As filed with the Securities and Exchange Commission on April 5, 2019

Registration No. 333-227679

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

EnVen Energy Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware		1311		35-2547516
(State or Other Jurisdiction of Incorporation or Organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

Three Allen Center

333 Clay Street, Suite 4200

Houston, Texas 77002

713-335-7000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

 

Steven A. Weyel

Chairman and Chief Executive Officer

EnVen Energy Corporation

Three Allen Center

333 Clay Street, Suite 4200

Houston, Texas 77002

713-335-7000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Richard D. Truesdell, Jr. Byron B. Rooney Davis Polk & Wardwell LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000		Arthur D. Robinson David W. Azarkh Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 (212) 455-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

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		☒  (Do not check if a smaller reporting company)		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 7(a)(2)(B) of the Securities Act.  ☒

 

 

CALCULATION OF REGISTRATION FEE

 

Title Of Each Class Of Securities To Be Registered		Proposed Maximum Aggregate Offering Price(1)(2)		Amount Of Registration Fee(3)
Class A Common Stock, par value $0.001 per share		$100,000,000		$12,120.00

(1)	Includes             shares to be sold upon exercise of the underwriters’ option to purchase additional shares. See “Underwriting.”

(2)	Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.

(3)	Previously paid.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED APRIL 5, 2019

PRELIMINARY PROSPECTUS

            Shares

 

 

EnVen Energy Corporation

Class A Common Stock

 

 

EnVen Energy Corporation is offering              shares of its Class A common stock.

This is our initial public offering and no public market exists for our Class A common stock. We anticipate that the initial public offering price will be between $        and $        per share.

 

 

We intend to apply to list our Class A common stock on The New York Stock Exchange (the “NYSE”) under the symbol “ENVN.”

 

 

We will have two classes of common stock outstanding after this offering: Class A common stock and Class B common stock. Each share of Class A common stock and Class B common stock entitles its holder to one vote on all matters presented to our stockholders generally. All of our Class B common stock will be held by EnVen Equity Holdings (as defined below). Immediately following this offering, the holders of our Class A common stock will collectively hold    % of the economic interests in us and     % of the voting power in us, and EnVen Equity Holdings, through its ownership of all of the outstanding Class B common stock, will hold the remaining     % of the voting power in us. We are a holding company and our sole material asset is the common units of EnVen GoM (as defined below), representing an    % economic interest in EnVen GoM immediately following this offering. The remaining     % economic interest in EnVen GoM is owned by EnVen Equity Holdings through its ownership of common units of EnVen GoM.

We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

 

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 25.

 

 

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

		Per Share				Total
Public offering price		$				$
Underwriting discounts and commissions(1)		$				$
Proceeds to EnVen Energy Corporation before expenses		$				$

 

(1)	We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting.”

The underwriters have an option to purchase up to an additional             shares of Class A common stock from us at the public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus.

The underwriters expect to deliver the shares of Class A common stock to purchasers on or about                 , 2019 through the book-entry facilities of The Depository Trust Company.

 

 

 

Citigroup		J.P. Morgan		Stifel
		BMO Capital Markets

 

 

                    , 2019

TABLE OF CONTENTS

 

 

 

 

 

We and the underwriters have not authorized anyone to provide you with any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We are offering to sell, and seeking offers to buy, shares of the Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Class A common stock.

Persons who come into possession of this prospectus and any other free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

Market Data

We use market data and industry forecasts throughout this prospectus, and in particular, in the sections entitled “Prospectus Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Market data used in this prospectus has been obtained from publicly-available information and publications as well as our good faith estimates. We believe that the information contained therein has been obtained from sources believed to be reliable. However, we have not independently verified the data obtained from these sources. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties that apply to the other forward-looking statements that are described in this prospectus. In addition, while we are not aware of any misstatements regarding the market or industry data presented herein, such statements involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” beginning on page 25 of this prospectus.

Non-GAAP Measures

We believe that the financial data included in this prospectus have been prepared in a manner that complies, in all material respects, with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and are

 

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consistent with current practice, with the exception of the presentation of certain non-GAAP financial information, such as Adjusted EBITDA and PV-10 (each, as described under the headings “Prospectus Summary—Summary Historical Consolidated Financial Data” and “Prospectus Summary—Summary Historical Reserve and Production Data,” respectively). These are supplemental financial measures that are not prepared in accordance with GAAP. Any analysis of non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP.

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) adjusted for depreciation, depletion, and amortization (“DD&A”), income tax expense, accretion of asset retirement obligations, non-cash stock-based compensation, interest expense, loss on extinguishment of long-term debt, loss on fair value of 11.00% Senior Notes due 2023 (“2023 Notes”), loss (gain) on derivatives, net, cash (paid) received for derivative settlements, net, non-cash interest income and other expenses. Management believes Adjusted EBITDA is useful because it allows management to more effectively evaluate our operating performance and compare to results of operations from period to period and against our peers without regard to our financing methods or capital structure. We adjust net income (loss) for the items listed above to arrive at Adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our results will be unaffected by unusual or non-recurring items. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measure of other companies. We believe that Adjusted EBITDA is a widely followed measure of operating performance and may also be used by investors to measure our ability to meet our debt service requirements. A reconciliation of net income (loss) to Adjusted EBITDA is provided in this prospectus under the heading “Prospectus Summary—Summary Historical Consolidated Financial Data—Non-GAAP Financial Measures—Adjusted EBITDA.”

PV-10

Proved, possible and probable reserve PV-10 values are non-GAAP financial measures and represent the period-end present values of estimated future cash inflows from our proved, possible and probable reserves, less future development and production costs, discounted at 10% to reflect timing of future cash flows, using SEC pricing assumptions in effect at the end of the period. Our proved, possible and probable reserve PV-10 values are inclusive of cash inflows from the future net revenues related to third-party production handling agreements, discounted at 10%. The PV-10 value of our proved reserves is equal to standardized measure of discounted future net cash flows at the applicable date, the most directly comparable GAAP financial measure, before deducting future income taxes, discounted at 10%. GAAP does not provide a measure of estimated future net cash flows for reserves other than proved reserves. Because PV-10 estimates of probable and possible reserves are more uncertain than PV-10 and standardized estimates of proved reserves, but have not been adjusted for risk due to that uncertainty, they may not be comparable with each other. Nonetheless, we believe that PV-10 estimates for reserve categories other than proved present useful information for investors about the future net cash flows of our reserves in the absence of a comparable GAAP measure such as the standardized measure of discounted future net cash flows.

Generally, PV-10 is not equal to, or a substitute for, the GAAP financial measure of standardized measure of discounted future net cash flows. Our proved, possible and probable reserve PV-10 values and standardized measure of discounted future net cash flows do not purport to present the fair value of our oil and natural gas reserves. However, our management believes that the presentation of PV-10 is useful because it presents the

 

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relative monetary significance of our properties regardless of tax structure. Further, investors may utilize the measure as a basis for comparison of the relative size and value of our reserves to other companies. We use this measure when assessing the potential return on investment related to our oil and natural gas properties. In addition, investors should be cautioned that estimates of PV-10 for probable and possible reserves, as well as the underlying volumetric estimates, are inherently more uncertain of being recovered and realized than comparable measures for proved reserves, and that the uncertainty for possible reserves is even more significant. See “Prospectus Summary—Summary Historical Reserve and Production Data,” “Risk Factors—Risks Related to Our Business—Oil, natural gas and NGL prices are volatile and declines in prices or an extended period of depressed prices will materially adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments” and “Risk Factors—Risks Related to Our Business—Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.”

Certain Definitions

As used in this prospectus, unless otherwise noted or the context otherwise requires:

1P. The total amount of proved reserves.

2P. The total amount of proved and probable reserves.

3P. The total amount of proved, probable and possible reserves.

Areal extent. The areal extent of a hydrocarbon-bearing rock (expressed in acres).

Bbl. One stock tank barrel, 42 U.S. gallons liquid volume.

Boe. Barrels of oil equivalent. One Boe is equal to one Bbl, six thousand cubic feet of natural gas, or 42 gallons of natural gas liquids based on approximate energy equivalency.

Boe/d. Barrels of oil equivalent per day.

BOEM. The Bureau of Ocean Energy Management.

Brutus field. The Brutus field is comprised of the U.S. Gulf of Mexico Green Canyon Blocks 158 and 202.

BSEE. The Bureau of Safety and Environmental Enforcement.

Cognac field. The Cognac field is comprised of the U.S. Gulf of Mexico Mississippi Canyon Blocks 150, 151, 194 and 195.

Completion. The process of treating a drilled well followed by the installation of permanent equipment for the production of oil, natural gas or NGLs.

Condensate. Condensate is a mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure, but that, when produced, is in the liquid phase at surface pressure and temperature.

DD&A. Depreciation, depletion, and amortization.

Deepwater. Offshore areas characterized by water depths between 500 feet and 7,500 feet.

Developed acreage. The number of acres allocated or assignable to productive wells or wells capable of production.

Development costs. Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing the oil and natural gas.

 

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Development well. A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.

Drill well. A project to drill and complete a new wellbore for the purpose of producing oil and natural gas.

Dry hole. Exploratory or development well that does not produce oil and/or natural gas in economically producible quantities.

Exploratory well. A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir.

Field. An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition, or both.

Full cost method of accounting for oil and natural gas activities. Method of accounting used for oil and natural gas properties, in which all costs associated with exploring for, acquiring and developing oil and natural gas reserves are capitalized.

General and administrative expenses or G&A expenses. The costs incurred for overhead, including compensation, corporate headquarters, software, legal compliance costs and audit and other fees for professional services. Under the full cost method of accounting, the portion of G&A expenses related to acquisition, exploration and development activities are capitalized as oil and natural gas properties.

Glider field. The Glider field is comprised of the U.S. Gulf of Mexico Green Canyon Block 248.

Gross acres. The total acres in which a working interest is owned.

Henry Hub or HH. A widely used benchmark for the pricing of natural gas in the U.S.

Lease operating expenses or LOE. The costs incurred for operating wells and equipment on producing properties, many of which are recurring.

Lobster field. The Lobster field is comprised of the U.S. Gulf of Mexico Ewing Bank Blocks 873, 917 and 963.

MBbls. Thousand barrels of oil or other liquid hydrocarbons. Based on approximate energy equivalency, one MBoe is equal to one MBbl, six MMcf of natural gas, or 42 MGals of NGLs.

MBbls/d. Thousand barrels of oil or other liquid hydrocarbons per day.

MBoe. Thousand barrels of oil equivalent. Based on approximate energy equivalency, one MBoe is equal to one MBbl, six MMcf of natural gas, or 42 MGals of NGLs.

MBoe/d. Thousand barrels of oil equivalent per day.

Mcf. Thousand cubic feet of natural gas. Based on approximate energy equivalency, one MBoe is equal to one MBbl, six MMcf of natural gas, or 42 MGals of NGLs.

MGals. Thousand gallons. Typically used to measure natural gas liquids. Based on approximate energy equivalency, one MBoe is equal to one MBbl, six MMcf of natural gas, or 42 MGals of NGLs.

MMBbl. Million barrels of oil or other liquid hydrocarbons.

MMBoe. Million barrels of oil equivalent.

 

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MMBtu. Million British Thermal Units. One British Thermal Unit, or Btu, is the quantity of heat required to raise the temperature of a one-pound mass of water by one degree Fahrenheit.

MMcf. Million cubic feet of natural gas.

MMcf/d. Million cubic feet of natural gas per day.

Natural gas liquid(s) or NGL(s). Natural gas liquid or natural gas liquids, which are naturally occurring substances found in natural gas, including ethane, butane, isobutane, propane, and natural gasoline that can be collectively removed from produced natural gas, separated into these substances, and sold.

Net pay thickness. The vertical extent of the effective hydrocarbon-bearing rock (expressed in feet).

NYMEX. The New York Mercantile Exchange.

Petronius field. The Petronius field is comprised of the U.S. Gulf of Mexico Vioska Knoll Blocks 742, 786 and 830.

Plugging and abandonment or P&A. The process of sealing off wells, decommissioning platforms and abandoning pipelines.

Possible oil and natural gas reserves. Those additional oil and natural gas reserves that are less certain to be recovered than probable reserves. Refer to Rule 4-10(a)(17) of Regulation S-X as promulgated by the SEC for a complete definition of possible oil and natural gas reserves.

Probable oil and natural gas reserves. Those additional oil and natural gas reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered. Refer to Rule 4-10(a)(18) of Regulation S-X as promulgated by the SEC for a complete definition of probable oil and natural gas reserves.

Production infrastructure. Various platform, production facilities, and pipelines allowing for the development, production, and transportation of oil and natural gas.

Productive well. A well that is found to be capable of producing oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well.

Proved developed oil and natural gas reserves. Reserves which can be expected to be recovered from existing wells with existing equipment and operating methods. Refer to Rule 4-10(a)(6) of Regulation S-X as promulgated by the SEC for a complete definition of developed oil and natural gas reserves.

Proved oil and natural gas reserves. The quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs and under existing economic conditions, operating methods, and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Refer to Rule 4-10(a)(22) of Regulation S-X as promulgated by the SEC for a complete definition of proved oil and natural gas reserves.

Proved undeveloped oil and natural gas reserves or PUDs. 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. Refer to Rule 4-10(a)(31) of Regulation S-X as promulgated by the SEC for a complete definition of undeveloped oil and natural gas reserves.

 

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Recomplete. Recompletes or recompletion, which means the modification of an existing well for the purpose of producing natural gas and crude oil from a different producing formation.

Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil or natural gas, or both, that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

SEC pricing. The average oil and natural gas price calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the previous 12-month period under the pricing methodology required by the SEC.

Sidetrack. A secondary wellbore drilled away from the original hole.

Standardized measure of discounted future net cash flows relating to oil and natural gas reserves or Standardized Measure. The present value, discounted at 10%, of future net cash flows from estimated proved reserves calculated using a 12-month unweighted arithmetic average of the first-day-of-the-month price for each month in the period January through December (with consideration of price changes only to the extent provided by contractual arrangements). The estimated future net cash flows are reduced by projected future development, production (excluding DD&A and impairments of oil and natural gas properties), P&A costs and estimated future income tax expenses.

Ultra deepwater. Offshore areas characterized by water depths greater than 7,500 feet.

Undeveloped acreage. Leased acres on which wells have not been drilled or completed to a point that would permit the production of economic quantities of oil or natural gas regardless of whether such acreage contains proved reserves.

Unproved properties. Properties with no proved reserves.

West Texas Intermediate or WTI. A widely used benchmark in the pricing of domestic and imported oil in the U.S.

Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

Workover expense. The costs incurred in connection with major remedial operations on a completed well to restore, maintain or improve the well’s production.

 

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RISK FACTORS

An investment in our Class A common stock involves risk. You should carefully consider the following risks and all of the other information set forth in this prospectus, including “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes, before deciding to invest in shares of our Class A common stock. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer. However, the selected risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations. In any of such cases, the trading price of our Class A common stock could decline due to any of these risks, and you may lose all or part of your investment.

Risks Related to Our Business

Oil, natural gas and NGL prices are volatile and declines in prices or an extended period of depressed prices will materially adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments.

The prices we receive for our oil, natural gas and NGL production heavily influence our revenue, operating results, profitability, access to capital, future rate of growth and carrying value of our properties. Oil, natural gas and NGLs are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the commodities market has been volatile. This market will likely continue to be volatile in the future. The prices we receive for our production, and the levels of our production, depend on numerous factors beyond our control. These factors include the following:

 

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domestic, regional and worldwide economic conditions impacting the global supply and demand for oil, natural gas and NGLs;

 

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the price and quantity of foreign imports;

 

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political and economic conditions in or affecting other producing countries, including the Middle East, Africa, South America and Russia;

 

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the ability of members of the Organization of the Petroleum Exporting Countries (“OPEC”) to agree to and maintain oil price and production controls;

 

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the level of oil and natural gas global exploration and production;

 

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the level of global oil, natural gas and NGL inventories;

 

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prevailing prices on local price indexes in the areas in which we operate;

 

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the proximity, capacity, cost, and availability of gathering and transportation facilities;

 

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localized and global supply and demand fundamentals and transportation availability;

 

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the cost of exploring for, developing, producing and transporting reserves;

 

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weather conditions and natural disasters;

 

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technological advances affecting energy consumption;

 

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risks associated with operating, drilling and working over rigs;

 

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the price and availability of alternative fuels;

 

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the price and availability of competitors’ supplies of oil, natural gas and NGL;

 

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expectations about future commodity prices;

 

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potential changes in U.S. laws restricting oil exports; and

 

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domestic, local and foreign governmental regulation and taxes.

Since the second half of 2014, oil prices have declined significantly. After averaging approximately $90.00 per Bbl in 2014, NYMEX WTI crude oil prices declined to an average of approximately $43.00 per Bbl in 2016 and an average of approximately $50.00 per Bbl in 2017. NYMEX WTI crude oil prices reached a high above $76.00 per Bbl during the year ended December 31, 2018. The International Energy Agency (“IEA”) forecasts a steady or slightly increasing U.S. production growth and a slowdown in global demand growth for 2019. This environment could cause the prices for oil to remain at current levels or to fall to lower levels, though oil prices have increased somewhat from the lows of the first quarter of 2016. On December 31, 2014, the NYMEX HH price for natural gas was $3.14 per MMBtu. The NYMEX HH price for natural gas declined to an average approximately between $2.50 per MMBtu to $2.60 per MMBtu during 2015 and 2016 and an average of approximately $3.00 per MMBtu in 2017. The NYMEX HH price for natural gas reached a high above $4.80 per MMBtu during the year ended December 31, 2018. The reduction in prices has been caused by many factors, including increases in natural gas production and reserves from unconventional (shale) reservoirs, without an offsetting increase in demand or an expectation of increasing demand. The expected increase in natural gas production, based on reports from the IEA, could cause the prices for natural gas to remain at current levels or fall to lower levels.

Substantially all of our production is sold to purchasers at market-based prices. Lower oil, natural gas and NGL prices will reduce our cash flows, borrowing ability and the present value of our reserves. If oil, natural gas and NGL prices materially deteriorate, we anticipate that the revised borrowing base under our Revolving Credit Facility may be reduced as the borrowing base depends, in part, upon projected revenues from, and asset values of, the oil and natural gas properties securing the facility. Any such reduction to the borrowing base under our Revolving Credit Facility could impact our capital expenditures. For a discussion of our capital expenditure requirements, see “—Our exploitation, development and exploration projects require substantial capital expenditures. We may be unable to obtain required capital or financing on satisfactory terms, which could lead to a decline in our ability to access or grow reserves.”

In addition, lower oil, natural gas and NGL prices may also reduce the amount of oil, natural gas and NGLs that we can produce economically and may affect our proved reserves. Our estimated proved reserves as of December 31, 2018 and 2017 and related PV-10 and Standardized Measure of our proved reserves were calculated under SEC rules using 12-month trailing average benchmark prices based on WTI of $65.56 per Bbl and $51.34 per Bbl, respectively, and HH of $3.10 per MMBtu and $2.98 per MMBtu, respectively. On December 31, 2018 and 2017, the NYMEX WTI price for crude oil was $45.41 per Bbl and $60.42 per Bbl, respectively, and the NYMEX HH price for natural gas was $2.94 per MMBtu and $2.95 per MMBtu, respectively. Using lower prices in estimating our proved reserves would likely result in a reduction in proved reserve volumes due to economic limits, which would reduce the PV-10 and Standardized Measure of our proved reserves and could materially affect our business, financial condition and results of operations.

If oil, natural gas and NGL prices are depressed or decrease, we may be required to record write-downs of the carrying value of our oil and natural gas properties.

We follow the full cost method of accounting for our oil and natural gas properties. Under such method, the net book value of properties less related deferred income taxes, may not exceed a calculated “ceiling.” The ceiling is then estimated after tax future net revenues from proved oil and natural gas properties, discounted at 10% per year. Discounted future net revenues are estimated using oil, natural gas, and NGL prices based on the average price during the preceding 12-month period determined as an unweighted, arithmetic average of the first-day-of-the-month price for each month within such period, except for changes which are fixed and determinable by existing contracts. The net book value is compared to the ceiling on a quarterly basis. The excess, if any, of the net book value above the ceiling is required to be written off as an expense of impairments of oil and natural gas properties.

 

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For the years ended December 31, 2018 and 2017, we did not recognize a write-down of the carrying value of our oil and natural gas properties. Since the nature of our business is tied to the commodity price environment, reductions in oil, natural gas, and NGL prices could result in full cost ceiling impairments in future periods. Sustained low prices for oil and natural gas will negatively impact the value of our estimated proved reserves and reduce the amounts of cash we would otherwise have available to pay expenses and service any indebtedness that we may incur. Under the full cost accounting rules, any write-off recorded may not be reversed even if higher oil and natural gas prices increase the ceiling applicable to future periods. In addition, some of our undeveloped locations may no longer be economically viable.

Our derivative activities could result in financial losses or could reduce our earnings.

We have entered into derivative instrument contracts for a significant portion of our estimated production from our proved producing developed oil properties. Our Revolving Credit Facility required us to hedge a significant portion of our estimated production from our proved producing developed properties through 2020. We currently do not have any hedges in place for the second quarter of 2020 and beyond. Our earnings may fluctuate significantly as a result of changes in the fair value of such derivative instruments. Such derivative instruments are subject to the risks and uncertainties described in this prospectus under “Special Note Regarding Forward-Looking Statements.” The portion of our estimated production from our proved producing developed oil properties that are unhedged exposes us to commodity price risk. For a discussion of minimum hedge requirements under our credit facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk.”

Our earnings may fluctuate significantly as a result of changes in the fair values of our derivative instruments. Derivative instruments also expose us to the risk of financial loss in some circumstances, including when:

 

•

production is less than the volume covered by the derivative instruments;

 

•

the counterparty to the derivative instrument defaults on its contractual obligations;

 

•

there is an increase in the differential between the underlying price in the derivative instrument and actual prices received; or

 

•

there are issues with regard to legal enforceability of such instruments.

The use of derivatives may, in some cases, require the posting of cash collateral with counterparties. If we enter into derivative instruments that require cash collateral and commodity prices or interest rates change in a manner adverse to us, our cash otherwise available for use in our operations would be reduced which could limit our ability to make future capital expenditures and make payments on our indebtedness, and which could also limit the size of our borrowing base. Future collateral requirements will depend on arrangements with our counterparties, highly volatile oil and natural gas prices and interest rates.

As of December 31, 2018, the fair value of our commodity derivative contracts was a net asset of $32.3 million. During the year ended December 31, 2018, we recognized a gain of $11.0 million on our derivatives primarily due to a decrease in the future commodity price outlook relative to when our outstanding derivative contracts were entered into, offset by less favorable cash settlements on our derivative positions during the year ended December 31, 2018. Any default by the counterparties to our derivative contracts when they become due could have a material adverse effect on our business, financial condition and results of operations. In addition, derivative arrangements could limit the benefit we would receive from increases in the prices for oil and natural gas, which could also have a material adverse effect on our financial condition.

We may not be able to secure new hedging contracts for our future estimated production from our proved producing developed oil and natural gas properties after the termination of our current hedging contracts. Any future unhedged estimated production from our proved producing developed oil and natural gas properties may cause our earnings to decline significantly as a result of any decreases in the prices for oil and natural gas.

 

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Further, under the terms of our Revolving Credit Facility, the percentage of our total estimated production from our proved producing developed oil and natural gas properties with respect to which we are allowed to enter into derivative contracts is limited, particularly during hurricane season, and we therefore retain the risk of a price decrease for our remaining estimated production from our proved producing developed oil and natural gas properties.

We may be unable to make attractive acquisitions or successfully integrate acquired businesses or properties, and any inability to do so may hinder our ability to grow and could materially adversely affect our results of operations, financial position and cash flows.

We intend to grow our business through focused and strategic acquisitions designed to reduce the risk of underperformance on the acquired properties. Our acquisition strategy may fail to identify attractive acquisition opportunities that meet our target criteria for potential production improvements and field cost reductions. Even if we do identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms. Competition for acquisitions may also increase the cost of, or cause us to refrain from, completing acquisitions.

In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. No assurance can be given that we will be able to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets.

The successful acquisition of producing properties requires an assessment of several factors, including:

 

•

recoverable reserves;

 

•

future oil, natural gas and NGL prices and their applicable differentials;

 

•

operating costs; and

 

•

potential environmental and other liabilities.

The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations.

The success of any completed acquisition will depend on our ability to integrate effectively the acquired business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our business, financial condition and results of operations.

There can be no assurance that we will be able to fully realize the anticipated benefits of any future acquisitions. Achieving the benefits of any future acquisitions depends in part on successfully consolidating functions and integrating operations, procedures and personnel in a timely and efficient manner, as well as our ability to realize the anticipated growth opportunities and synergies from combining the acquired assets and operations with our current operations. Additionally, the integration of acquired assets or businesses requires the dedication of substantial management effort, time and resources which may divert management’s focus and

 

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resources from other strategic opportunities and from operational matters during this process. The integration process may result in the loss of key employees and the disruption of ongoing business, customer and employee relationships that may adversely affect our ability to achieve the anticipated benefits of the acquisitions. Furthermore, consummated acquisitions may in fact result in an increase in G&A expenses, capital expenditures and operating expenses and a corresponding decrease in cash flows.

We may incur losses as a result of title defects in the properties in which we invest.

The existence of a material title deficiency can render a lease worthless and can adversely affect our business, financial condition and results of operations. While we typically review title searches and sometimes obtain title opinions prior to acquiring leases or commencing drilling operations on a lease or in a unit, the failure of title may not be discovered until a well is drilled, in which case we may lose the lease and the right to produce all or a portion of the minerals under the property.

Our exploitation, development and exploration projects require substantial capital expenditures. We may be unable to obtain required capital or financing on satisfactory terms, which could lead to a decline in our ability to access or grow reserves.

The oil and natural gas industry is capital intensive. We make, and expect to continue to make, substantial capital expenditures for the exploitation, development and exploration of oil and natural gas reserves, and our capital expenditures have historically exceeded cash generated by our operations in a given period. We expect to fund 2019 capital expenditures with cash on hand and cash generated by operations, based on current commodity prices. The actual amount and timing of our future capital expenditures may differ materially from our estimates as a result of, among other things, oil, natural gas and NGL prices; actual drilling results; the availability of services and equipment; and regulatory, technological and competitive developments. A reduction in commodity prices from current levels may result in a decrease in our actual capital expenditures, which would negatively impact our ability to grow production. We intend to finance our near-term capital expenditures primarily through cash flow from operations; however, our financing needs may require us to draw on our Revolving Credit Facility or alter or increase our capitalization substantially through the issuance of debt or equity securities or the sale of assets. The issuance of additional indebtedness would require that a portion of our cash flow from operations be used for the payment of interest and principal on our indebtedness, thereby reducing our ability to use cash flow from operations to fund working capital, capital expenditures and acquisitions.

Our cash flow from operations and access to capital are subject to a number of variables, including:

 

•

our proved reserves;

 

•

the level of hydrocarbons we are able to produce from existing wells;

 

•

the prices at which our production is sold;

 

•

the level of our operating expenses;

 

•

our ability to acquire, locate and produce new reserves; and

 

•

our ability to borrow under our Revolving Credit Facility.

If our revenues or the borrowing base under our Revolving Credit Facility decrease as a result of lower oil, natural gas and NGL prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels. If additional capital is needed, we may not be able to obtain debt or equity financing on terms acceptable to us, if at all. If cash flow generated by our operations or available borrowings under our Revolving Credit Facility are not sufficient to meet our capital requirements, the failure to obtain additional financing could result in a curtailment of our operations relating to development of our properties, which in turn could lead to a decline in our reserves and production, and could adversely affect our business, financial condition and results of operations. For a discussion on the risks of incurring substantial indebtedness, see “—Our indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.”

 

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Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could result in a total loss of investment or otherwise materially adversely affect our business, financial condition or results of operations.

Our future business, financial condition and results of operations will depend on the success of our exploitation, development and exploration activities, which are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable hydrocarbons production, including dry holes, that we will not recover all or any portion of our investment in such wells or that various characteristics of such wells will cause us to plug or abandon such wells prior to their producing in commercially viable quantities.

Our decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. For a discussion of the uncertainty involved in these processes, see “—Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.” In addition, our cost of drilling, completing and operating wells is often uncertain.

Further, many factors may curtail, delay or cancel our scheduled drilling projects, including the following:

 

•

delays or restrictions imposed by or resulting from compliance with regulatory requirements including limitations resulting from wastewater disposal and discharge of greenhouse gases;

 

•

pressure or irregularities in geological formations;

 

•

loss of control or equipment malfunctions;

 

•

shortages of or delays in obtaining equipment and qualified personnel;

 

•

equipment failures, accidents or other unexpected operational events;

 

•

lack of available gathering facilities or delays in construction of gathering facilities;

 

•

lack of available capacity on interconnecting transmission pipelines;

 

•

adverse weather conditions, including hurricanes and tropical storms;

 

•

issues related to compliance with environmental and other governmental regulations;

 

•

environmental hazards, such as oil and natural gas leaks, oil spills, pipeline and tank ruptures, encountering naturally occurring radioactive materials, releases of well stimulation and completion fluids, toxic gases or other pollutants into the surface and subsurface environment;

 

•

declines in oil, natural gas, and NGL prices;

 

•

limited availability of financing at acceptable terms;

 

•

title issues; and

 

•

limitations in the market for oil and natural gas.

These risks may cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination or loss of wells and other regulatory penalties, any of which could materially adversely affect our business, financial condition and results of operations.

Furthermore, the marketability of expected oil and natural gas production from our discoveries and prospects will also be affected by numerous factors. These factors include, but are not limited to, market fluctuations of prices (such as significant declines in oil prices), proximity, capacity and availability of drilling

 

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rigs and related equipment, qualified personnel and support vessels, processing facilities, transportation vehicles and pipelines, equipment availability, access to markets and government regulations (including, without limitation, regulations relating to prices, taxes, royalties, allowable production, domestic supply requirements, importing and exporting of oil and natural gas, the ability to flare or vent natural gas, environmental protection and climate change). The effect of these factors, individually or jointly, may result in us not receiving an adequate return on invested capital.

Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.

The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to current and future economic conditions and commodity prices. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of our reserves.

In order to prepare reserve estimates, including those in our third party reserve engineer reserve estimates presented herein, we must project production rates and timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as oil, natural gas and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds.

Actual future production, oil, natural gas, and NGL prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves will vary from our estimates, including those included in our December 31, 2018 and 2017 reserve reports prepared by NSAI. Any significant variance from the above assumptions could materially affect the estimated quantities and present value of our reserves. For instance, initial production rates reported by us or other operators may not be indicative of future or long-term production rates, our recovery efficiencies may be worse than expected, and production declines may be greater than we estimate and may be rapid and irregular when compared to initial production rates. In addition, we may adjust reserve estimates to reflect production history, results of exploration and development, existing commodity prices and other factors, many of which are beyond our control.

You should not assume that the present value of future net revenues from our reserves is the current market value of our estimated reserves. We generally base the estimated discounted future net cash flows from reserves on prices and costs on the date of the estimate. Actual future prices and costs may differ materially from those used in the present value estimate. A material and adverse variance of actual production, revenues and expenditures from those underlying reserve estimates would have a material adverse effect on our business, financial condition and results of operations.

The net production estimates and forecasts for our capital programs may differ materially from the actual amounts.

The production estimates with respect to our capital programs described in this prospectus are based on our analysis of historical production data, assumptions regarding capital expenditures and anticipated production declines. These estimates of reserves and production are based on estimates of our engineers without review by an independent reserve engineering firm. We cannot assure you that these estimates of production are accurate and the actual production related to our capital programs may differ materially from the amounts indicated in this prospectus.

The present value of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated oil and natural gas reserves.

The present value of future net cash flows from our proved reserves is referred to as the Standardized Measure, which is a reporting convention that provides a common basis for comparing oil and natural gas

 

31

companies subject to the rules and regulations of the SEC. Standardized Measure requires the use of specific pricing as required by the SEC as well as operating and development costs prevailing as of the date of computation. Consequently, it may not reflect the prices ordinarily received or that will be received for oil, natural gas, and NGL production because of varying market conditions, nor may it reflect the actual costs that will be required to produce or develop the oil and natural gas properties. Accordingly, estimates included herein of future net cash flow may be materially different from the future net cash flows that are ultimately received. Therefore, the Standardized Measure of our estimated reserves included in this prospectus should not be construed as accurate estimates of the current fair value of our proved reserves.

Unless we replace our reserves with new reserves and develop those reserves, our reserves and production will decline, which would adversely affect our future cash flows and results of operations.

Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Unless we conduct successful ongoing exploitation, development and exploration activities or continually acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Our future reserves and production, and therefore our future cash flow and results of operations, are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. We may not be able to develop, exploit, find or acquire sufficient additional reserves to replace our current and future production. If we are unable to replace our current and future production, the value of our reserves will decrease, and our business, financial condition and results of operations would be materially and adversely affected.

Relatively short production periods or reserve lives for some U.S. Gulf of Mexico properties subject us to higher reserve replacement needs and may impair our ability to reduce production during periods of low oil, natural gas and NGL prices.

High production rates can result in the recovery of a relatively higher percentage of booked reserves from properties in the U.S. Gulf of Mexico during the initial few years when compared to onshore regions in the U.S. Due to high initial production rates, production of booked reserves from reservoirs in the U.S. Gulf of Mexico can decline more rapidly than from other producing reservoirs. Nearly all of our existing operations are in the U.S. Gulf of Mexico or directly support our U.S. Gulf of Mexico operations. As a result, our reserve replacement needs from new prospects may be greater than those of other oil and natural gas companies with longer-life reserves in other producing areas. Also, our expected revenues and return on capital will depend on prices prevailing during what can be relatively short production periods. Our need to generate revenues to fund ongoing capital commitments or repay outstanding indebtedness may limit our ability to slow or shut in production from producing wells during periods of low prices for oil, natural gas, and NGLs.

Properties that we decide to drill may not yield oil or natural gas in commercially viable quantities.

Properties that we decide to drill that do not yield oil or natural gas in commercially viable quantities will materially adversely affect our business, financial condition and results of operations. There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or natural gas in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercially viable quantities. We cannot assure you that the analogies we draw from available data from other wells or more fully explored or producing prospects will be applicable to our drilling prospects. In addition, the wells that are profitable may not meet our internal return targets, which are dependent upon the current and expected future market prices for oil, natural gas and NGLs, expected costs associated with producing oil, natural gas and NGLs and our ability to add reserves at an acceptable cost. Further, our drilling operations may be curtailed, delayed or canceled as a result of numerous factors. See “—Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could result in a total loss of investment or otherwise materially adversely affect our business, financial condition or results of operations.”

 

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Our identified potential drilling locations, which are scheduled out over many years, are susceptible to uncertainties that could materially alter the occurrence or timing of their drilling.

Our identified potential drilling locations, including those without associated proved undeveloped reserves, represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including the availability of capital, construction of infrastructure, inclement weather, regulatory approvals, commodity prices, lease expirations, our ability to secure rights to drill at deeper formations, costs and drilling results.

Further, our identified potential drilling locations are in various stages of evaluation, ranging from locations that are ready to drill to locations that will require substantial additional analysis of data. We cannot predict in advance of drilling and testing whether any particular drilling location will yield oil or natural gas reserves in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of technology and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas reserves will be present or, if present, whether oil or natural gas reserves will be present in sufficient quantities to be economically viable. Even if sufficient amounts of oil or natural gas reserves exist, we may damage the potentially productive hydrocarbon bearing formation or experience mechanical difficulties while drilling or completing the well, possibly resulting in a reduction in production from the well or abandonment of the well. If we drill dry holes in our current and future drilling locations, our drilling success rate will decline and may materially harm our business. The analogies we draw from available data from other wells, more fully explored locations or producing fields may not be applicable to our drilling locations.

Further, initial production rates reported by us or other operators in the areas in which we operate may not be indicative of future or long-term production rates. Of these uncertainties, we do not know if the potential drilling locations we have identified will ever be drilled or if we will be able to produce oil or natural gas reserves from these or any other potential drilling locations. As such, our actual drilling activities may materially differ from those presently identified, which could adversely affect our business, financial condition and results of operations.

The development of our estimated proved undeveloped reserves may take longer and may require higher levels of capital expenditures than we currently anticipate. Therefore, our estimated proved undeveloped reserves may not be ultimately developed or produced.

As of December 31, 2018, approximately 26% of our total estimated proved reserves were classified as proved undeveloped and were estimated to require approximately $259.4 million of future development costs. Development of these undeveloped reserves may take longer and require higher levels of capital expenditures than we currently anticipate. Delays in the development of our reserves, increases in costs to drill and develop such reserves or decreases in commodity prices will reduce the value of our estimated proved undeveloped reserves and future net revenues estimated for such reserves and may result in some projects becoming uneconomic. In addition, delays in the development of reserves could cause us to have to reclassify our proved undeveloped reserves as unproved reserves. Further, we may be required to write down our proved undeveloped reserves if we do not drill those wells within five years after their respective dates of booking. Our probable and possible undeveloped reserves primarily represent incremental production volumes in excess of volumes considered proved based on the rules and regulations of the SEC. Due to the nature of our probable and possible undeveloped reserves, there are not significant future development costs associated with our probable or possible undeveloped reserves. Although we intend to fund the future development costs associated with our proved, probable and possible undeveloped reserves with cash on hand and cash generated by operations, based on current commodity prices, there is no certainty such cash on hand and cash generated by operations will be sufficient to fund the required future development costs. A reduction in commodity prices from current levels may result in a decrease in our actual capital expenditures, which would negatively impact our ability to grow production. Furthermore, the actual costs to develop our proved, probable and possible undeveloped reserves may be materially greater than what we currently estimate. intend to fund the future development costs

 

33

associated with our proved, probable and possible undeveloped reserves with cash on hand and cash generated by operations, based on current commodity prices, there is no certainty such cash on hand and cash generated by operations will be sufficient to fund the required future development costs. A reduction in commodity prices from current levels may result in a decrease in our actual capital expenditures, which would negatively impact our ability to grow production. Furthermore, the actual costs to develop our proved, probable and possible undeveloped reserves may be materially more than what we currently estimate.

Our indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.

As of December 31, 2018, we had $325.0 million of aggregate principal amount of 2023 Notes outstanding, no outstanding borrowings and availability of $321.4 million under our Revolving Credit Facility (after giving effect to $3.6 million of outstanding letters of credit), subject to the borrowing base of $400.0 million and total elected commitments of $325.0 million. Because our borrowing capacity under the Revolving Credit Facility depends, in part, upon projected revenues from, and asset values of, the oil and natural gas properties securing the facility, which fluctuates from time to time, the availability under the Revolving Credit Facility also fluctuates from time to time. See “Management’s Discussion and Analysis of Financial Condition—Liquidity and Capital Resources—Other Significant Sources of Liquidity—Revolving Credit Facility.”

Subject to the limits contained in the credit agreement governing the Revolving Credit Facility and the indenture governing the 2023 Notes, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions or for other purposes. If we do so, the risks related to our level of debt could intensify.

Our consolidated indebtedness could have important consequences, including but not limited to the following:

 

•

making it more difficult for us to satisfy our obligations with respect to our existing indebtedness;

 

•

it may limit our flexibility in planning for, or reacting to, changes in our operations or business;

 

•

it may make us more vulnerable to downturns in our business or in the economy;

 

•

a significant portion of our cash flows from operations will be dedicated to the repayment of our indebtedness and will not be available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

•

it may restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities;

 

•

it may adversely affect terms under which suppliers provide material and services to us; and

 

•

it may limit our ability to borrow additional funds or dispose of assets.

In addition, the indenture governing the 2023 Notes and the credit agreement governing the Revolving Credit Facility each contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest.

There would be a material adverse effect on our business, financial condition and results of operations if we were unable to service our indebtedness or obtain additional financing, as needed.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under applicable debt instruments, which may not be successful.

Our ability to make scheduled payments on or to refinance our indebtedness obligations, including the Revolving Credit Facility and the 2023 Notes, depends on our financial condition and operating performance,

 

34

which are subject to prevailing economic and competitive conditions and certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund debt service obligations, we may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital or restructure or refinance indebtedness. Our ability to restructure or refinance indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of sufficient cash flows and capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet debt service and other obligations. The credit agreement governing the Revolving Credit Facility and the indenture governing the 2023 Notes restrict our ability to dispose of assets and our use of the proceeds from such disposition. We may not be able to consummate those dispositions, and the proceeds of any such disposition may not be adequate to meet any debt service obligations then due.

If we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the Revolving Credit Facility and the 2023 Notes, which would allow our creditors at that time to declare all outstanding indebtedness to be due and payable. Under these circumstances, our lenders and creditors could compel us to apply all of our available cash to repay our borrowings. In addition, the lenders under the Revolving Credit Facility and the holders of the 2023 Notes could seek to foreclose on our assets that constitute their collateral. If the amounts outstanding under our indebtedness were to be accelerated, or were the subject of foreclosure actions, our assets may not be sufficient to repay in full the money owed to the lenders, and such payment acceleration would have a material adverse effect on our liquidity, business and financial condition.

Restrictions in our existing and future debt agreements could limit our growth and our ability to engage in certain activities.

The credit agreement governing the Revolving Credit Facility and the indenture governing the 2023 Notes each contain, a number of significant covenants, including restrictive covenants that may limit our ability to, among other things:

 

•

incur additional indebtedness and guarantee indebtedness;

 

•

pay dividends or make other distributions on, or redeem or repurchase, capital stock and make other restricted payments;

 

•

prepay, redeem or repurchase certain debt;

 

•

issue certain preferred stock or similar equity securities;

 

•

make loans or investments;

 

•

consummate certain asset sales;

 

•

engage in transactions with affiliates;

 

•

grant or assume liens;

 

•

alter the businesses we conduct;

 

•

enter into agreements restricting our subsidiaries’ ability to pay dividends; and

 

•

consolidate, merge or transfer all or substantially all of our assets.

 

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In addition, the credit agreement governing the Revolving Credit Facility and the indenture governing the 2023 Notes require us to maintain certain financial ratios or to reduce our indebtedness if we are unable to comply with such ratios. These restrictions may also limit our ability to obtain future financings to withstand a future downturn in our business or the economy in general, or to otherwise conduct necessary corporate activities. We may also be prevented from taking advantage of business opportunities that arise because of such limitations.

A default, if not waived, could result in acceleration of the indebtedness outstanding under the Revolving Credit Facility and the 2023 Notes and in a default with respect to, and an acceleration of, the indebtedness outstanding under any other debt agreements. The accelerated indebtedness would become immediately due and payable and could result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. If that occurs, we may not be able to make all of the required payments or borrow sufficient funds to refinance such indebtedness. Even if new financing were available at that time, it may not be on terms that are acceptable to us. Furthermore, if we were unable to repay the amounts due and payable under the Revolving Credit Facility or the 2023 Notes, those lenders or noteholders could proceed against the collateral granted to them to secure such indebtedness.

We are currently dependent on Shell for a substantial majority of our revenues. Therefore, we are indirectly subject to the business risks of Shell. We have no control over Shell’s business decisions and operations, and Shell is under no obligation to adopt a business strategy that favors us.

We typically sell our production to a relatively small number of customers, as is customary in the exploration, development and production business. Historically, we have sold a large portion of our oil production to Shell. For the years ended December 31, 2018 and 2017, sales to Shell accounted for approximately 86% and approximately 85% of our total revenue, respectively. See “Notes to Consolidated Financial Statements—Note 10—Related Party Transactions” for further discussion of our relationship with Shell as of and for the years ended December 31, 2018 and 2017.

We expect to derive a substantial majority of our revenues from Shell for the foreseeable future. Therefore, any event, whether in our area of operations or otherwise, that adversely affects Shell’s financial condition, leverage, results of operations or cash flows may materially and adversely affect our revenues. Accordingly, we are indirectly subject to the business risks of Shell, some of which are the following:

 

•

the volatility of oil and natural gas prices, which could have a negative effect on its ability to purchase and sell oil and natural gas or its ability to finance its operations;

 

•

the availability of capital on an economic basis to fund its trading activities;

 

•

its operating risks, including potential environmental liabilities;

 

•

transportation capacity constraints and interruptions;

 

•

adverse effects of governmental and environmental regulation; and

 

•

losses from pending or future litigation.

Our use of seismic data is subject to interpretation and may not accurately identify the presence of oil and natural gas, which could adversely affect the results of our drilling operations.

Even when properly used and interpreted, 2-D and 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. In addition, the use of 3-D seismic and other advanced technologies requires greater predrilling expenditures than traditional drilling strategies, and we could incur losses as a result of such expenditures. As a result, our drilling activities may not be successful or economical.

 

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Our use of seismic data is subject to the terms of various non-exclusive license agreements and changes to our corporate structure and ownership may affect our rights under those agreements.

Our 3-D seismic license agreements are non-exclusive, industry-standard agreements. Accordingly, the licensor of such seismic data has the right to license the same data to our competitors, which could adversely affect our acquisition strategy and the execution of our business plan. We are also not authorized to assign any of our rights under our license agreements, including in a transaction with a potential joint venture partner or acquirer, without complying with the terms of the license agreements and a payment to the licensor (by us or by the acquirer in the event of a change of control transaction or our partner in a joint venture transaction).

Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits.

Our operations are subject to all of the hazards and operating risks associated with drilling for and production of oil and natural gas, including the risk of fire, explosions, blowouts, surface cratering, uncontrollable flows of natural gas, oil and formation water, pipe or pipeline failures, collisions with other vessels, abnormally pressured formations, casing collapses and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases, as well as natural disasters such as currents and hurricanes. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, suspension of operations and repairs to resume operations.

Our operations in the U.S. Gulf of Mexico and Gulf Coast region are particularly susceptible to interruption and damage from hurricanes. Any of these operating hazards could cause personal injuries, fatalities, oil spills, discharge of hazardous substances into the air and water or environmental damage, lost production and revenue, remediation and clean-up costs and liability for damages, all of which could adversely affect our business, financial condition and results of operations and may not be fully covered by our insurance.

We endeavor to contractually allocate potential liabilities and risks between us and the parties that provide us with services and goods. Under our agreements with our vendors, to the extent responsibility for environmental liability is allocated between the parties, each party typically assumes all responsibility for control and removal of pollution or contamination which arises out of, is related to, incident to, connected with or results from its performance of its obligations under such agreements, regardless of the source of such pollution. Nevertheless, vendors often seek to alter this basic allocation of pollution risk so that (i) our vendors generally assume all responsibility for control and removal of pollution or contamination which is directly associated with such vendors’ equipment while in their control or for pollution or contamination that occurs above the surface of the water and (ii) we generally assume the responsibility for control and removal of all other pollution or contamination which may occur during our operations, including pre-existing pollution and pollution which may result from fire, blowout, cratering, seepage or any other uncontrolled flow of oil, natural gas or other substances, as well as the use or disposition of all drilling fluids. In addition, we generally employ a knock-for-knock indemnity for equipment and property, but in some instances, when appropriate for the applicable vendor, we agree to indemnify our vendors for loss or destruction of vendor-owned property that occurs in the wellbore and for loss of rental equipment while in our care, custody and control. However, despite this general allocation of risk, we might not succeed in enforcing such contractual allocation, might incur an unforeseen liability falling outside the scope of such allocation or may be required to enter into contractual arrangements with terms that vary from the above allocations of risk. As a result, we may incur substantial losses which could materially adversely affect our business, financial condition and results of operations.

In accordance with what we believe to be customary industry practice, we maintain insurance against most, but not all, of our business risks. Our insurance may not be adequate to cover all losses or liabilities we may suffer. We do not insure against business interruption. Also, in the future, insurance may no longer be available

 

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to us or, if it is, its availability may be at costs that do not justify its purchase. Available forms of business interruption insurance that insure against potential lost or delayed production and related cost flow are cost prohibitive for us. The occurrence of a significant uninsured claim, a claim in excess of insurance coverage limits or a claim at a time when we are not able to or choose not to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flows. In addition, we may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might adversely impact our financial condition. We may also be liable for environmental damages caused by previous owners of properties purchased or acquired by us, for which liabilities may not be covered by insurance.

We maintain insurance against claims made for bodily injury, property damage and clean-up costs stemming from a sudden and accidental pollution event. However, we may not have coverage if we are unaware of the pollution event and unable to report the “occurrence” to our insurance company within the time frame required under our insurance policy. We have no coverage for gradual, long-term pollution events. In addition, these policies do not provide coverage for all liabilities, the insurance coverage may not be adequate to cover claims that may arise and we may not be able to maintain adequate insurance at rates we consider reasonable. We may elect not to obtain insurance for any or all of these risks if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. A loss not fully covered by insurance could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Business—Operational Hazards and Insurance.”

Our offshore operations involve special risks that could affect operations adversely.

Offshore operations are subject to a variety of operating risks specific to the marine environment, such as capsizing, collisions and damage or loss from hurricanes or other adverse weather conditions. These conditions can cause substantial damage to facilities and interrupt production. As a result, we could incur substantial liabilities that could reduce or eliminate the funds available for exploration, development or acquisitions, or result in loss of equipment and properties. In particular, we do not intend to put in place business interruption insurance due to its high cost. We therefore may not be able to rely on insurance coverage in the event of such natural phenomena.

In addition, an oil spill on or related to our properties and operations could expose us to joint and several strict liability, without regard to fault, under applicable law for all containment and oil removal costs and a variety of public and private damages including, but not limited to, the costs of responding to a release of oil, natural resource damages, and economic damages suffered by persons adversely affected by an oil spill. If an oil discharge or substantial threat of discharge were to occur, we may be liable for costs and damages, which could be material to our results of operations and financial position.

Our operations may be materially adversely affected by tropical storms and hurricanes.

Tropical storms, hurricanes and the threat of tropical storms and hurricanes often result in the shutdown of operations in the U.S. Gulf of Mexico as well as operations within the path and the projected path of the tropical storms or hurricanes. In addition, climate change could result in an increase in the frequency and severity of tropical storms, hurricanes or other extreme weather events. Recent weather events, such as Hurricane Harvey in 2017 and Hurricane Michael in 2018, caused significant disruption to the operations of offshore and coastal facilities in the U.S. Gulf of Mexico region. In the future, during a shutdown period, we may be unable to access wellsites and our services may be shut down. Additionally, tropical storms or hurricanes may cause evacuation of personnel and damage to our platforms and other equipment, which may result in suspension of our operations. The shutdowns, related evacuations and damage can create unpredictability in activity and utilization rates, as well as delays and cost overruns, which could have a material adverse effect on our business, financial condition and results of operations.

 

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The geographic concentration of our properties in the U.S. Gulf of Mexico subjects us to an increased risk of loss of revenues or curtailment of production from factors affecting the U.S. Gulf of Mexico specifically.

The geographic concentration of our properties in the deepwater of the U.S. Gulf of Mexico means that some or all of our properties could be affected by the same event should the U.S. Gulf of Mexico experience:

 

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severe weather, including hurricanes and tropical storms;

 

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delays or decreases in production, the availability of equipment, facilities or services;

 

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changes in the status of pipelines that we depend on for transportation of our production to marketplace;

 

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delays or decreases in the availability of capacity to transport, gather or process production; or

 

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changes in the regulatory environment.

In addition, as of December 31, 2018, our top five fields constituted approximately 79% of our proved reserves, which may exacerbate the risks set forth above. Because a substantial portion of our properties could experience the same adverse condition at the same time, these conditions could have a relatively greater impact on our results of operations than they might have on other operators who have properties over a wider geographic area and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Conservation measures and technological advances could reduce demand for oil and natural gas.

Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Competition in the oil and natural gas industry is intense, making it more difficult for us to acquire properties, market oil or natural gas and secure trained personnel.

Many of our larger competitors not only explore for and produce oil, natural gas, and NGLs, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. There is substantial competition for investment capital in the oil and natural gas industry and many of our competitors have access to capital at a lower cost than that available to us. These companies may be able to pay more for productive oil and natural gas properties and exploratory prospects or to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial, technical or personnel resources permit. These larger companies may have a greater ability to continue exploration activities during periods of low oil, natural gas, and NGL prices and to absorb the burden of existing, and any changes to, federal, state, local and other laws and regulations more easily than we can. Furthermore, we may not be able to aggregate sufficient quantities of production to compete with larger companies that are able to sell greater volumes of production to intermediaries, thereby reducing the realized prices attributable to our production. Any inability to compete effectively with larger companies could have a material adverse effect on our business, financial condition and results of operations. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours. In addition, other companies may be able to offer better compensation packages to attract and retain qualified personnel than we are able to offer. The cost to attract and retain qualified personnel has increased in recent years due to competition and may increase substantially in the future. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, raising additional capital and attracting and retaining quality personnel, which could have a material adverse effect on our business, financial condition and results of operations.

 

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The marketability of our production is dependent upon transportation and other facilities, certain of which we do not control. If these facilities are unavailable or there are changes in or challenges to our rates and other terms and conditions of service, our operations could be interrupted and our revenues reduced.

The marketability of our oil, natural gas, and NGL production depends in part upon the availability, proximity and capacity of transportation facilities owned by third parties. Our share of oil, natural gas, and NGL production from our properties is sold under a series of arm’s length contracts awarded on a competitive bid basis or entered into following negotiations. Oil is sold directly to companies with refineries in the Gulf Coast regions of Texas and Louisiana at prices based on widely-used industry benchmarks. Gas is processed in one of nine large onshore gas plants, where we are paid our contractual share of revenues from the sale of natural gas. We sell our residue gas to a purchaser who delivers to various industrial and energy markets as well as intrastate and interstate pipeline systems.

We use a series of pipelines, most of which are not ours, to transport our oil, natural gas, and NGL production from our offshore platforms to shore. These movements are made under a combination of transportation contracts and tariffs, in some instances, subject to regulation by the Federal Energy Regulatory Commission (“FERC”). Natural disasters or other operational situations beyond our control could result in increased transportation costs to us or require us to find transportation alternatives. Such circumstances may also cause us to involuntarily curtail our production.

There are a limited number of alternative methods of transportation for our offshore production. Since a substantial portion of our oil, natural gas, and NGL production is transported by pipelines owned by third parties, the inability or unwillingness of these parties to provide transportation services to us for a reasonable fee could result in us having to find transportation alternatives, increased transportation costs or involuntary curtailment of a significant portion of our oil, natural gas, and NGL production which could have a material adverse effect on our results of operations and cash flows.

The rates charged on certain of these pipeline systems are regulated by the FERC or state regulatory agencies, or both. These regulatory agencies also regulate other terms and conditions of the services these pipeline systems provide, including the types of services offered. If one of these regulatory agencies, on its own initiative or in response to a request by the pipeline owner, pipeline operator or a third party, were to alter the tariff rates or make any other material changes to the types or terms and conditions of services available to us, the cost of transporting our oil, natural gas, and NGLs could increase. Furthermore, the regulatory agencies that regulate pipeline systems periodically implement new rules, regulations and terms and conditions of services subject to their jurisdiction. New initiatives or orders may adversely affect the rates we charge or pay for pipeline services, or otherwise materially adversely affect our business, financial condition, results of operations and cash flows.

We are, in part, dependent on third-party operators who influence our productivity.

With respect to oil and natural gas projects that we do not operate, we have limited influence over operations, including limited control over the maintenance of safety and environmental standards. The operators of those properties may, depending on the terms of the applicable joint operating agreement:

 

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refuse to initiate exploration or development projects;

 

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initiate exploration or development projects on a slower or faster schedule than we would prefer;

 

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delay the pace of exploratory drilling or development; and/or

 

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drill more wells or build more facilities on a project than we can afford, whether on a cash basis or through financing, which may limit our participation in those projects or limit the percentage of our revenues from those projects.

The occurrence of any of the foregoing events could have a material adverse effect on our anticipated exploration and development activities.

 

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The unavailability or high cost of additional drilling rigs, equipment, supplies, personnel and oilfield services could materially affect our ability to execute our exploitation and development plans within our budget and on a timely basis.

The demand for qualified and experienced field personnel to drill wells and conduct field operations, geologists, geophysicists, engineers and other professionals in the oil and natural gas industry can fluctuate significantly, often in correlation with oil, natural gas, and NGL prices, causing periodic shortages. Historically, there have been shortages of drilling and workover rigs, pipe and other equipment as demand for rigs and equipment has increased along with the number of wells being drilled. We cannot predict whether these conditions will exist in the future and, if so, what their timing and duration will be. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, we may not be able to drill all of our acreage before our leases expire. Equipment shortages could delay or cause us to incur significant expenditures that are not provided for in our capital budget, which could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to keep pace with technological developments in our industry.

The oil and natural gas industry is characterized by rapid and significant technological advancements and introductions of new products and services using new technologies. As others use or develop new technologies, we may be placed at a competitive disadvantage or may be forced by competitive pressures to implement those new technologies at substantial costs. In addition, other oil and natural gas companies may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and that may in the future allow them to implement new technologies before we can. We may not be able to respond to these competitive pressures or implement new technologies on a timely basis or at an acceptable cost. If one or more of the technologies we use now or in the future were to become obsolete, our business, financial condition and results of operations could be materially adversely affected.

Our operations are subject to complex laws and regulations, including evolving environmental and occupational health and safety laws and regulations. These laws and regulations could adversely affect the manner or feasibility of conducting our operations. Additionally, we may incur significant delays, costs and liabilities that could have a material adverse effect on our business, financial condition and results of operations.

Our oil and natural gas exploitation, production and transportation operations are subject to complex and stringent laws and regulations. In order to conduct our operations in compliance with these laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various federal, state and local governmental authorities. We may incur substantial costs in order to maintain compliance with these existing laws and regulations. Failure to comply with these laws and regulations may also result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties, including the assessment of natural resource damages, as well as injunctions limiting or prohibiting our activities. These regulations could also change to our detriment. Our costs of compliance may increase if existing laws and regulations are revised or reinterpreted, or if new laws and regulations become applicable to our operations. Such costs could have a material adverse effect on our business, financial condition and results of operations.

We may incur significant delays, costs and liabilities as a result of environmental and occupational health and safety laws and regulations applicable to our exploitation, development and production activities. These delays, costs and liabilities could arise under a wide range of federal, regional, state and local laws and regulations relating to the generation, transportation and disposal of hazardous substances, waste disposal, air emissions, water discharges, remediation, restoration and reclamation of environmental contamination, including oil spill cleanup and well plugging and abandonment requirements, protection of endangered and other protected species, and related matters. We are also subject to extensive regulation of worker health and safety. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal

 

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penalties, imposition of cleanup and site restoration costs and liens, and, in some instances, issuance of orders or injunctions limiting or requiring discontinuation of certain operations.

Strict, joint and several liabilities may be imposed under certain environmental laws, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons or property, including natural resources, may result from the environmental and worker health and safety impacts of our operations. We have been named from time to time as a defendant in litigation related to such matters. Also, new laws, regulations or enforcement policies could be more stringent and impose unforeseen liabilities, significantly increase our operating or compliance costs, reduce our liquidity, delay or halt our operations or otherwise alter the way we conduct our business. If we are not able to recover the resulting costs through insurance or increased revenues, our business, financial condition or results of operations could be materially and adversely affected. See “Business—Regulation of the Oil and Natural Gas Industry—Environmental Regulations and Worker Health and Safety” for a further description of laws and regulations that affect us.

Environmental liabilities could adversely affect our business, financial condition and results of operations.

Environmental liabilities, including those related to our recent environmental investigation, could adversely affect our business, financial condition and results of operations. The oil and natural gas business is subject to environmental hazards, such as oil spills, gas leaks, ruptures, fires and discharges of petroleum products and hazardous and other substances and historical disposal activities. These environmental hazards could expose us to material liabilities, such as for property damages, personal injuries, criminal fines and penalties or environmental remediation measures, including costs of investigating and remediating contaminated properties. We also may be liable for environmental damages caused by the previous owners or operators of properties we have purchased or are currently operating. A variety of stringent federal, state and local laws and regulations govern the environmental aspects of our business and impose strict requirements for, among other things:

 

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well drilling or workover, operation and abandonment;

 

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waste management;

 

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financial assurance; and

 

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controlling air emissions, preventing water contamination and unauthorized waste discharges.

Recent proposed and final regulations include the following:

 

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Ground-Level Ozone Standards. In October 2015, the U.S. Environmental Protection Agency (“EPA”) issued a final rule under the Clean Air Act (“CAA”) lowering the National Ambient Air Quality Standard (“NAAQS”) for ground-level ozone from 75 to 70 parts per billion. The EPA made the majority of area designations pursuant to this rule on November 16, 2017 and June 4, 2018 and finalized designations for the remaining regions of the country on July 25, 2018. State implementation of the revised NAAQS could result in stricter permitting requirements, delay or prohibit our ability to obtain such permits and increased expenditures for pollution control equipment, the costs of which could be significant.

 

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Protected and Endangered Species. We conduct operations on leases in areas where certain species are known to exist that are currently protected or could become protected under state and federal laws. The presence of protected species, marine protection areas and other similar areas where we operate could cause increased costs arising from species or habitat protection measures, or could result in limitations or prohibitions on our exploration and production activities.

Any noncompliance with these laws and regulations could subject us to administrative, civil or criminal penalties or other liabilities. As discussed under “Business—Environmental Compliance Matter,” in September 2018 we made self-disclosures to the EPA regarding an improperly filtered water sample, an inaccurate report

 

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and improper disposal of water clarifier liquids, and formally reported a fire incident to the Bureau of Safety and Environmental Enforcement (“BSEE”), in each case in connection with the Cognac platform. The EPA is currently conducting an investigation based on our self-disclosures. We are uncertain at this time whether the EPA will pursue administrative, civil, or criminal penalties or injunctive relief, if any, against EnVen, nor are we certain what actions, if any, BSEE may pursue. Resolution of any criminal claims pursued against EnVen could result in substantial monetary fines and penalties, probation, a monitor program, injunctive action or suspension and debarment from operational activities. We are not able at this time to definitively determine EnVen’s potential financial or other exposure related to these matters, nor the timing to fully resolve these matters. However, any financial or other penalties or actions imposed on EnVen in connection with these matters may have a material adverse effect on our business, results of operations or financial performance.

Additionally, our compliance with environmental, health and safety and other laws may, from time to time, result in increased costs to our operations or decreased or delayed production, and may affect our costs of acquisitions. In addition, existing, modified or new environmental laws may, in the future, cause a decrease or delay in our production or cause an increase in our costs of production, development or exploration. Pollution and similar environmental risks generally are not fully insurable, so we may have to bear these additional costs in full.

We have plugging and abandonment obligations related to our current and former oil and natural gas operations and are required to provide bonds or other forms of financial assurance in connection with those operations. Changes in these requirements could have a material adverse effect on us.

We are subject to state and federal laws that impose financial assurance requirements in connection with our oil and natural gas operations, such as bonding and insurance requirements in order to drill, operate, and plug and abandon wells. Procuring and placing financial assurance, such as bonds, letters of credit, or sinking escrow or trust accounts, may be costly and, depending on our financial condition and market conditions, may be difficult or impossible to obtain. Failure to provide the required financial assurance could result in the suspension of the affected operations and/or production.

The BOEM and the BSEE have regulations applicable to lessees in federal waters that require lessees to have substantial U.S. assets and net worth or post bonds or other acceptable financial assurance that the regulatory obligations will be met. Financial responsibility requirements are also required under the Oil Pollution Act (“OPA”) to cover containment and cleanup costs resulting from an oil spill.

In July 2016, BOEM issued a new Notice to Lessees and Operators (“NTL”), which has not been implemented and is currently under review by BOEM. The NTL augments requirements for the posting of financial assurance by offshore lessees and discontinues the policy of supplemental bonding waivers. During the review period, BOEM has primarily focused on requiring incremental financial assurance or bonding for sole liability properties (properties with no predecessor or co-lessees), with which EnVen is currently in compliance. However, changes to the NTL, or any other new rules, regulations or legal initiatives by BOEM or other governmental authorities that impose more stringent requirements regarding financial assurances or otherwise adversely affecting our offshore activities could result in increased costs and consequently have a material adverse effect on our business, financial condition and results of operations.

As of December 31, 2018, our asset retirement obligations totaled $178.7 million, net of restricted cash for abandonment obligations and sellers’ notes payable and escrowed cash as per our estimates.

Climate change legislation or regulations restricting greenhouse gas emissions may increase our costs, adversely affect our operations and impact the demand for the oil and natural gas that we produce.

Since 2009, the EPA has been monitoring and regulating greenhouse gas (“GHG”) emissions from certain sources in the oil and natural gas sector due to their association with climate change. Our facilities are subject to

 

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the EPA’s GHG reporting rules that cover offshore (as well as onshore) oil and natural gas production, processing, transmission, storage and distribution facilities. Under these rules, reporting of GHG emissions from such facilities, which includes most of our facilities, is required on an annual basis. The continued compliance with these rules could result in increased compliance costs for our operations.

From time to time, the U.S. Congress has considered legislation to regulate GHG emissions, and many states have already taken legal measures to reduce emissions of GHG. In August 2015, the EPA finalized the Clean Power Plan (“CPP”), which set forth binding guidelines for GHG emissions from existing power plants as well as New Source Performance Standards regulating GHG emissions from new, modified and reconstructed power plants (“Power Plant NSPS”). On March 28, 2017, President Trump signed an executive order (the “March 2017 Executive Order”) directing the EPA to initiate a rulemaking to suspend, revise or rescind both the CPP and the Power Plant NSPS (as well as other regulations relating to the energy industry) as necessary to ensure consistency with the goals of energy independence, economic growth and cost-effective environmental regulation. On April 4, 2017, the EPA announced in the Federal Register that it is initiating its review of the Power Plant NSPS and CPP, and on August 21, 2018, the EPA proposed to replace the CPP in its entirety with the Affordable Clean Energy Rule (the “ACE Rule”), which is aimed at reducing GHG emissions from fossil fueled fired power plants by improving their efficiency. The ACE Rule was published in the Federal Register on August 31, 2018 and the period for public comment expired on October 31, 2018. Proposed revisions to the Power Plant NSPS were published in the Federal Register on December 20, 2018. The outcome of these rulemakings is uncertain and is likely to be subject to an extensive notice and comment process and litigation. Any regulation restricting GHG emissions from the power sector, whether the CPP or any regulation replacing it, could adversely affect the demand for natural gas.

In June 2016, the EPA published new source performance standards (the “2016 Standards”) for methane, identified as a potent GHG, and volatile organic compound emissions from certain new, modified and reconstructed equipment, processes and activities across the oil and natural gas sector. These rules included first-time standards to address emissions of methane from equipment and processes across the source category, including fugitive emissions from well sites and compressors, and equipment leaks at natural gas processing plants. In accordance with the March 2017 Executive Order, the EPA has initiated a review of these standards. In March 2018, the EPA announced amendments to two narrow provisions of the 2016 New Source Performance Standards including removing the requirement for completion of delayed repairs during unscheduled or emergency vent blowdowns under the fugitive emissions provisions. On October 15, 2018, the EPA published proposed revisions to the 2016 Standards which, among other changes, would reduce the required frequency of monitoring surveys at well sites and compressor stations, increase time to complete repairs related to leaks and allow companies operating in certain states to follow state-level standards as an alternative to federal standards. The draft rule is subject to a 60-day comment period beginning from the date of publication in the Federal Register. The outcome of this rulemaking is uncertain.

On the international level, in December 2015, the U.S. joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France which prepared an agreement requiring member countries to review and represent a progression in their intended nationally determined contributions of GHG (the “Paris Agreement”). This agreement set GHG emission reduction goals every five years beginning in 2020, however, it does not create any binding obligations for nations to limit their GHG emissions. The Paris Agreement was signed by the U.S. in April 2016 and entered into force in November 2016. On June 1, 2017, President Trump announced that the U.S. plans to withdraw from the Paris Agreement and will seek negotiations to either re-enter the Paris Agreement under different terms or to establish a new framework agreement. The Paris Agreement provides for a four-year exit process beginning when it took effect in November 2016, which would result in an effective exit date of November 2020 for the U.S. The U.S.’ adherence to the exit process and/or the terms on which the U.S. may re-enter the Paris Agreement or a separately negotiated agreement are unclear at this time.

The adoption and implementation of any international, federal or state legislation or regulations that require reporting of GHGs, or limit emissions of GHGs from our equipment and operations or those that transport,

 

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process or store our products, could require us to incur costs to reduce emissions of GHGs associated with our operations, as well as cause delays or restrictions in our ability to permit GHG emissions from new or modified sources. In addition, substantial limitations on GHG emissions could adversely affect demand for our products.

In addition, some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events. If any such effects were to occur, they could adversely affect or delay demand for our products, or cause us to incur significant costs in preparing for or responding to those effects.

More comprehensive and stringent regulation in the U.S. Gulf of Mexico in the aftermath of the Macondo well oil spill has significantly increased costs and delays in offshore oil and natural gas exploration and production operations.

Following an April 20, 2010 fire and explosion aboard the Deepwater Horizon drilling rig and resulting oil spill from the Macondo well operated by a third party in deepwater in the U.S. Gulf of Mexico, there have been a series of regulatory initiatives developed and implemented at the federal level to address the direct impact of the incident and to prevent similar incidents in the future. Beginning in 2010 and continuing through the present, the Department of Interior (“DOI”) through the BOEM and the BSEE, has issued a variety of regulations and NTLs, intended to impose additional safety, permitting and certification requirements applicable to exploration, development and production activities in the U.S. Gulf of Mexico. These regulatory initiatives effectively slowed down the pace of drilling and production operations in the U.S. Gulf of Mexico as adjustments were being made in operating procedures, certification requirements and lead times for inspections, drilling applications and permits, and exploration and production plan reviews, and as the federal agencies evolved into their present day bureaus.

On April 17, 2015, BSEE published a proposed rule that would impose more stringent standards on blowout preventers (“BOP”). In April 2016, BSEE issued a final version of this rule effective July 2016, though some requirements of the rule have delayed compliance deadlines. The final rule addresses the full range of systems and equipment associated with well control operations, focusing on requirements for BOPs, well design, well control casing, cementing, real-time monitoring and subsea containment. Key features of the well control regulations include requirements for BOPs, double shear rams, third-party reviews of equipment, real time monitoring data, safe drilling margins, centralizers, inspections and other reforms related to well design and control, casing, cementing and subsea containment. On March 28, 2017, President Trump signed an executive order (the “March 2017 Executive Order”) directing federal agencies to initiate rulemakings to suspend, revise or rescind certain regulations relating to the energy industry as necessary to ensure consistency with the goals of energy independence, economic growth and cost-effective environmental regulation. In response to the March 2017 Executive Order and a subsequent executive order issued by President Trump in April 2017 focusing on offshore energy development, in May 2018, BSEE published a proposal to relax certain requirements of the July 2016 rule. Any final rule is likely to be the subject of legal challenges.

In addition to the array of new or revised safety, permitting and certification requirements developed and implemented by the DOI in the past few years, there have been a variety of proposals to change existing laws and regulations that could affect offshore development and production, such as, for example, a proposal to significantly increase the minimum financial responsibility demonstration required under the OPA.

To the extent that the existing regulatory initiatives implemented and pursued over the past few years or any future restrictions, whether through legislative or regulatory means or increased or broadened permitting and enforcement programs, foster uncertainties or delays in our offshore oil and natural gas development or exploration activities, then such conditions may have a material adverse effect on our business, financial condition and results of operations.

 

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Should we fail to comply with all applicable FERC administered statutes, rules, regulations and orders, we could be subject to substantial penalties and fines.

Under the Energy Policy Act of 2005, the FERC has civil penalty authority under the Natural Gas Act of 1938 (“NGA”) and the Natural Gas Policy Act to impose penalties for violations of up to $1 million per day for each violation in addition to disgorgement of unjust profits associated with any violation. While our operations have not been regulated by FERC as a natural gas company under the NGA, FERC has adopted regulations that may subject certain of our otherwise non-FERC jurisdictional operations to FERC annual reporting and posting requirements. We also must comply with the anti-market manipulation rules enforced by FERC. Additional rules and legislation pertaining to those and other matters may be considered or adopted by FERC from time to time. Failure to comply with those regulations in the future could subject us to civil penalty liability, as described in “Business—Regulation of the Oil and Natural Gas Industry.”

Derivatives laws and related regulations and other regulations could have a material adverse effect on our ability to hedge risks associated with our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) amended the U.S. Commodity Exchange Act (the “CEA”) and U.S. federal securities laws to provide comprehensive federal oversight of the over-the-counter derivatives market and entities that participate in that market. The Dodd-Frank Act also mandated that the Commodity Futures Trading Commission (the “CFTC”) adopt regulations that implement the provisions of the Dodd-Frank Act relating to derivatives referred to as “swaps.”

The CEA and CFTC rules generally require certain classes of swaps to be cleared on a derivatives clearing organization and executed on an exchange or execution facility. The CEA, CFTC rules and rules of the federal banking regulators also require swap dealers to exchange margin with certain counterparties when transacting in uncleared swaps. At present, we qualify for exceptions from these requirements for those swaps that we enter into to hedge our commercial risk. However, if we were to fail to qualify for such exceptions, we could become subject to some or all of these requirements, which would increase our cost of entering into and maintaining such hedging positions. Moreover, the application of the clearing, trade execution and margin requirements and other related regulations to our dealer counterparties may change the cost and availability of the swaps that we use for hedging. Certain other requirements, such as reporting and recordkeeping, may also apply to the swaps that we enter into, but these requirements are not expected to have a material impact on us.

In December 2016, the CFTC re-proposed rules that would impose position limits for certain futures and option contracts in specified energy, metals and agricultural commodities (including oil and natural gas) and for swaps that are their economic equivalents, subject to exceptions for certain bona fide hedging transactions. As these proposed position limit rules are not yet final, the impact of these provisions on us is uncertain at this time.

Federal banking regulators have adopted capital requirements for certain regulated financial institutions in connection with the Basel III Accord. If we enter into derivatives with financial institutions that are subject to these capital requirements, the financial institutions could contractually require us to post cash or other collateral to secure our obligations under the derivatives to reduce the amount of capital the financial institutions may be required to maintain with respect to such derivatives. In addition, the financial institutions could price such transactions at a premium to compensate for their additional capital costs relating to such derivatives.

The Dodd-Frank Act, the rules mandated thereby, the proposed position limits rules, and the rules implementing the Basel III Accord capital requirements, among other rules, could significantly increase the cost of derivative contracts and materially reduce our liquidity (including through requirements to post collateral), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivative contracts, and increase our exposure to less creditworthy counterparties. If we are limited in our use of derivatives in the future as a result of the Dodd-Frank Act and derivatives regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures.

 

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The Trump administration has indicated in public statements that the Dodd-Frank Act will be under scrutiny and that some of its provisions and the rules promulgated thereunder may be revised, repealed or amended. Any such changes, including their nature and impact, cannot yet be determined with any degree of certainty.

In addition to the Dodd-Frank Act, the European Union and other foreign regulators have adopted and are implementing reforms generally comparable with the reforms under the Dodd-Frank Act. Implementation and enforcement of these regulatory provisions may reduce our ability to hedge our market risks with non-U.S. counterparties and may make transactions involving cross-border swaps more expensive and burdensome.

We face various risks associated with increased activism against oil and natural gas exploration and development activities.

Opposition toward oil and natural gas drilling and development activity has been growing globally. Companies in the oil and natural gas industry are often the target of activist efforts from both individuals and non-governmental organizations regarding safety, human rights, environmental matters, sustainability, and business practices. Anti-development activists are working to, among other things, delay or cancel certain operations such as offshore drilling and development.

Future activist efforts could result in the following:

 

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delay or denial of drilling permits;

 

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shortening of lease terms or reduction in lease size;

 

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restrictions or delays on our ability to obtain additional seismic data;

 

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restrictions on installation or operation of gathering or processing facilities;

 

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restrictions on the use of certain operating practices;

 

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legal challenges or lawsuits;

 

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damaging publicity about us;

 

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increased regulation;

 

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increased costs of doing business;

 

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reduction in demand for our products; and

 

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other adverse effects on our ability to develop our properties.

Uncertainties related to the interpretation and application of recently enacted tax legislation may result in a material adverse effect on our cash tax liabilities, results of operations and financial condition if the Internal Revenue Service (“IRS”) does not agree with our interpretations and assumptions with respect to this new legislation.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) significantly revised U.S. federal corporate income tax law by, among other things, reducing the U.S. federal corporate income tax rate to 21%, limiting the tax deduction for interest expense to 30% of adjusted earnings, allowing immediate expensing for certain new investments, and, effective for net operating losses arising in taxable years beginning after December 31, 2017, eliminating net operating loss carrybacks, permitting indefinite net operating loss carryforwards, and limiting the use of net operating loss carryforwards to 80% of current year taxable income.

There are a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions in the Tax Act. In the absence of guidance on these issues, we will use what we believe are reasonable interpretations and assumptions in applying the Tax Act for purposes of determining our cash tax liabilities and

 

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results of operations, which may change as we receive additional clarification and implementation guidance and as the interpretation of the Tax Act evolves over time. It is possible that the IRS could issue subsequent guidance or take positions on audit that differ from the interpretations and assumptions that we previously made, which could have a material adverse effect on our cash tax liabilities, results of operations and financial condition.

In the past, we have identified material weaknesses in internal control over financial reporting, and we cannot assure you that additional material weaknesses will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements which could require us to restate financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the price of our Class A common stock.

Currently, we are a private company and have not been required to file reports with the SEC. During 2017, management identified errors in previously issued financial statements. The items identified related to internal controls primarily over the preparation, validation and review of the DD&A expense calculations and full cost ceiling tests and the accounting for our Series A preferred stock issued on December 30, 2016. Management concluded these were material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of a company’s financial statements will not be prevented, or detected and corrected on a timely basis. Further, it was determined that we did not have a sufficient number of trained employees for key financial reporting processes and internal controls.

Prior to the issuance of the financial statements for the year ended December 31, 2017, we corrected the errors in the financial statements for the year ended December 31, 2016 and reissued those restated financial statements to the appropriate users. The restated financial statements for the year ended December 31, 2016 were subsequently reflected in the comparative audited financial statements for the years ended December 31, 2017 and 2016 included elsewhere in this prospectus. In addition, we have since remediated the identified material weaknesses by modifying our internal controls to provide additional levels of review, training for staff and enhanced documentation. We have also hired a number of additional staff members, including a more senior, experienced Chief Accounting Officer, an Assistant Controller, a Director of Financial Reporting and a Manager of Technical and Financial Accounting.

However, we cannot assure you that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting. Furthermore, pursuant to Section 404 of the Sarbanes-Oxley Act, we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an emerging growth company, we will not be required to include this attestation report on internal control over financial reporting issued by our independent registered public accounting firm. We could be an emerging growth company for up to five years. An independent assessment of the effectiveness of our internal control over financial reporting could detect problems that our management’s assessment might not. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in the price of our Class A common stock.

The loss of senior management or technical personnel could materially adversely affect our operations.

We depend on the services of our senior management and technical personnel. We do not maintain, nor do we plan to obtain, any insurance against the loss of any of these individuals. We have employment agreements

 

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with our senior executives which contain restrictions on competition with us in the event they cease to be employed by us. However, as a practical matter, such employment agreements may not assure the retention of our key employees. The loss of the services of our senior management or technical personnel could have a material adverse effect on our business, financial condition and results of operations.

Our business may be adversely affected by information technology system failures, network disruptions and breaches in data security.

The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain exploration, development, production, processing, distribution and accounting activities. We depend on digital technologies to interpret seismic data, to manage drilling rigs, production equipment and gathering transportation systems, to conduct reservoir modeling and reserves estimation and to process and record financial and operating data. Pipelines, refineries, power stations and distribution points for both fuels and electricity are also becoming interconnected by computer systems. If any such systems were to fail or create erroneous information in our hardware or software network infrastructure, possible consequences include our loss of communication links, an inability to find, produce, process and sell oil and natural gas and an inability to automatically process commercial transactions or engage in similar automated or computerized business activities.

We rely heavily on our information systems, and the availability and integrity of these systems are essential for us to conduct our business and operations. We face various security threats, including cybersecurity threats such as attempts to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the security of our facilities and infrastructure or third-party facilities and infrastructure, such as gathering and processing facilities, pipelines and refineries; and threats from terrorist acts. Cybersecurity incidents are increasing in frequency, evolving in nature and include, but are not limited to, installation of malicious software, unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data.

We have experienced cybersecurity incidents in the past, and may experience them in the future. For instance, our employees have been and may continue to be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate information or to introduce viruses or other malware programs into our computer systems. These emails appear to be legitimate emails sent by us but direct recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information through email or download malware. One such incident occurred in September 2015, where one or more individuals impersonated a member of senior management by creating email accounts designed to mimic such officer’s email address, and then induced certain of our employees to wire funds to non-Company accounts under the guise of conducting business on behalf of the Company. As a result of this scheme, approximately $1.6 million was improperly transferred from the Company, $1.0 million of which was reimbursed by insurance. Despite our efforts to mitigate such emails (frequently referred to as “spoof” and “phishing” emails) through employee education, such “spoof” and “phishing” activities remain a problem that may damage our information technology infrastructure, compromise our confidential information and/or cause us to suffer financial harm.

While management has taken steps to address cybersecurity concerns by implementing network security and internal control measures to monitor and mitigate security threats and to increase security for our information, facilities, and infrastructure, our implementation of such procedures and controls may result in increased costs, and there can be no assurance that a system failure or data security breach will not occur. Given the unpredictability of the timing, nature and scope of information technology disruptions, there can be no assurance that the above procedures and controls will be sufficient to prevent security breaches from occurring and we could be subject to manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

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In addition to cybersecurity threats, other information system failures and network disruptions could have a material adverse effect on our ability to conduct our business. We could experience system failures due to power or telecommunications failures, human error, natural disasters, fire, sabotage, hardware or software malfunction or defects, computer viruses, intentional acts of vandalism or terrorism and similar acts or occurrences. Such system failures could result in the unanticipated disruption of our operations, communications or processing of transactions, as well as loss of, or damage to, sensitive information, facilities, infrastructure and systems essential to our business and operations, the failure to meet regulatory standards and the delays in reporting of our financial results, and other disruptions to our operations, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

A terrorist attack or armed conflict could harm our business.

Terrorist activities, anti-terrorist efforts and other armed conflicts involving the U.S. or other countries may adversely affect the U.S. and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers’ operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.

Changes in generally accepted accounting principles in the U.S. could have a material adverse effect on our previously reported results of operations.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC, and various bodies formed to promulgate and to interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our previously reported results of operations and could affect the reporting of transactions completed before the announcement of a change.

In January 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. This update was issued to clarify certain narrow aspects of guidance concerning the recognition of financial assets and liabilities established in ASU 2016-01. For non-public entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. We will adopt this ASU effective January 1, 2019. We have elected the fair value option to account for the 2023 Notes and all of its features; therefore, during the year ended December 31, 2018, the 2023 Notes are recorded at their fair value and the change to the fair value is recorded as Loss on fair value of 11.00% Senior Notes due 2023. Upon the adoption of this ASU, the change in the fair value of the 2023 Notes that exceeds the amount resulting from a change in the base market rate will be attributable to instrument-specific credit risk and be separately recognized in other comprehensive income.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), codified as ASC Topic 842, Leases (“ASC 842”), which supersedes the lease requirements in ASC Topic 840, Leases (“ASC 840”). ASC 842 establishes the principles lessees and lessors should apply to report information relating to the amount, timing, and uncertainty of cash flows arising from lease arrangements. The new standard requires lessees to recognize a right-of-use asset and liability on their balance sheets for all leases, including operating

 

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leases, with a term greater than 12 months (with the election of the short-term lease practical expedient). The new standard also requires enhanced quantitative and qualitative disclosures, including any significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized from existing leases. For lessors, the new standard modifies the classification criteria and the accounting for sales-type and direct financing leases.

As of December 31, 2018, we have substantially concluded our evaluation regarding the impact of this standard and have finalized an implementation plan to adopt this standard effective January 1, 2019. Accordingly, the comparative periods in the financial statements prior to January 1, 2019 will be presented pursuant to the requirements of ASC 840. We expect the adoption of ASC 842 will have a material impact on our consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities for operating leases, including drilling rigs, office space and certain information technology equipment. Upon the effective date of January 1, 2019, we expect to recognize an operating lease right-of-use assets of approximately $50 million to $60 million, lease liabilities of approximately $50 million to $60 million, and an immaterial cumulative effect adjustment to the beginning accumulated deficit balance as of January 1, 2019. These amounts primarily relate to drilling rigs leased for the development and exploration of our oil and natural gas properties. We do not expect the standard to have a material impact on our consolidated statement of operations, consolidated statement of cash flow, or significantly modify the accounting for leases where we act as lessor.

It is difficult to predict the exact impact of these or future changes to accounting principles or our accounting policies, any of which could materially adversely affect our results of operations.

Additionally, our assumptions, estimates and judgments related to complex accounting matters could significantly affect our financial results. GAAP and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including, but not limited to, revenue recognition, impairment of long-lived assets, intangibles, self-insurance, income taxes, property and equipment, litigation and equity-based compensation are highly complex and involve many subjective assumptions, estimates and judgments by us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by us (i) could require us to make changes to our accounting systems to implement these changes that could increase our operating costs and (ii) could significantly change our reported or expected financial performance.

Risks Related to Our Organizational Structure

Our principal asset is our interest in EnVen GoM and, accordingly, we depend on distributions from EnVen GoM to pay taxes and expenses, including payments under the tax receivable agreement that we and EnVen GoM are party to with EnVen Equity Holdings (the “Tax Receivable Agreement”). Our ability to make such distributions may be subject to various limitations and restrictions.

We are a holding company and have no material assets other than our ownership of LLC Units of EnVen GoM. As such, we have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of EnVen GoM and its subsidiaries and distributions we receive from EnVen GoM. There can be no assurance that our subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in our debt instruments, will permit such distributions.

EnVen GoM is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to any entity-level U.S. federal income tax. Instead, taxable income is allocated to holders of its LLC Units, including us. Accordingly, we will incur income taxes on our allocable share of any net taxable income of EnVen GoM. Under the terms of the EnVen GoM LLC Agreement, EnVen GoM is obligated to make tax distributions to holders of LLC Units, including us. In addition to tax expenses, we will also incur expenses related to our

 

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operations, including payments under the Tax Receivable Agreement, which, in the future, could be significant. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” We intend, as its managing member, to cause EnVen GoM to make cash distributions to the owners of LLC Units, including us, in an amount sufficient to (i) fund all or part of their tax obligations in respect of taxable income allocated to them and (ii) cover our operating expenses, including payments under the Tax Receivable Agreement. However, EnVen GoM’s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which EnVen GoM is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering EnVen GoM insolvent. If we do not have sufficient funds to pay tax or other liabilities or to fund our operations, we may have to borrow additional funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments generally will be deferred and will accrue interest until paid. However, nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” In addition, if EnVen GoM does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired. See “—Risks Related to Ownership of Our Class A Common Stock.”

The Tax Receivable Agreement requires us to make cash payments to holders of LLC Units of EnVen GoM in respect of certain tax benefits to which we may become entitled, and, in the future, we may be required to make substantial payments.

We are a party to the Tax Receivable Agreement with EnVen Equity Holdings for the benefit of the members of EnVen Equity Holdings. Under the Tax Receivable Agreement, we are required to make cash payments to EnVen Equity Holdings or its members, as applicable, equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (1) the increases in the tax basis of assets of EnVen GoM resulting from any redemptions or exchanges of LLC Units from EnVen Equity Holdings and/or its members, or any prior sales of interests in EnVen GoM and (2) certain other tax benefits related to our making payments under the Tax Receivable Agreement. The amount of the cash payments that we may be required to make under the Tax Receivable Agreement in the future could be significant. For example, assuming (i) that EnVen Equity Holdings redeemed or exchanged all of its LLC Units immediately after the completion of this offering, (ii) no material changes in relevant tax law, and (iii) that we earn sufficient taxable income in each year to realize on a current basis all tax benefits that are subject to the Tax Receivable Agreement, based on the assumed initial public offering price of $             per share of our Class A common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, we expect that the tax savings we would be deemed to realize would aggregate approximately $             million over the                  -year period from the assumed date of such redemption or exchange, and over such period we would be required to pay EnVen Equity Holdings or its members 85% of such amount, or approximately $             million, over such period. The actual amounts we may be required to pay under the Tax Receivable Agreement may materially differ from these hypothetical amounts, as potential future tax savings we will be deemed to realize, and Tax Receivable Agreement payments by us, will be calculated based in part on the market value of our Class A common stock at the time of redemption or exchange and the prevailing federal tax rates applicable to us over the life of the Tax Receivable Agreement (as well as the assumed combined state and local tax rate), and will generally be dependent on us generating sufficient future taxable income to realize all of these tax savings (subject to the exceptions described below). Any payments made by us to EnVen Equity Holdings or its members under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us and will generally reduce our earnings that we may have otherwise achieved had the Tax Receivable Agreement not been in place. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” Payments under the Tax

 

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Receivable Agreement are not conditioned on EnVen Equity Holdings’ or any its members’ continued ownership of LLC Units or our Class A common stock after this offering.

The actual amount and timing of any payments under the Tax Receivable Agreement vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of LLC Units, the price of our Class A common stock at the time of redemptions or exchanges, the amount of gain recognized by such holders of LLC Units, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable. To date, we have not made any payments under the Tax Receivable Agreement (as there have not been any redemptions or exchanges of LLC Units from EnVen Equity Holdings and/or its members). As described elsewhere herein, the Tax Receivable Agreement represents a contractual arrangement by which we agree to remit a portion of our cash tax savings resulting from certain equity transactions to the counterparty to those equity transactions. Such cash payments required by the Tax Receivable Agreement will generally be made only if, when, and to the extent that we realize cash tax savings. Such payments would be required to be made in the period in which we realize, or are deemed to realize, the cash tax savings, and the source of cash to make such payments is cash on hand that otherwise would have been retained due to the reduction in our cash taxes resulting from the equity transactions. Payments due pursuant to the Tax Receivable Agreement may be viewed as self-financing because we retain a portion (i.e., 15%) of the cash tax savings resulting from the equity transactions that trigger payments under the Tax Receivable Agreement. Accordingly, we do not anticipate that any payments that may eventually be required to be made pursuant to the Tax Receivable Agreement will require incremental financing beyond the amount otherwise required for us to satisfy our cash flow requirements for income taxes.

Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the members of EnVen Equity Holdings that will not benefit Class A common stockholders to the same extent as it will benefit the members of EnVen Equity Holdings.

Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the members of EnVen Equity Holdings, directly or indirectly through EnVen Equity Holdings, which will not benefit the holders of our Class A common stock to the same extent as it will benefit the members of EnVen Equity Holdings. The Tax Receivable Agreement provides for the payment by us to EnVen Equity Holdings or its members, as applicable, of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances, are deemed to realize, as a result of (1) the increases in the tax basis of assets of EnVen GoM resulting from any redemptions or exchanges of LLC Units from EnVen Equity Holdings and/or its members and (2) certain other tax benefits related to our making payments under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” Although we will retain 15% of the amount of such tax benefits, this and other aspects of our organizational structure may adversely impact the future trading market for our Class A common stock. In addition, as a result of certain provisions in the EnVen GoM LLC Agreement that are favorable to EnVen Equity Holdings and its members, our ability to derive tax benefits with respect to property previously contributed to EnVen GoM by EnVen Equity Holdings or the members of EnVen Equity Holdings may be significantly limited. See “—Risks Related to Ownership of Our Class A Common Stock.”

In certain cases, payments under the Tax Receivable Agreement to EnVen Equity Holdings or the its members may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

The Tax Receivable Agreement provides that if (i) we materially breach any of our material obligations under the Tax Receivable Agreement, (ii) certain mergers, asset sales, other forms of business combinations, or other changes of control were to occur or (iii) we elect an early termination of the Tax Receivable Agreement, then our or our successor’s obligations under the Tax Receivable Agreement would accelerate and become due and payable, based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement.

 

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As a result, (i) we could be required to make payments under the Tax Receivable Agreement that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement and (ii) we could be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement. If we were to exercise our right to terminate the Tax Receivable Agreement immediately after this offering, based on the initial public offering price of $             per share of our Class A common stock and a discount rate equal to the lesser of 6.5% and LIBOR plus 100 basis points, we estimate that we would be required to pay $             million in the aggregate under the Tax Receivable Agreement.

We will not be reimbursed for any payments made to EnVen Equity Holdings or its members under the Tax Receivable Agreement in the event that any tax benefits are disallowed.

Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, and the Internal Revenue Service, or the IRS, or another tax authority may challenge all or part of the tax basis increases, as well as other related tax positions we take, and a court could sustain such challenge. If the outcome of any such challenge would reasonably be expected to materially affect a recipient’s payments under the Tax Receivable Agreement, then the recipient will have the right to participate in and to monitor at its own expense any such challenge. We will not be reimbursed for any cash payments previously made to EnVen Equity Holdings or its members under the Tax Receivable Agreement in the event that any tax benefits initially claimed by us and for which payment has been made to EnVen Equity Holdings or its members are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to EnVen Equity Holdings or its members will be netted against any future cash payments that we might otherwise be required to make to EnVen Equity Holdings or such member under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to EnVen Equity Holdings or its members for a number of years following the initial time of such payment and, if any of our tax reporting positions are challenged by a taxing authority, we will not be permitted to reduce any future cash payments under the Tax Receivable Agreement until any such challenge is finally settled or determined. As a result, payments could be made under the Tax Receivable Agreement in excess of the tax savings that we realize in respect of the tax attributes with respect to EnVen Equity Holdings or its members that are the subject of the Tax Receivable Agreement.

We are substantially influenced by our significant equity investors.

After giving effect to the consummation of this offering, entities affiliated with Bain Capital Credit (“Bain”), Adage Capital Partners, L.P. and EIG Global Energy Partners will beneficially own approximately      %,     % and     % of the combined voting power of our common stock through their ownership of both Class A common stock and Class B common stock (reflecting the inclusion of the Series A preferred stock on an as-converted-to-common basis at a conversion price based on initial issue price of $12.00). As such, our significant equity investors have significant influence over corporate management and affairs. It is possible that the interests of the significant equity investors may in some circumstances conflict with our interests. For example, the significant equity investors may have different tax positions from us, especially in light of the Tax Receivable Agreement, that could influence their decisions regarding whether and when to support the disposition of assets, the incurrence or refinancing of new or existing indebtedness, or the termination of the Tax Receivable Agreement and the acceleration of our obligations thereunder. In addition, the determination of future tax reporting positions, the structuring of future transactions and the handling of any challenge by any taxing authority to our tax reporting positions may take into consideration the significant equity investors’ tax or other considerations which may differ from the considerations of us or our other stockholders. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

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In addition, certain of the significant equity investors are in the business of making or advising on investments in companies and may hold, and may from time to time in the future, acquire interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business. EnVen’s certificate of incorporation provides that, to the fullest extent permitted by law, none of the significant equity investors or any director who is not employed by us or his or her affiliates will have any duty to refrain from engaging in a corporate opportunity in the same or similar lines of business as us. The significant equity investors may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Presently and at any time following the consummation of this offering, the members of EnVen Equity Holdings will have the right to have their LLC Units redeemed pursuant to the terms of the EnVen GoM LLC Agreement.

Under the terms of the EnVen GoM LLC Agreement, the holders of LLC Units in EnVen GoM will be entitled to have their LLC Units redeemed for cash or, under certain circumstances, shares of our Class A common stock. We have also entered into a registration rights agreement pursuant to which the shares of Class A common stock issued to the members of EnVen Equity Holdings upon redemption of LLC Units will be eligible for resale, subject to certain limitations set forth therein. See “Certain Relationships and Related Party Transactions—Registration Rights Agreements.”

In certain circumstances, EnVen GoM will be required to make distributions to us and the other holders of LLC Units, and the distributions that EnVen GoM will be required to make may be substantial.

Under the EnVen GoM LLC Agreement, EnVen GoM will generally be required from time to time to make pro rata distributions in cash to us and the other holders of LLC Units in amounts that are intended to be sufficient to cover the taxes on our and the other LLC Units holders’ respective allocable shares of the taxable income of EnVen GoM. As a result of (i) potential differences in the amount of net taxable income allocable to us and the other LLC Unit holders, (ii) the lower tax rate applicable to corporations than individuals and (iii) the favorable tax benefits that we anticipate receiving from (a) acquisitions of interests in EnVen GoM in connection with future taxable redemptions or exchanges of LLC Units for shares of our Class A common stock and (b) payments under the Tax Receivable Agreement, we expect that these tax distributions will be in amounts that exceed our tax liabilities and obligations to make payments under the Tax Receivable Agreement. Our board of directors will determine the appropriate uses for any excess cash so accumulated, which may include, among other uses, dividends, the payment of obligations under the Tax Receivable Agreement and the payment of other expenses. We will have no obligation to distribute such cash (or other available cash other than any declared dividend) to our stockholders. No adjustments to the redemption or exchange ratio of LLC Units for shares of Class A common stock will be made as a result of either (i) any cash distribution by us or (ii) any cash that we retain and do not distribute to our shareholders. To the extent that we do not distribute such excess cash as dividends on our Class A common stock and instead, for example, hold such cash balances or lend them to EnVen GoM, the members of EnVen Equity Holdings would benefit from any value attributable to such cash balances as a result of their ownership of Class A common stock following a redemption or exchange of their LLC Units. See “Certain Relationships and Related Party Transactions—EnVen GoM LLC Agreement.”

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.

We are subject to income taxes in the United States, and our tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

•

changes in the valuation of our deferred tax assets and liabilities;

 

•

expected timing and amount of the release of any tax valuation allowances;

 

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•

tax effects of stock-based compensation; or

 

•

changes in tax laws, regulations or interpretations thereof.

In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal and state authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.

If we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), as a result of our ownership of EnVen GoM, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business, financial condition and results of operations.

Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.

As the managing member of EnVen GoM, we will control and operate EnVen GoM. On that basis, we believe that our interest in EnVen GoM is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of EnVen GoM, our interest in EnVen GoM could be deemed an “investment security” for purposes of the 1940 Act.

We and EnVen GoM intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Ownership of Our Class A Common Stock

The requirements of being a U.S. public company require significant resources and management attention and affect our ability to attract and retain executive management and qualified board members.

As a U.S. public company following this offering, we will incur legal, accounting, and other expenses that we did not previously incur. We will be subject to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including the reporting requirements thereunder, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the NYSE listing requirements and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.”

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an emerging growth company, we will not be required to include this attestation report on internal control over financial reporting issued by our independent registered public accounting firm. When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of complying with Section 404 will significantly increase and management’s attention may be diverted from other business concerns, which could materially adversely affect our business and

 

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results of operations. We may need to hire more employees in the future or engage outside consultants to comply with these requirements, which will further increase our cost and expense. If we fail to implement the requirements of Section 404 in the required timeframe, we may be subject to sanctions or investigations by regulatory authorities, including the SEC and the NYSE. Furthermore, if we are unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of shares of our Class A common stock could decline, and we could be subject to sanctions or investigations by regulatory authorities. Failure to implement or maintain effective internal control systems required of public companies could also restrict our future access to the capital markets. In addition, enhanced legal and regulatory regimes and heightened standards relating to corporate governance and disclosure for public companies result in increased legal and financial compliance costs and make some activities more time consuming.

We expect that being a public company subject to these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

An active trading market for our Class A common stock may not develop, and the market price for our Class A common stock may be volatile or may decline regardless of our operating performance.

Prior to the completion of this offering, there has been no public market for our Class A common stock. An active trading market for shares of our Class A common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of our Class A common stock at an attractive price, or at all. The price for our Class A common stock in this offering will be determined by negotiations between us and the representatives of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your Class A common stock at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our Class A common stock, and it may impair our ability to attract and motivate our employees through equity incentive awards and our ability to acquire other companies, products or technologies by using our Class A common stock as consideration.

The price of our Class A common stock may fluctuate substantially or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the public offering price.

You should consider an investment in our Class A common stock to be risky, and you should invest in our Class A common stock only if you can withstand a significant loss and wide fluctuations in the market value of your investment. Some factors that may cause the market price of our Class A common stock to fluctuate, in addition to the other risks mentioned in this section of the prospectus, are:

 

•

our operating and financial performance, including reserve estimates;

 

•

quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and revenues;

 

•

the public reaction to our press releases, our other public announcements and our filings with the SEC;

 

•

strategic actions by our competitors;

 

•

changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;

 

•

speculation in the press or investment community;

 

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the failure of research analysts to cover our Class A common stock;

 

•

sales of our Class A common stock by us, our directors or officers or the perception that such sales may occur;

 

•

our payment of dividends;

 

•

changes in accounting principles, policies, guidance, interpretations or standards;

 

•

additions or departures of senior management or key personnel;

 

•

actions by our stockholders;

 

•

announcements related to litigation or actions by various regulators;

 

•

default on our indebtedness;

 

•

future issuances of our capital stock or other securities;

 

•

general market conditions, including fluctuations in commodity prices;

 

•

domestic and international economic, legal and regulatory factors unrelated to our performance; and

 

•

the realization of any risks described under this “Risk Factors” section.

These and other market and industry factors may cause the market price and demand for our Class A common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their Class A common stock and may otherwise negatively affect the liquidity of our Class A common stock. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies.

If you purchase shares of Class A common stock in this offering, you will suffer immediate dilution of your investment.

The initial public offering price of our Class A common stock will be substantially higher than the net tangible book value per share of our Class A common stock. Therefore, if you purchase shares of our Class A common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent shares subsequently are issued under outstanding options or warrants, you will incur further dilution. Based on the initial public offering price of $            per share, you will experience immediate dilution of $            per share, representing the difference between our pro forma net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price. If the underwriters exercise their option to purchase additional shares of our Class A common stock, or if outstanding options to purchase our Class A common stock are exercised, you will experience additional dilution. You may experience additional dilution upon future equity issuances or the exercise of stock options to purchase Class A common stock granted to our employees, executive officers and directors under our 2015 Plan or other equity incentive plans. See “Dilution.”

A significant portion of our total outstanding shares are eligible to be sold into the market in the near future, which could cause the market price of our Class A common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our Class A common stock in the public market, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our Class A common stock. After this offering, we will have outstanding                shares of Class A common stock (or                shares if the underwriters exercise their option to purchase additional shares in full), including shares issuable upon conversion of the Series A preferred stock in connection with this offering. In addition,

 

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approximately              shares of Class A common stock are issuable upon redemption of LLC Units that are held by EnVen Equity Holdings and approximately                      shares of Class A common stock are issuable upon exercise of currently outstanding warrants. Under the terms of the EnVen GoM LLC Agreement, the holders of LLC Units in EnVen GoM are entitled to have their LLC Units redeemed for shares of our Class A common stock or cash, at our election. In addition, see “Prospectus Summary—Our Organizational Structure ” for a discussion of our outstanding warrants. The shares that we are selling in this offering may be resold in the public market immediately without restriction, unless purchased by our affiliates or existing stockholders. Substantially all of the remaining                 shares outstanding are currently restricted as a result of securities laws or lock-up agreements but will become eligible to be sold at various times beginning days after this offering. Moreover, after this offering, holders of an aggregate of approximately                shares of our Class A common stock will have rights, subject to specified conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of Class A common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

•

being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

 

•

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, in the assessment of our internal control over financial reporting;

 

•

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

•

exemption from the requirements of holding a nonbinding advisory vote on executive compensation and obtaining stockholder approval of any golden parachute payments not previously approved.

We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our Class A common stock less attractive if we rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be reduced or more volatile. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

If securities or industry analysts do not publish or cease publishing research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain

 

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research coverage by securities and industry analysts. If no or few securities or industry analysts commence coverage of us, the trading price for our Class A common stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model or our stock performance, or if our results of operations fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Because we expect to be a United States real property holding corporation, non-U.S. holders may be subject to U.S. federal income tax in connection with the disposition of shares of our Class A common stock.

A non-U.S. holder of our Class A common stock not otherwise subject to U.S. federal income tax on gain from the sale or other disposition of our Class A common stock may nevertheless be subject to U.S. federal income tax with respect to such sale or other disposition if we are a United States real property holding corporation at any time within the five-year period preceding the sale or other disposition (or the non-U.S. holder’s holding period, if shorter). Generally, a corporation is a United States real property holding corporation if the fair market value of its “United States real property interests,” as defined in the Internal Revenue Code of 1986, as amended, and applicable Treasury Regulations, equals or exceeds 50% of the aggregate fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. We believe we are, and will be in the foreseeable future, a United States real property holding corporation. Accordingly, if either (1) our Class A common stock is not regularly traded on an established securities market during the calendar year in which the sale or disposition occurs or (2) the non-U.S. holder has owned or is deemed to have owned, at any time within the relevant period, more than 5% of our Class A common stock, the non-U.S. holder may be subject to tax on the net gain from the sale or other disposition under the regular graduated U.S. federal income tax rates applicable to U.S. persons and could, under certain circumstances, be subject to withholding at a 15% rate on the amount realized on such sale or other disposition. See “Material U.S. Federal Tax Considerations for Non-U.S. Holders of Class A Common Stock.”

We may issue preferred stock whose terms could adversely affect the voting power or value of our Class A common stock.

Our amended and restated certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our Class A common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our Class A common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the Class A common stock.

Our historical financial data may not be a reliable indicator of our future results.

As a public company, our cost structure will be different and will include both additional recurring costs and nonrecurring costs that we will incur during our transition to being a public company. Accordingly, our historical consolidated financial information may not be reflective of our financial position, results of operations or cash flows or costs had we been a public company during the periods presented, and the historical financial information may not be a reliable indicator of what our financial position, results of operations or cash flows will be in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares, including:

 

•

limitations on the removal of directors;

 

•

our classified board of directors, under which a director only comes up for election once every three years;

 

•

limitations on the ability of our stockholders to call special meetings, except the special meetings may be called by the stockholders holding a majority of the combined voting power of our then outstanding Class A common stock and Class B common stock as long as the shareholders affiliated with Bain Capital Credit (the “Bain Investors”) and their affiliates collectively beneficially own at least 25% of the outstanding shares of our Class A common stock;

 

•

establishing advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders;

 

•

providing that the board of directors is expressly authorized to adopt, or to alter or repeal our amended and restated bylaws; and

 

•

establishing advance notice and certain information requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

These provisions could also limit the price that investors might be willing to pay in the future for shares of our Class A common stock, thereby depressing the market price of our Class A common stock.

In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. The provisions in our amended and restated certificate of incorporation and amended and restated bylaws that could discourage, delay or prevent an unsolicited change in control of our company include board authority to issue preferred stock without stockholder approval.

Furthermore, in connection with this offering, we will enter into a shareholders agreement with the Bain Investors. The shareholders agreement provides the Bain Investors with the right to nominate a certain number of nominees to our board of directors so long as the Bain Investors and their affiliates collectively beneficially own at least 10% of the outstanding shares of our Class A common stock. See “Certain Relationships and Related Party Transactions—Shareholders Agreement.”

In addition, our amended and restated certificate of incorporation will provide that we are not governed by Section 203 of the DGCL which, in the absence of such provisions, would impose additional requirements regarding mergers and other business combinations. See “Description of Capital Stock—Our Certificate of Incorporation and Bylaws.”

 

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Our amended and restated certificate of incorporation will include exclusive forum, venue and jurisdiction provisions. By purchasing a share of our Class A common stock, a shareholder is irrevocably consenting to these provisions regarding claims, suits, actions or proceedings and submitting to the exclusive jurisdiction of Delaware courts.

Our amended and restated certificate of incorporation, which will be effective prior to the consummation of this offering, will be governed by Delaware law. Our amended and restated certificate of incorporation will include exclusive forum, venue and jurisdiction provisions designating Delaware courts as the exclusive venue for most claims, suits, actions and proceedings involving us or our officers, directors and employees. It will also provide that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the federal securities laws. See “Description of Capital Stock—Exclusive Venue.” If a dispute were to arise between a shareholder and us or our officers, directors or employees, the shareholder may be required to pursue its legal remedies in Delaware which may be an inconvenient or distant location and which is considered to be a more corporate-friendly environment. By purchasing a share of our Class A common stock in this offering, a shareholder is submitting to the exclusive jurisdiction of the U.S. federal and state courts in Delaware.

Our ability to pay dividends may be restricted by the terms of our Revolving Credit Facility and 2023 Notes.

Following our initial public offering, we will consider paying a cash dividend on our Class A common stock. In the event we decide to pay dividends in the future, our ability to pay dividends may be limited by covenants in our Revolving Credit Facility and the indenture governing our 2023 Notes. Additionally, we are a holding company and have no material assets other than our ownership of LLC Units of EnVen GoM. As such, we have no independent means of generating revenue or cash flow, and our ability to declare and pay dividends in the future is dependent upon the financial results and cash flows of EnVen GoM and its subsidiaries and distributions we receive from EnVen GoM. Any future determination to pay dividends to holders of our Class A common stock will depend on our results of operations, financial condition, capital requirements, contractual restrictions and any other factors that our board of directors may deem relevant, and we can provide no assurance that we will continue to pay dividends to our shareholders following completion of this offering. See “Dividend Policy.”

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition or results of operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors, many of which are beyond our control, that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Risk Factors.” You should specifically consider the numerous risks outlined under “Risk Factors.”

Forward-looking statements may include statements about:

 

•

the volatility of oil and natural gas prices;

 

•

potential write-downs of the carrying value of our oil and natural gas properties if oil and natural gas prices decline;

 

•

potential financial losses or earnings reductions from our derivative activities;

 

•

our future acquisitions and the impact of any such acquisitions;

 

•

the possibility that we may be unable to make attractive acquisitions or successfully integrate acquired businesses;

 

•

any title defects in properties in which we invest;

 

•

the substantial capital expenditures necessary for our exploitation and development projects;

 

•

risks associated with oil and natural gas exploration and production operations;

 

•

uncertainty with respect to our reserves;

 

•

any inability to replace our reserves with new reserves;

 

•

uncertainties associated with the long-term nature of drilling, including the potential inability to raise the substantial amount of capital that may be necessary;

 

•

the risk that we may incur substantial losses and be subject to substantial liability claims as a result of our operations, which we may not be adequately insured for, if at all;

 

•

extreme weather conditions affecting our ability to conduct drilling activities;

 

•

risks associated with operating in one major geographic area, as our properties are all located on the outer continental shelf and deepwater of the U.S. Gulf of Mexico;

 

•

conservation plans and technological measures reducing demand for oil and natural gas;

 

•

our dependence upon a single customer for a substantial majority of our revenue;

 

•

competition within the oil and natural gas industry;

 

•

the fact that the marketability of our production is dependent upon transportation and other facilities operated by third parties, the capacity and operation of which we do not control;

 

•

the unavailability or high cost of additional drilling rigs, equipment, supplies, personnel and oilfield services;

 

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•

the possibility that we may not be able to keep pace with technological developments in our industry;

 

•

risks, costs and liabilities related to the complex U.S. federal, state, local and other laws and regulations, including regarding tax, environmental, health, and safety issues, and derivatives that we are subject to;

 

•

increased activism against oil and natural gas exploration and development activities;

 

•

our retention of key employees;

 

•

risks, costs and liabilities relating to a failure of our information systems or computer-based technology, or security threats, including cybersecurity threats and other disruptions;

 

•

the occurrence of terrorist attacks aimed at our facilities or operations;

 

•

the volatility of our stock price;

 

•

the increased time and costs associated with operating as a public company;

 

•

our ability to establish and maintain effective internal controls;

 

•

other factors discussed under “Risk Factors” and elsewhere in this prospectus; and

 

•

our plans, objectives, expectations and intentions contained in this prospectus that are not historical.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $         per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses.

We intend to use the net proceeds from this offering to purchase      LLC Units directly from EnVen GoM at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions.

EnVen GoM anticipates that it will use the $         million in net proceeds it receives from the sale of LLC Units to us (together with any additional proceeds we may receive if the underwriters exercise their option to purchase additional shares of Class A common stock, which will be used to purchase additional LLC Units from EnVen GoM) to redeem up to 35% of the aggregate principal amount of the 2023 Notes at a redemption price equal to 111.0% of the 2023 Notes to be redeemed plus accrued and unpaid interest, pursuant to the terms of the indenture governing the 2023 Notes. As of December 31, 2018, $325 million of the 2023 Notes were outstanding. The 2023 Notes have a stated maturity of February 15, 2023 and accrue interest at a rate equal to 11.0% per annum. This prospectus does not constitute a notice of redemption or an obligation to issue a notice of redemption for the 2023 Notes.

On October 6, 2016, we entered into an engagement letter (the “Engagement Letter”) with FBR Capital Markets & Co. (“FBR”) giving FBR the right to act as the lead underwriter and bookrunner for our initial public offering. If a different lead underwriter is appointed, FBR is entitled to a fee equal to that of the highest paid bookrunner in the underwriting syndicate of our initial public offering. On June 1, 2017, B. Riley Financial, Inc. merged with FBR establishing B. Riley FBR, Inc. As a result of the merger, on May 31, 2018, in conjunction with our Annual General Meeting, we elected not to utilize B. Riley FBR, Inc. as the lead underwriter as provided in the Engagement Letter.

In addition, immediately following the 2018 Refinancing Transactions (as defined below), entities affiliated with Bain beneficially held 11.3% of the aggregate principal amount of our 2023 Notes.

We intend to use any remaining proceeds from this offering for general corporate purposes, including to expand our current business through acquisitions of, or investments in, other businesses, products or technologies. However, we have no commitments with respect to any such acquisitions or investments at this time.

Our management will have broad discretion in the application of the net proceeds from this offering used for general corporate purposes, and investors will be relying on the judgment of our management regarding the application of the proceeds. Pending their use, we may invest such net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

Each $1.00 increase (decrease) in the assumed initial public offering price per share of $        per share, based on the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial offering price per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds from this offering by $          million.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2018:

 

•

on an actual basis (as adjusted to give effect to the Stock Split);

 

•

on an as adjusted basis to reflect (1) the automatic conversion of all outstanding shares of our preferred stock into            shares of our Class A common stock upon the closing of this offering, (2) our issuance and sale of            shares of our Class A common stock in this offering at the initial public offering price of $        per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (3) our use of the net proceeds from this offering as described under “Use of Proceeds” in this prospectus.

You should read this information in conjunction with our audited consolidated financial statements as of and for the years ended December 31, 2018 and 2017 and the related notes and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, as well as, other financial information, each of which appears elsewhere in this prospectus.

 

		As of December 31, 2018
(In thousands, except number of shares and par value)		Actual				As Adjusted
Cash and cash equivalents(1)		$	121,184
Long-term debt:
Revolving Credit Facility(2)			—
11.00% Senior Notes due 2023(3)		$	350,100
Total long-term debt		$	350,100
Equity(4):
Accumulated deficit		$	(17,375	)
Stockholders’ equity:
Series A convertible perpetual preferred stock, par value $0.001; 25,000,000 shares authorized and 10,762,683 shares issued and outstanding as of December 31, 2018 actual; no shares authorized, issued or outstanding, as adjusted		$	11
Class A common stock, par value $0.001;              shares authorized and              issued and outstanding(5)		$	16
Class B common stock, par value $0.001;              shares authorized and              issued and outstanding(5)		$	3
Additional paid-in capital		$	320,411
Total stockholders’ equity		$	303,066
Non-controlling interest		$	39,805
Total equity		$	342,871
Total capitalization		$	692,971

 

(1)	Does not include current portion of restricted cash as of December 31, 2018 of approximately $0.4 million reserved as cash collateral for certain bonding requirements. Restricted cash includes amounts held in escrow for plugging and abandonment obligations.

(2)	At December 31, 2018, we had no outstanding borrowings and availability of $321.4 million under our Revolving Credit Facility (after giving effect to $3.6 million of outstanding letters of credit), subject to the borrowing base of $400.0 million and total elected commitments of $325.0 million.

(3)	Due to the fair value option election, the 2023 Notes are presented at their fair value as of December 31, 2018.

 

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(4)

As of December 31, 2018, we had Series A Warrants and Series B Warrants outstanding, each of which was exercisable to purchase              shares of Class A common stock (giving effect to the Stock Split). Series A Warrants have the exercise price of $12.50 for one share of Class A common stock and Series B Warrants have the exercise price of $15.00 for one share of Class A common stock. See “Prospectus Summary—Our Organizational Structure” for a discussion of our outstanding warrants.

(5)	As adjusted to give effect to the Stock Split.

 

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DIVIDEND POLICY

Following our initial public offering, we will consider paying a cash dividend on our Class A common stock. Any decision relating to the declaration, amount and payment of any future dividends on shares of Class A common stock is at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, including restrictive covenants contained in our financing agreements, implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant. We have not declared or paid any dividends on our Class A common stock since our inception. Our ability to pay dividends may be limited by covenants in our Revolving Credit Facility and the indenture governing our 2023 Notes.

We are a holding company and have no material assets other than our ownership of LLC Units of EnVen GoM. As such, we have no independent means of generating revenue or cash flow, and our ability to declare and pay dividends in the future is dependent upon the financial results and cash flows of EnVen GoM and its subsidiaries and distributions we receive from EnVen GoM.

 

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DILUTION

If you invest in shares of our Class A common stock, your investment will be immediately diluted to the extent of the difference between the initial public offering price per share of Class A common stock and the pro forma as adjusted net tangible book value per share of Class A common stock after this offering. Dilution results from the fact that the per share offering price of the shares of Class A common stock is substantially in excess of the pro forma as adjusted net tangible book value per share attributable to our pre-IPO owners. We have presented dilution in pro forma as adjusted net tangible book value per share of Class A common stock after giving effect to this offering assuming that all of the holders of LLC Units (other than us) had their LLC Units redeemed in exchange for newly-issued shares of Class A common stock on a one-for-one basis in order to more meaningfully present the dilutive impact on the investors in this offering.

After giving effect to the Stock Split, our pro forma net tangible book value as of December 31, 2018 was $         or $        per share of Class A common stock. Pro forma net tangible book value per share of Class A common stock represents tangible assets, less liabilities, divided by the aggregate number of shares of Class A common stock outstanding after giving effect to the automatic conversion of all outstanding shares of our preferred stock into            shares of our Class A common stock (after giving effect to the Stock Split) upon the closing of this offering and the redemption by all of the holders of LLC Units (other than us) of their LLC Units in exchange for newly-issued shares of Class A common stock on a one-for-one basis.

After giving effect to the sale by us of the                  shares of Class A common stock in this offering, at an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, and the receipt and application of the net proceeds, our pro forma as adjusted net tangible book value estimated as of December 31, 2018 would have been approximately $         or $         per share of Class A common stock (after giving effect to the Stock Split). This represents an immediate increase in pro forma net tangible book value to existing stockholders of $         per share and an immediate dilution in net tangible book value of $        per share to new investors. Dilution per share represents the difference between the price per share to be paid by new investors for the shares of Class A common stock sold in this offering and the net tangible book value per share immediately after this offering. The following table illustrates this per share dilution assuming the underwriters do not exercise their option to purchase additional shares of our Class A common stock:

 

Assumed initial public offering price per share of Class A common stock		$
Pro forma net tangible book value per share of Class A common stock (after giving effect to the Stock Split)
Increase in pro forma net tangible book value per share of Class A common stock attributable to this offering
Pro forma as adjusted net tangible book value per share of Class A common stock after giving effect to this offering (after giving effect to the Stock Split)
Dilution per share of Class A common stock to new investors		$

A $1.00 increase or decrease in the assumed initial public offering price per share of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease total consideration paid to us by new investors and total consideration paid to us by all stockholders by approximately $        . An increase (decrease) of 1,000,000 in the number of shares offered by us would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by all stockholders by $        , $        and $        per share, respectively. To the extent that we grant stock options to our employees in the future and those stock options are exercised or other issuances of Class A common stock are made, there will be further dilution to new investors.

 

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The following table sets forth, on a pro forma basis, as of December 31, 2018:

 

•

the number of shares of Class A common stock purchased from EnVen in this offering and the number of shares issued to holders of LLC Units other than us assuming they redeemed all of their LLC Units in exchange for shares of Class A common stock,

 

•

the total consideration paid, or to be paid, by the investors purchasing shares in this offering and by such holders of LLC Units and

 

•

the average price per share paid, or to be paid, by existing stockholders and by the new investors in this offering and by such holders of LLC Units,

based upon the assumed initial public offering price of $     per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by EnVen.

 

		Shares Purchased								Total Consideration								Average Price Per Share
		Number				Percent				Amount				Percent
Existing stockholders								%		$						%
New investors
Total							100	%		$					100	%

The foregoing tables assume no exercise of the underwriters’ option to purchase additional shares or outstanding stock options after December 31, 2018. As of December 31, 2018,              shares of Class A common stock were subject to outstanding options, at a weighted average exercise price of $        . To the extent these options are exercised there will be further dilution to new investors.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial data for the periods and as of the dates indicated. The selected consolidated financial data as of and for each of the fiscal years ended December 31, 2018 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of future expected results.

The following selected historical consolidated financial data should be read in conjunction with the information included under the headings “Summary Historical Consolidated Financial Data,” “Use of Proceeds,” “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the related notes included elsewhere in this prospectus.

 

(In thousands, except for the number of shares outstanding and per share amounts)		Year ended December 31,
		2018				2017
Statement of operations
Total revenues(1)		$	623,014			$	434,411
Operating expenses(1):
Lease operating expenses			86,082				97,560
Workover, repair, and maintenance expenses			19,069				18,642
Transportation, gathering, and processing costs(2)			10,816				—
Depreciation, depletion, and amortization			196,220				170,372
General and administrative expenses			65,202				42,397
Accretion of asset retirement obligations			35,016				31,392
Total operating expenses		$	412,405			$	360,363
Operating income		$	210,609			$	74,048
Other (expense) income:
Interest expense			(64,695	)			(60,307	)
Gain on derivatives, net			11,014				5,020
Interest income			5,567				4,370
Loss on extinguishment of long-term debt			(4,012	)			—
Loss on fair value of 11.00% Senior Notes due 2023			(25,100	)			—
Total other expense		$	(77,226	)		$	(50,917	)
Income tax expense			22,730				14,095
Net income		$	110,653			$	9,036
Net income attributable to non-controlling interest		$	14,777			$	2,581
Net income attributable to EnVen Energy Corporation		$	95,876			$	6,455
Series A preferred stock dividends			(33,616	)			(21,590	)
Net income (loss) attributable to EnVen Energy Corporation common stockholders		$	62,260			$	(15,135	)
Historical earnings (loss) per share data(3)
Net income (loss) per common share—basic		$	3.69			$	(0.95	)
Net income (loss) per common share—diluted		$	3.42			$	(0.95	)
Weighted average common shares outstanding—basic			16,159,133				15,912,950
Weighted average common shares outstanding—diluted			27,592,222				15,912,950
Adjusted earnings (loss) per share data(4)
Adjusted net income (loss) per common share—basic
Adjusted net income (loss) per common share—diluted
Adjusted weighted average common shares outstanding—basic
Adjusted weighted average common shares outstanding—diluted

 

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