 2019:

June 30, 2020

December 31, 2019

Weighted Average Remaining Lease Terms (in years):

Operating leases

1.81

2.16

Financing leases

3.14

3.14

Weighted Average Discount Rate:

Operating leases

5.75%

6.04%

Financing leases

5.90%

6.24%

Maturities for the Company’s lease liabilities on the consolidated balance sheet as of June 30, 2020, were as follows (in thousands):

June 30, 2020

Operating Leases

Financing Leases

2020 (remaining after June 30, 2020)

$

3,040

$

690

2021

702

552

2022

168

475

2023

171

156

2024

72

7

Total future minimum lease payments

4,153

1,880

Less: imputed interest

(211)

(164)

Present value of lease liabilities

$

3,942

$

1,716

The following table summarizes expenses related to the Company’s leases for the three months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

Operating lease cost (1) (2)

$

743

$

100

Financing lease cost - amortization of right-of-use assets

155

-

Financing lease cost - interest on lease liabilities

27

-

Administrative lease cost (3)

19

18

Short-term lease cost (1) (4)

615

2,068

Total lease cost

$

1,559

$

2,186


(1)This total does not reflect amounts that may be reimbursed by other third parties in the normal course of business, such as non-operating working interest owners.
(2)Costs related to office leases and compressors with lease terms of twelve months or more.
(3)Costs related primarily to office equipment and IT solutions with lease terms of more than one month and less than one year.
(4)Costs related primarily to drilling rigs, generators and compressor agreements with lease terms of more than one month and less than one year.

The following table summarizes expenses related to the Company’s leases for the six months ended June 30, 2020 and 2019 (in thousands):

Six Months Ended June 30, 2020

Six Months Ended June 30, 2019

Operating lease cost