carbon energy corporation...2020/08/25 · exchange act of 1934, as amended (the “exchange...

Shareholder Presentation

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Carbon Energy Corporation

August 25, 2020

IMPORTANT DISCLOSURES

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Forward-Looking Statements

The slides contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). Except for historical information, statements made in the slide presentation, including those relating to the Company’s strategies,estimated and anticipated production, expenditures, infrastructure, estimated costs, number of wells to be drilled, estimated reserves, reserve potential, recoverable reserves, and financialposition are forward-looking statements as defined by the Securities and Exchange Commission. These statements are based on assumptions and estimates that management believes arereasonable based on currently available information; however, management’s assumptions and the Company's future performance are subject to a wide range of business risks anduncertainties and there is no assurance that these goals and projections can or will be met. Any number of factors could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to, the volatility of oil and gas prices, the costs and results of drilling and operations, the timing of production, mechanical and other inherentrisks associated with oil and gas production, weather, the availability of drilling equipment, changes in interest rates, litigation, uncertainties about reserve estimates, and environmental risk.We caution you not place undue reliance on these forward-looking statements, which speak only as of the date reflected in the slide presentation, and we undertake no obligation to publiclyupdate or revise any forward-looking statements. Further information on risks and uncertainties is available in the Company’s filings with the Securities and Exchange Commission, whichare incorporated by reference.

Actual quantities of oil and gas that may be ultimately recovered from Carbon’s interests will differ substantially from our estimates. Factors affecting ultimate recovery include the scope ofCarbon’s drilling program, which will be directly affected by the availability of capital, drilling and production costs, commodity prices, availability of drilling services and equipment,drilling results, lease expirations, transportation constraints, regulatory approvals, field spacing rules, recovery of gas in place, length of horizontal laterals, actual drilling results, andgeological and mechanical factors affecting recovery rates and other factors. Estimates of resource potential may change significantly as development of our resource plays providesadditional data.

Non-GAAP Measures

The slide presentation contains certain references to EBITDA and Adjusted EBITDA value, which are non-GAAP financial measures, as defined under Regulation G of the rules andregulations of the SEC.

EBITDA and Adjusted EBITDA

“EBITDA” and “Adjusted EBITDA” are non-GAAP financial measures. We define EBITDA as net income or loss before interest expense, taxes, depreciation, depletion and amortization.We define Adjusted EBITDA as EBITDA prior to accretion of asset retirement obligations, non-cash stock-based compensation expense, the unrealized gain or loss on commodityderivatives and the gain or loss on sold investments or properties. EBITDA and Adjusted EBITDA is consolidated including non-controlling interests and as used and defined by us, may notbe comparable to similarly titled measures employed by other companies and are not measures of performance calculated in accordance with GAAP. EBITDA and Adjusted EBITDA shouldnot be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by or used in operating, investing and financing activities, or other income orcash flow statement data prepared in accordance with GAAP. EBITDA and Adjusted EBITDA provide no information regarding a company’s capital structure, borrowings, interest costs,capital expenditures, and working capital movement or tax position. EBITDA and Adjusted EBITDA do not represent funds available for discretionary use because those funds are requiredfor debt service, capital expenditures, working capital, income taxes, franchise taxes, exploration and development expenses, and other commitments and obligations. However, ourmanagement believes EBITDA and Adjusted EBITDA are useful to an investor in evaluating our operating performance because these measures are widely used by investors in the oil andnatural gas industry to measure a company’s operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company tocompany depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors; and help investors to moremeaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure; and are used by ourmanagement for various purposes, including as a measure of operating performance, in presentations to our board of directors, as a basis for strategic planning and forecasting and by ourlenders pursuant to a covenant under our credit facility.

There are significant limitations to using EBITDA and Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurringitems that materially affect our net income or loss, the lack of comparability of results of operations of different companies and the different methods of calculating EBITDA and AdjustedEBITDA reported by different companies.

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Preparation of Reserves Estimates Our estimates of proved oil, natural gas and NGL reserves as of June 30, 2020 , were based on the average fiscal-year prices for oil, natural gas and NGL (calculated as the unweighted arithmetic average of the first-day-of-the month price for each month within the 12-month period ended June 30, 2020. Proved developed oil, gas and NGL reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped oil, gas and NGL reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Proved undeveloped reserves on undrilled acreage are limited to those locations on development spacing areas that are offsetting economic producers that are reasonably certain of economic production when drilled. Proved undeveloped reserves for other undrilled development spacing areas are claimed only where it can be demonstrated with reasonable certainty that there is continuity of economic production from the existing productive formation. Proved undeveloped reserves are included when they are scheduled to be drilled within five years. SEC rules dictate the types of technologies that a company may use to establish reserve estimates including the extraction of non-traditional resources, such as natural gas extracted from shales as well as bitumen extracted from oil sands. Uncertainties are inherent in estimating quantities of proved reserves, including many factors beyond our control. Reserve engineering is a subjective process of estimating subsurface accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and its interpretation. As a result, estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing, and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices or development and production expenses, may require revision of such estimates. Accordingly, quantities of oil and natural gas ultimately recovered will vary from reserve estimates.

Reserve estimates are based on production performance, data acquired remotely or in wells, and are guided by petrophysical, geologic, geophysical and reservoir engineering models. Estimates of our proved reserves were based on deterministic methods. In the case of mature developed reserves, reserve estimates are determined by decline curve analysis and in the case of immature developed and undeveloped reserves, by analogy, using proximate or otherwise appropriate examples in addition to volumetric analysis. The technologies and economic data used in estimating our proved reserves include empirical evidence through drilling results and well performance, well logs and test data, geologic maps and available downhole and production data.

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Carbon Energy CorporationPreparation of Reserves Estimates (continued)

Further, the internal review process of our wells and related reserve estimates includes but is not limited to the following:

● A comparison is made and documented of actual data from our accoun�ng system to the data u�lized in the reserve database.Current production, revenue and expense information obtained from our accounting records is subject to external quarterly reviews, annual audits and additional internal controls over financial reporting. This process is designed to create assurance that production, revenues and expenses are accurately reflected in the reserve database. ● A comparison is made and documented of land and lease records to ownership interest data in the reserve database. This process is designed to create assurance that the costs and revenues utilized in the reserves estimation match actual ownership interests. ● A comparison is made of property acquisi�ons, disposals, re�rements or transfers to the property records maintained in the reserve database to verify that all are accounted for accurately. ● Natural gas pricing for the first flow day of every month is obtained from Pla�s Gas Daily. Oil pricing for the first flow day of every month is obtained from the U.S. Energy Information Administration. At the reporting date, 12-month average prices are determined. Regional variations in pricing and related deductions are similarly obtained and a 12-month average is calculated at year end. For the years ended December 31, 2019 and 2018, the independent engineering firm, Cawley, Gillespie & Associates, Inc. (“CGA”) reviewed with us,technical personnel field performance and future development plans. Following these reviews, we furnished our internal reserve database and supporting data to CGA in order for them to prepare their independent reserve estimates and final report. We restrict access to our database containing reserve information to select individuals from our engineering and corporate development departments. CGA’s independent reserve estimates and final report are for our interests in the respective oil and gas properties and represents 100% of the total proved hydrocarbon reserves owned by us or 99% of the consolidated proved hydrocarbon reserves presented in our consolidated financial statements. CGA’s report does not include the hydrocarbonreserves owned by the non-controlling interests of our consolidated partnerships. We calculated the estimated reserves of the non-controlling interests of the consolidated partnerships’ oil and gas properties by multiplying CGA’s independent reserve estimates for such properties by the respective non-controlling interests in those properties.

Our Director of Corporate Planning and Development, Todd Habliston, is responsible for overseeing the preparation of the reserve estimates with consultations from our internal technical and accounting staff. Mr. Habliston started his career with ARCO Oil and Gas in 1983, has served as Adjunct Professor of Economics at the Colorado School of Mines, and has over 35 years of oil and gas experience in all aspects of reservoir and production engineering. Mr. Habliston earned a B.S. in Chemical and Petroleum Refining Engineering from the Colorado School of Mines and an MBA from Purdue University. He is a registered Professional Engineer and is a member of SPE, SPEE, AAPG and API.

Emphasize Health, Safety and Environmental best practices and compliance

Acquire and develop oil and gas producing assets located in California

Build value from acquired assets through

• Lease operating expense reductions

• Gathering and infrastructure optimization

• Production enhancement projects

• Field development projects

• Operational synergies

Utilize science and technology to develop assets with highest rate of return on capital invested

Low capital, low risk, field development projects

Develop assets through drilling as commodity prices warrant

Substantial majority of oil production is hedged through June 2023

Maintain favorable debt metrics and financial flexibility

Management team has long-term successful track record of creating value for its shareholders and partners

Strong technical team with acquisition, production and drilling expertise

Carbon Energy Growth Strategy

Acquire and Develop

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Carbon Energy Growth Strategy

Acquire and Develop

Carbon has identified the Ventura Basin of California as an area which presents an excellentopportunity to acquire and develop a portfolio of light oil, low operating cost producingproperties

Legacy producers are divesting Ventura Basin production and midstream assets

Carbon has acquired Ojai Field, Timber Canyon Field, Holser Field and Sespe Field assets, and iscurrently implementing field development programs

Extensive field development opportunities exist within the target properties

Carbon will grow the asset base through acquisitions, low-risk exploitation and development ofproperties

Ventura Basin, California

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Ventura Basin Production Attributes

Shallow decline, long life reserves

Low capital maintenance requirements

Multipay conventional producing formations

No thermal / steam flood operations

Light crude oil

Low water cut

Shallow depth (2,000’ to 8,000’)

Permitted water management systems

Favorable land and regulatory environment


Carbon California Company LLC

53.92%

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Carbon California Operating Company

LLC

100%


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Wellcount

Oil - Gross Producing w/ Working Interest 322

Gas - Gross Producing w/ Working Interest -

ORRI - Total 25

Injection - Gross Active 16

Acreage

Company Gross 17,071

Company Net 16,774

Avg GWI% 98%

Net Developed 5,231

Net Undeveloped 11,544

Total Net Acreage Position 16,774

Deep Rights 16,774

Fee Minerals 7,725

Developed 1,450

Undeveloped 6,275

HBP 9,049

Developed 3,781

Undeveloped 5,269

%Fee 46%

%HBP 54%

Carbon CaliforniaAugust 2020

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Go Private Plan

• Filed with SEC to reverse split shares, delist and go private

• Significant annual savings and G&A reductions

• Quarterly financial and management reporting to all

shareholders

• Current status responding to SEC comments

• Expect shareholder meeting in September

• Majority shareholder supports transaction

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Operating Profile July 1, 2020• Approximate Net Daily Sales Volume

• Crude Oil: 1,280 barrels per day

• Residue Gas: 1,775 mcf per day

• Plant Liquids: 180 barrels per day

• Average Base Production Decline Rate: 3% per year

• Average Lease Operating Expense: $23.20 per barrel of oil

• Planned Field Development Capital: 2020 $3,900,000

2021 $6,200,000

• Crude Oil Index: Buena Vista 26

T12M Differential to Brent: +$1.44 per barrel

T12M Differential to WTI: +$5.66 per barrel

• Shares Outstanding:

Common Shares: 7,899,020

Preferred Shares: 625,000

Common & Preferred: 8,524,020

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Debt Summary

*OIE Notes: interest only through 2021, 2 yr principal & interest thereafter / 10% interest / 12% PIK option - includes accrued interest

**Carbon Energy holds 53.92% ownership in Carbon California Company. Carbon California Debt is non-recourse to Carbon Energy Corp / Feb 15, 2022 Maturity / $40.0 million borrowing base

($000) 6/30/2020 12/31/2019 Change

Carbon Energy (standalone)

Old Ironsides Notes* 16,422$ 25,675$ (9,253)$

UMB PPP Loan 1,339$ -$ 1,339$

Total Carbon Energy (standalone) 17,761$ 25,675$ (7,914)$

Appalachian Business (divested May 2020)

Appalachian Revolver -$ 69,150$ (69,150)$

Appalachian Term Loan -$ 5,833$ (5,833)$

Total Appalachian Business -$ 74,983$ (74,983)$

Carbon California Company

Carbon California Revolver** 37,200$ 33,000$ 4,200$

Carbon California Subordinated Debt** 13,236$ 13,000$ 236$

Total Carbon California Company 50,436$ 46,000$ 4,436$

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Contingent Payment Summary

• Carbon’s Appalachian assets were sold for $125 million: $110 million in cash at closing and up to $15 million in contingent payments based on future prices of natural gas (“Contingent Payment”)

• Contingent Payment amounts are based on natural gas prices rising above annual contractual natural gas price benchmarks

• Based on August 21, 2020 NYMEX forward strip pricing, the current value of the Contingent Payment is approximately $8.5 million

Note: Per US GAAP, the Contingent Payment is deemed not estimable nor certain of receipt. No value for the Contingent Payment is recorded within Carbon’s consolidated balance sheet.

2020 2021 2022

Volume (MMbtu) 5,331,500 10,236,000 9,847,500

Annual Average

Benchmark NYMEX Price

($/MMbtu) 2.084$ 2.342$ 2.386$

8/21/20 NYMEX Future

Pricing 2.115$ 2.911$ 2.641$

8/21/20 vs Benchmark 0.031$ 0.569$ 0.255$

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Sale of Appalachia BusinessOutstanding Funds Summary

As of June 30, 2020

Description ($000) Estimated Release Timing($000)

Specified Retained Liabilities $3,194 8/7/20: $575 Q3-20: $1,819 Q4-21: $800

Representations and Warranties Policy Retention

$1,650 Q4-21: $550Q2-23: $1,100

Total Escrow Funds $4,844

Remaining Appalachia Assets to be Conveyed

$1,570 Q3-20: $1,570

Total Outstanding Funds $6,414*

*Final Settlement is yet to be determined and could result in additional funds due to Carbonnot yet included in the above amounts

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Old Ironsides Promissory Note Summary

• Payoff discounts are available to Carbon upon achievement of principal payment thresholds/timeline, as outlined below:


($ million) Final

Settlement(1)

Final

Settlement(1) Jan 2021

Threshold $20.0 $18.0 $18.0

OIE Promissory Notes $26.9 $26.9 $26.9

Principal Payments Made

Toward Threshold ($10.5) ($10.5) ($10.5)

6/30/20 Outstanding Balance $16.4 $16.4 $16.4

Additional Threshold Payment

Required ($9.5) ($7.5) ($7.5)

Payoff Discount

(if Threshold Achieved) ($6.9) ($4.8) ($3.3)

Resultant Balance (Estimate) $0.0 $4.1 $5.6

(1) Final Settlement of Appalachia Asset sale anticipated September 2020

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Carbon California Company(shown as 100% interest)

Summary Financial Data($OOO)


12/31/19 YTD Q1-20 Q2-20 6/30/20 YTD

(Audited) (Unaudited) (Unaudited) (Unaudited)

Revenues 28,241$ 20,315$ 1,551$ 21,866$

Expenses 27,339 6,726 6,353 13,079

Interest 5,034 1,178 1,191 2,369

Net Income (4,132)$ 12,411$ (5,993)$ 6,418$

Summary Adjusted EBITDA ($OOO, except oil pricing)

12/31/19 YTD Q1-20 Q2-20 6/30/20 YTD(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Adjusted EBITDA 11,070$ 1,365$ 1,083$ 2,448$

Average NYMEX Oil ($/bbl) 57.04$ 45.78$ 28.00$ 36.89$

OIL

MBO

GAS

MMCF

NGL

MBBL

OIL EQUIV

(6:1)

MMBOE

GAS EQUIV

(6:1)

BCFE %Oil + NGL %GAS

NPV @ 10%

$000

Net Debt

$000

NAV

$000

Carbon California 9,174 12,243 1,184 12 74 84% 16% 68,644$ (27,694)$ 40,950$

OIL

MBO

GAS

MMCF

NGL

MBBL

OIL EQUIV

(6:1)

MMBOE

GAS EQUIV

(6:1)


NPV @ 10%

$000

Carbon California 4,713 6,645 632 6 39 83% 17% 35,590$

OIL

MBO

GAS

MMCF

NGL

MBBL

OIL EQUIV

(6:1)

MMBOE

GAS EQUIV

(6:1)


NPV @ 10%

$000


OIL

MBO

GAS

MMCF

NGL

MBBL

OIL EQUIV

(6:1)

MMBOE

GAS EQUIV

(6:1)


NPV @ 10%

$000


SEC 20Q2 Price Basis: SEC 20Q2 Differentials

Average First Day of Month Prices Trailing 12 Months BV26 6.16$ per barrel of oil

$47.17 per barrel of oil SoCal 0.216$ per MMBtu of gas

$2.066 per MMBtu of gas NGLs 25% of WTI

Proved Undeveloped

Carbon Energy CorporationProved Reserves Summary - Net Ownership

As of July 1, 2020SEC 20Q2 Prices

Total Proved Net Asset Value

Proved Developed Producing

Proved Developed Non-Producing

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_______________________________ San Diego

Bakersfield

Petrolia

California Oil and Gas Basins

Santa Cruz

Ventura

Los Angeles

Sacramento

San Francisco

Sacramento Basin

San Joaquin Basin

Salinas Basin

Santa Maria Basin

Ventura Basin

Los Angeles Basin

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_______________________________

Sespe

Ojai

Rincon

San Miguelito

West Montalvo

Oxnard

Saticoy

South Mtn

Bardsdale / ShiellsCanyon

Big Mountain / Oak Park / Simi

Temescal /Piru Creek /Hopper Canyon

Wayside CanyonHonor Rancho

Santa Clara Ave.

Cascade

TimberCanyon

Placerita /Tapo Ridge /

Santa Susana /Tapo Canyon South /

Aliso Canyon /Oat Mtn

Fillmore

West Mtn

Ramona

Del Valle

Newhall-Portero

Castaic

Newhall

Santa Paula

Holser

Carbon Energy Ventura Basin

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ORRI and Mineral Interests 17,000 acres


Field Development Program

Existing Portfolio of Field Development Opportunities

• Nearly 300 identified actionable development projects on existing properties

• Identified and evaluated by Carbon’s technical team

• Audited by Cawley Gillespie

Development Drilling Program

• Ojai Field Saugus and Diatomite Development

• Ojai Field and Timber Canyon Field Development

• Sespe Field and Holser Field Development

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Development Opportunities

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Opportunity summary: 100% Carbon California Company

Resource by opportunity (MBoe) PV10 by opportunity ($000)

$197 million43 MMBoe

9.4

3.4

3.8

0.7 0.2

5.1

1.2

0.4

14.1

$64

$19 $18

$1

$1 $14

$5

$1

$31

Mohnian

Monterey

Saugus

Timber Canyon Field

Holser Field

Sespe Field

Water Flood

Diatomite

Sespe Explore

Numbers may not tie due to roundingNote: Assumes 6:1 gas to oil ratio

Nominal Nymex Price Forecast: $48.50/bo (WTI) and $2.50/mmbtu (HH)Effective date of July 1, 2020

Opportunity Locations

CGA

Reviewed

SEC

Proved

Oil

(Mbbls)

Gas

(MMcf)

NGL

(Mbbls)

Equivalent

(Mboe)

Operating

cash flow Capex

Future net

cash flow

NPV10

($000)

IRR

(%)

RECOMPLETION 107 107 97 2,050 2,199 204 2,620 $ 78,647 $ 7,729 $ 70,918 $ 26,866 415%

RETURN TO PRODUCTION 96 96 67 1,637 2,616 255 2,328 $ 56,502 $ 2,117 $ 54,385 $ 16,386 225%

OJAI - MONTEREY 31 11 11 6,310 11,336 1,178 9,378 $ 284,511 $ 49,250 $ 235,261 $ 63,657 71%

OJAI - SAUGUS 125 125 18 3,393 - - 3,393 $ 124,655 $ 30,950 $ 93,705 $ 19,095 45%

OJAI - MOHNIAN 24 12 12 3,083 2,778 289 3,835 $ 129,460 $ 39,523 $ 89,937 $ 17,572 31%

OJAI - DIATOMITE 10 0 0 513 649 67 688 $ 18,401 $ 8,500 $ 9,901 $ 1,368 26%

OJAI - SESPE 1 0 0 158 151 16 199 $ 6,312 $ 1,900 $ 4,412 $ 602 27%

SESPE FIELD 64 64 12 3,725 5,454 480 5,113 $ 166,069 $ 75,872 $ 90,197 $ 14,379 25%

TIMBER CANYON FIELD 13 3 3 829 1,388 144 1,205 $ 37,678 $ 9,425 $ 28,253 $ 4,561 28%

HOLSER FIELD 6 6 6 424 17 1 428 $ 17,888 $ 5,850 $ 12,038 $ 1,334 20%

WATERFLOOD 5 5 0 12,660 4,809 635 14,096 $ 531,385 $ 81,171 $ 450,214 $ 31,008 17%

Grand Total 482 429 226 34,782 31,396 3,269 43,283 $1,451,508 $312,288 $1,139,221 $196,826 160%

Well Count Net Unrisked Resource Undiscounted ($000)

Carbon Energy CorporationDevelopment Plan Maps

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Ventura Basin Acquisition Opportunities

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Concentration of Ventura Basin Assets

• 3 Operators account for approximately 80% of Basin Production

- Aera Energy (Ventura Avenue Field)

- California Resources Corporation (Coastal / Central / Eastern Assets)

- Carbon California Company (Ojai, Timber Canyon, Sespe, Holser Fields)

Legacy major oil company assets remain unexploited since early 1990s

Proven Ventura Basin Operating Experience

• Technical and operating team has multiple years of Ventura Basin experience

Favorable Ventura Basin Regulatory Environment

• Carbon staff has favorable engagement and relationships with Federal, State and County government authorities

• Active participation in Government, Conservation and Environmental initiatives

1700 Broadway Suite 1170 Denver, CO 80290 270 Quail Ct, Suite B Santa Paula, CA 93060

www.carbonenergycorp.com

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carbon energy corporation...2020/08/25 · exchange act of 1934, as amended (the “exchange...

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