EVOLVE TRANSITION INFRASTRUCTURE LP The following discussion and analysis should be read in conjunction with the financial statements and the summary of significant accounting policies and notes included herein and in our most recent Annual Report on Form 10-K. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, forecasts, guidance, beliefs and expected performance. The "forward-looking statements" are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these "forward-looking statements." Please read "Cautionary Note Regarding Forward-Looking Statements."
Overview
We are a publicly-traded limited partnership formed in 2005 focused on the acquisition, development, ownership and operation of infrastructure critical to the transition of energy supply to lower carbon sources. We own natural gas gathering systems, pipelines and processing facilities inSouth Texas and continue to pursue energy transition infrastructure opportunities. Our common units are currently listed on the NYSE American under the symbol "SNMP." OnFebruary 26, 2021 , in connection with our management team's focus on expanding our business strategy to focus on the ongoing energy transition in the industries in which we operate, we changed our name toEvolve Transition Infrastructure LP and our general partner changed its name toEvolve Transition Infrastructure GP LLC . Recent Developments
Board Committee and Compensation Changes
OnMarch 31, 2021 ,Alan S. Bigman resigned from the Board.Mr. Bigman served as the chair of the audit committee and as a member of the conflicts committee.Mr. Bigman was also designated as the audit committee financial expert. In response toMr. Bigman's resignation, onMarch 31, 2021 , the Board (i) designatedRichard S. Langdon as the audit committee financial expert and appointedMr. Langdon as chairman of the audit committee; and (ii) appointedSteven E. Meisel to serve as a member of the audit committee and to replaceMr. Langdon as chairman of the conflicts committee.Mr. Langdon continues to serve as a member of the conflicts committee. OnMarch 31, 2021 , the Board reviewed the compensation of the independent members of the Board and determined that in consideration of the current composition of the Board and the current strategies and goals of the Partnership, a simplified compensation structure without the opportunity for equity compensation is desirable. Effective as ofApril 1, 2021 , the compensation of the independent members of the Board consists of a monthly$12,500 retainer, payable on the last day of each calendar month, with the first such payment occurring onApril 30, 2021 .
How We Evaluate Our Operations
We evaluate our business on the basis of the following key measures:
? our throughput volumes on gathering systems upon acquiring those assets;
? our operating expenses; and
our Adjusted EBITDA, a non-GAAP financial measure (for a reconciliation of
? Adjusted EBITDA to the most comparable GAAP financial measure please read
"-Non-GAAP Financial Measures-Adjusted EBITDA").
Throughput Volumes
Our management analyzes our performance based on the aggregate amount of throughput volumes on the gathering system. We must connect additional wells or well pads withinMesquite's Catarina Asset, which is inDimmit ,La Salle andWebb counties inTexas , in order to maintain or increase throughput volumes on Western Catarina Midstream. Our success in connecting additional wells is impacted by successful drilling activity byMesquite on the acreage dedicated to Western Catarina Midstream, our ability to secure volumes fromMesquite or third parties from new wells drilled on non-dedicated acreage, our ability to attract hydrocarbon volumes currently gathered by our competitors and our ability to cost-effectively construct or acquire new infrastructure. Construction of the Seco Pipeline was completed inAugust 2017 , however,Mesquite does not currently transport any volumes on the Seco Pipeline following termination of the Seco Pipeline Transportation Agreement effectiveFebruary 12, 2020 . Future throughput volumes on the pipeline are dependent on execution of a new transportation agreement withMesquite or execution of an agreement with a third party. 27 --------------------------------------------------------------------------------
Operating Expenses
Our management seeks to maximize Adjusted EBITDA, a non-GAAP financial measure, in part by minimizing operating expenses. These expenses are or will be comprised primarily of field operating costs (which generally consists of lease operating expenses, labor, vehicles, supervision, transportation, minor maintenance, tools and supplies expenses, among other items), compression expense, ad valorem taxes and other operating costs, some of which will be independent of our oil and natural gas production or the throughput volumes on the midstream gathering system but fluctuate depending on the scale of our operations during a specific period.
Non-GAAP Financial Measures-Adjusted EBITDA
To supplement our financial results and guidance presented in accordance with
GAAP, we use Adjusted EBITDA, a non-GAAP financial measure, in this Form 10-Q.
We believe that non-GAAP financial measures are helpful in understanding our
past financial performance and potential future results, particularly in light
of the effect of various transactions effected by us. We define Adjusted EBITDA
as net income (loss) adjusted by: (i) interest (income) expense, net, which
includes interest expense, interest expense net (gain) loss on interest rate
derivative contracts, and interest (income); (ii) income tax expense (benefit);
(iii) depreciation, depletion and amortization; (iv) asset impairments;
(v) accretion expense; (vi) (gain) loss on sale of assets; (vii) unit-based
compensation expense; (viii) unit-based asset management fees; (ix)
distributions in excess of equity earnings; (x) (gain) loss on mark-to-market
activities; (xi) commodity derivatives settled early; (xii) (gain) loss on
embedded derivatives; and (xiii) acquisition and divestiture costs.
Adjusted EBITDA is used as a quantitative standard by our management and by
external users of our financial statements such as investors, research analysts,
our lenders and others to assess: (i) the financial performance of our assets
without regard to financing methods, capital structure or historical cost basis;
(ii) the ability of our assets to generate cash sufficient to pay interest costs
and support our indebtedness; and (iii) our operating performance and return on
capital as compared to those of other companies in our industry, without regard
to financing or capital structure.
We believe that the presentation of Adjusted EBITDA provides useful information
to investors in assessing our financial condition and results of operations. The
GAAP measure most directly comparable to Adjusted EBITDA is net income (loss).
Our non-GAAP financial measure of Adjusted EBITDA should not be considered as an
alternative to GAAP net income (loss). Adjusted EBITDA has important limitations
as an analytical tool because it excludes some but not all items that affect net
income (loss). Adjusted EBITDA should not be considered in isolation or as a
substitute for analysis of our results as reported under GAAP. Because Adjusted
EBITDA may be defined differently by other companies in our industry, our
definition of Adjusted EBITDA may not be comparable to similarly titled measures
of other companies, thereby diminishing its utility.
The following table sets forth a reconciliation of Adjusted EBITDA to net loss,
its most directly comparable GAAP performance measure, for each of the periods
presented (in thousands):
Three Months Ended
March 31,
2021 2020
Net loss $ (34,805) $ (41,341)
Adjusted by:
Interest expense, net 30,447 23,009
Income tax expense 40 (73)Depreciation, depletion and amortization 5,461 5,915 Asset impairments
- 23,247
Accretion expense 148 138
Unit-based compensation expense 337 398
Unit-based asset management fees 4,447 1,155
Distributions in excess of equity earnings 1,011 4,821 (Gain) loss on mark-to-market activities
- (4,473)
Adjusted EBITDA $ 7,086 $ 12,796
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Significant Operational Factors
Throughput. The following table sets forth selected throughput data pertaining to the Midstream segment for the periods indicated:
Three Months Ended
March 31,
2021 2020
Western Catarina Midstream:
Oil (MBbls/d) 6.1 8.0
Natural gas (MMcf/d) 78.9 99.8
Water (MBbls/d) 2.4 3.0
Seco Pipeline:
Natural gas (MMcf/d) - 0.3
Production. Our production for the three months ended
Subsequent Events
Palmetto Divestiture
OnApril 30, 2021 , but effectiveMarch 1, 2021 (the "Palmetto Effective Time"),SEP Holdings IV, LLC ("SEP IV"), a wholly-owned subsidiary of the Partnership entered into a purchase agreement (the "Palmetto PSA") withWesthoff Palmetto LP ("Palmetto Buyer"), pursuant to which SEP IV sold to Palmetto Buyer specified wellbores and other associated assets located inGonzales andDewitt Counties,Texas (the "Palmetto Assets") for a base purchase price of approximately$11.5 million , which remains subject to customary post-closing adjustments (the "Palmetto Divestiture"). Pursuant to the Palmetto PSA, other than a limited amount of retained obligations, Palmetto Buyer has agreed to assume all obligations relating to the Palmetto Assets that arose on or after the Palmetto Effective Time. The Palmetto PSA contains customary representations and warranties by SEP IV and Palmetto Buyer, and SEP IV and Palmetto Buyer have agreed to customary indemnities relating to breaches of representations, warranties and covenants and the payment of assumed and excluded obligations.
The transaction contemplated by the Palmetto PSA closed simultaneously with the execution of the Palmetto PSA.
Maverick Divestiture
OnApril 30, 2021 , but effectiveMarch 1, 2021 (the "Maverick Effective Time"), SEP IV entered into a purchase agreement (the "Maverick PSA") withBayshore Energy TX LLC ("Maverick Buyer"), pursuant to which SEP IV sold to Maverick Buyer specified wellbores and other associated assets located inZavala County, Texas (the "Maverick 1 Assets") for a base purchase price of approximately$2.8 million , which remains subject to customary post-closing adjustments (the "Maverick 1 Divestiture"). Pursuant to the Maverick PSA, other than a limited amount of retained obligations, Maverick Buyer has agreed to assume all obligations relating to the Maverick 1 Assets that arose on or after the Maverick Effective Time. The Maverick PSA contains customary representations and warranties by SEP IV and Maverick Buyer, and SEP IV and Maverick Buyer have agreed to customary indemnities relating to breaches of representations, warranties and covenants and the payment of assumed and excluded obligations.
The Maverick 1 Divestiture closed simultaneously with the execution of the Maverick PSA.
Also onApril 30, 2021 , SEP IV entered into a letter agreement with Maverick Buyer pursuant to which SEP IV has agreed to sell additional other specified wellbores and other associated assets located inZavala andDimmit Counties,Texas (the "Maverick 2 Assets") for a base purchase price of approximately$1.4 million , which will also be subject to customary post-closing adjustments (the "Maverick 2 Divestiture"). The closing of the Maverick 2 Divestiture is conditioned upon SEP IV obtaining certain consents and complying with other preferential rights related to the Maverick 2 Assets. Once the Partnership has satisfied such conditions, SEP IV and Maverick Buyer will enter in a purchase agreement with respect to the Maverick 2 Assets. The Maverick 2 Divestiture is expected to close in the second quarter of 2021.
NYSE American Update
OnApril 29, 2021 , the Partnership received notice (the "2021 Notice") fromNYSE American LLC ("NYSE American") that the Partnership was not in compliance with the continued listing standards set forth in Section 1003(a)(ii) of the NYSE American Company Guide (the "Company Guide"). That section applies if a listed company has stockholders' equity of less thanU.S. $4.0 million and has reported losses from continuing operations and/or net losses in three of its four most recent fiscal years. The Partnership can regain compliance under Section 1003(a)(ii) of the Company Guide, as well as under Section 1003(a)(i), as previously disclosed, under the 29 -------------------------------------------------------------------------------- compliance plan approved by the NYSE American onJune 25, 2020 , which granted the Partnership a plan period throughOctober 3, 2021 . The Partnership is not required to submit an additional plan to NYSE American with respect to Section 1003(a)(ii). Receipt of the 2021 Notice does not affect the Partnership's business, operations, financial or liquidity condition, or reporting requirements with theSEC .
Gas Lift Agreement
OnApril 21, 2021 , but effectiveJanuary 1, 2021 ,Catarina Midstream, LLC , a wholly-owned subsidiary of the Partnership, entered into a Gas Lift Agreement (the "Gas Lift Agreement") withSN Catarina, LLC , a subsidiary ofMesquite . Pursuant to the Gas Lift Agreement, (i)Catarina Midstream LLC will provide certain gas lift services ancillary toMesquite's oil and gas operations on thePiloncillo Ranch inSouth Texas , and (ii)Mesquite will pay a per-Mcf gas lift fee based on the volume ofCatrina Midstream, LLC's compressed gas delivered toMesquite in connection with the provision of such gas lift services. The initial term of the Gas Lift Agreement is one year and it will continue on a year-to-year basis thereafter unless terminated by either party at least 60 days prior to the expiration of the initial term or any successive one-year term. Under the terms of the Gas Lift Agreement, each of the parties provided general representations and warranties and indemnification to the other party.
ATM Program
OnApril 20, 2021 the Partnership entered into an ATM Sales Agreement (the "Sales Agreement") withVirtu Americas LLC ("Virtu"). Pursuant to the to the terms of the Sales Agreement, the Partnership may sell from time to time through Virtu, as the Partnership's sales agent or principal, common units having an aggregate offering price of up to$7,000,000 (the "ATM Units"). Sales of the ATM Units can be made by any method permitted that is deemed an "at the market offering" as defined in Rule 415 under the Securities Act of 1933. The Partnership will use the net proceeds from any sales pursuant to the Sales Agreement, after deducting offering expenses and Virtu's commissions, for general partnership purposes, which may include repaying or refinancing a portion of the Partnership's outstanding indebtedness and funding capital expenditures or working capital.
Amended and Restated Executive Services Agreement for Realignment
OnApril 15, 2021 , the Partnership and our general partner entered into that certain Amended and Restated Executive Services Agreement for Realignment (the "Amended Agreement") withGerald F. Willinger , a current member of the Board, and the Chief Executive Officer of our general partner. The Amended Agreement amends and restates that certain Executive Services Agreement, datedAugust 2, 2019 , by and betweenMr. Willinger , our general partner and the Partnership.
The Amended Agreement is entered into in connection with the Partnership's go-forward strategy to acquire, develop and own infrastructure critical to the transition of energy supply to lower carbon sources.
Pursuant to the terms of the Amended Agreement, for a period fromApril 15, 2021 throughDecember 31, 2021 ,Mr. Willinger will continue to serve in his role as Chief Executive Officer of the General Partner and will cooperate with the Board in connection with the Board's realignment and transition of his roles and responsibilities to other members of the management team for our general partner and the Partnership. The Amended Agreement includes a customary general release of claims and certain covenants and agreements fromMr. Willinger related to confidential information, cooperation following termination or expiration of the Amended Agreement, non-solicitation of customers and non-competition. 30 --------------------------------------------------------------------------------
Results of Operations by Segment
Three months ended
Midstream Operating Results
The following table sets forth the selected financial and operating data
pertaining to the Midstream segment for the periods indicated (in thousands):
Three Months Ended
March 31,
2021 2020 Variance
Revenues:
Gathering and transportation sales $ - $ 785 $ (785) (100)%
Gathering and transportation lease revenues 9,294 12,606 (3,312) (26)%
Total gathering and transportation sales 9,294 13,391 (4,097) (31)%
Operating expenses:
Lease operating expenses 357 51 306 NM (a)
Transportation operating expenses 1,903 2,558 (655) (26)%
Depreciation and amortization 5,144 5,143 1 0%
Accretion expense 93 86 7 8%
Total operating expenses 7,497 7,838 (341) (4)%
Other income:
Earnings (loss) from equity investments 599 (1,202) 1,801 (150)%
Operating income $ 2,396 $ 4,351 $ (1,955) (45)%
(a) Variances deemed to be Not Meaningful "NM."
Gathering and transportation sales. Gathering and transportation sales decreased approximately$0.8 million , or 100%, to zero for the three months endedMarch 31, 2021 , compared to approximately$0.8 million for the same period in 2020. This decrease was the result of the termination of the Seco Pipeline Transportation Agreement, which was effective throughFebruary 12, 2020 . Gathering and transportation lease revenues. Gathering and transportation lease revenues decreased approximately$3.3 million , or 26%, to approximately$9.3 million for the three months endedMarch 31, 2021 , compared to approximately$12.6 million for the same period in 2020. This decrease was primarily the result of a decrease in overall volumes being transported through Western Catarina Midstream under the Gathering Agreement. Lease operating expenses. Lease operating expenses, which include ad valorem taxes, increased approximately$0.3 million , or 600%, to approximately$0.4 million for the three months endedMarch 31, 2021 , compared to approximately less than$0.1 million during the same period in 2020. Transportation operating expenses. Our transportation operating expenses generally consist of equipment rentals, chemicals, treating, metering fees, permit and regulatory fees, labor, minor maintenance, tools, supplies and pipeline integrity management expenses. Our transportation operating expenses decreased by approximately$0.7 million , or 26%, to approximately$1.9 million for the three months endedMarch 31, 2021 compared to approximately$2.6 million for the same period in 2020. This decrease was due to the nature of operating expenses being dependent on throughput. Depreciation and amortization expense. Gathering and transportation assets are stated at historical acquisition cost, net of any impairments, and are depreciated using the straight-line method over the useful lives of the assets, which range from five to 15 years for equipment and up to 36 years for gathering facilities. Our depreciation and amortization expense was consistent for the three months endedMarch 31, 2021 compared to the same period in 2020. Earnings from equity investments. Earnings from equity investments increased approximately$1.8 million , or 150%, to earnings of approximately$0.6 million for the three months endedMarch 31, 2021 , compared to a loss of approximately$1.2 million for the same period in 2020. This increase was primarily the result of higher throughput during the three months endedMarch 31, 2021 . 31 --------------------------------------------------------------------------------
Production Operating Results
The following tables set forth the selected financial and operating data pertaining to the Production segment for the periods indicated (in thousands, except net production and average sales and average unit costs):
Three Months Ended
March 31,
2021 2020 Variance
Revenues:
Natural gas sales at market price $ 75 $ 112 $ (37) (33)%
Natural gas hedge settlements - 94 (94) (100)%
Natural gas mark-to-market activities - 28 (28) (100)%
Natural gas total 75 234 (159) (68)%
Oil sales at market price 2,306 2,361 (55) (2)%
Oil hedge settlements - 381 (381) (100)%
Oil mark-to-market activities - 4,445 (4,445) (100)%
Oil total 2,306 7,187 (4,881) (68)%
NGL sales 135 31 104 NM (a)
Total revenues 2,516 7,452 (4,936) (66)%
Operating expenses:
Lease operating expenses 1,483 1,858 (375) (20)%
Production taxes 105 106 (1) (1)%
Depreciation, depletion and amortization 317 772 (455) (59)%
Asset impairments - 23,247 (23,247) (100)%
Accretion expense 55 52 3 6%
Total operating expenses 1,960 26,035 (24,075) (92)%
Operating income $ 556 $ (18,583) $ 19,139 (103)%
(a) Variances deemed to be Not Meaningful "NM."
Three Months Ended
March 31,
2021 2020 Variance
Net production:
Natural gas (MMcf) 30 42 (12) (29)%
Oil production (MBbl) 41 48 (7) (15)%
NGLs (MBbl) 6 5 1 20%
Total production (MBoe) 52 60 (8) (13)%
Average daily production (Boe/d) 578 659 (81) (12)%
Average sales prices:
Natural gas price per Mcf with hedge
settlements$ 2.50 $ 4.90 $
(2.40) (49)%
Natural gas price per Mcf without
hedge settlements$ 2.50 $ 2.67 $
(0.17) (6)%
Oil price per Bbl with hedge
settlements$ 56.24 $ 57.13 $
(0.89) (2)%
Oil price per Bbl without hedge
settlements$ 56.24 $ 49.19 $
7.05 14%
NGL price per Bbl without hedge
settlements$ 22.50 $ 6.20 $
16.30 263%
Total price per Boe with hedge
settlements$ 48.38 $ 49.65 $
(1.27) (3)%
Total price per Boe without hedge
settlements$ 48.38 $ 41.73 $
6.65 16%
Average unit costs per Boe:
Field operating expenses (a)$ 30.54 $ 32.73 $ (2.19) (7)% Lease operating expenses$ 28.52 $ 30.97 $ (2.45) (8)% Production taxes$ 2.02 $ 1.77 $ 0.25 14%
Depreciation, depletion and
amortization$ 6.10 $ 12.87 $
(6.77) (53)%
(a) Field operating expenses include lease operating expenses and production
taxes.
Production. For the three months endedMarch 31, 2021 , 79% of our production was oil, 12% was NGLs and 10% was natural gas as compared to the three months endedMarch 31, 2020 , when 80% of our production was oil, 8% was NGLs and 12% was natural gas. The production mix between the periods has remained largely consistent. Combined production decreased by 8 MBoe for the three months endedMarch 31, 2021 . This decrease was due to weather related issues inSouth Texas causing certain wells to temporarily cease production. Sales of natural gas, NGLs and oil. Unhedged oil, NGL and unhedged natural gas sales remained relatively consistent for the three months endedMarch 31, 2021 , with no material change when compared to the same period in 2020. Oil and natural gas sales were impacted by a slight decrease in production as noted above which was offset by increased oil and NGL prices. 32 -------------------------------------------------------------------------------- Our total production-related revenue decreased approximately$4.9 million for the three months endedMarch 31, 2021 , compared to the same period in 2020. This decrease was primarily the result of an approximately$4.9 million gain on oil and natural gas hedging activities during the three months endedMarch 31, 2020 compared to no activity during the same period in 2021 due to production being unhedged for 2021. The following tables provide an analysis of the impacts of changes in average realized prices and production volumes between the periods on our unhedged revenues from the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2021 (dollars in thousands, except average sales prices): Q1 2021 Q1 2020 Production Q1 2020 Revenue Production Production Volume Average Decrease Volume Volume Difference Sales Price due to Production Natural gas (MMcf) 30 42 (12)$ 2.67 $ (32) Oil (MBbl) 41 48 (7)$ 49.19 $ (344) NGLs (MBbl) 6 5 1$ 6.20 $ 6 Total oil equivalent (MBoe) 52 60 (8)$ 41.73 $ (370) Q1 2021 Q1 2020 Revenue Average Average Average Sales Q1 2021 Decrease Sales Price Sales Price Price Difference Volume due to Price Natural gas (MMcf)$ 2.50 $ 2.67 $ (0.17) 30 $ (5) Oil (MBbl)$ 56.24 $ 49.19 $ 7.05 41 $ 289 NGLs (MBbl)$ 22.50 $ 6.20 $ 16.30 6 $ 98 Total oil equivalent (MBoe)$ 48.38 $ 41.73 $ 6.65 52 $ 382 A 10% increase or decrease in our average realized sales prices, excluding the impact of derivatives, would have increased or decreased our revenues for the three months endedMarch 31, 2021 by approximately$0.3 million . Hedging and mark-to-market activities. We apply mark-to-market accounting to our derivative contracts and the full volatility of the non-cash change in fair value of our outstanding contracts is reflected in oil and natural gas sales. We do not have derivative contracts related to production in 2021 and beyond. As a result, there are no hedging and mark-to-market activities or related cash settlements for the three months endedMarch 31, 2021 . For the three months endedMarch 31, 2020 , we had a non-cash mark-to-market gain of approximately$4.5 million . Cash settlements received for our commodity derivative contracts were approximately$0.5 million for the three months endedMarch 31, 2020 . Field operating expenses. Our field operating expenses generally consist of lease operating expenses, labor, vehicles, supervision, transportation, minor maintenance, tools and supplies expenses, as well as production and ad valorem taxes. Lease operating expense. Lease operating expenses, which includes ad valorem taxes, decreased approximately$0.4 million , or 20%, to approximately$1.5 million for the three months endedMarch 31, 2021 , compared to approximately$1.9 million for the same period in 2020. This decrease was primarily the result of reduced workover activity during the three months endedMarch 31, 2021 compared to the same period in 2020. Depreciation, depletion and amortization expense. Depreciation, depletion and amortization expense includes the depreciation, depletion and amortization of acquisition costs and equipment costs. Depletion is calculated using units-of-production under the successful efforts method of accounting. Assuming other variables remain constant, as oil, natural gas and NGL production increases or decreases, our depletion expense would increase or decrease as well. Our depreciation, depletion and amortization expense for the three months endedMarch 31, 2021 decreased approximately$0.5 million , or 59%, to approximately$0.3 million , compared to approximately$0.8 million for the same period in 2020. This decrease is primarily the result of reduced depletion from the$23.2 million proved property impairment charges taken in the first quarter 2020.
Impairment expense. We did not record impairment charges for the three months
ended
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