Nov. 8, 2019, 3:51 p.m. EST

10-Q: ENERGY 11, L.P.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Certain statements within this report may constitute forward-looking statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as "may," "will," "could," "anticipate," "believe," "estimate," "expect," "intend," "predict," "continue," "further," "seek," "plan" or "project" and variations of these words or comparable words or phrases of similar meaning.

These forward-looking statements include such things as:

? references to future success in the Partnership's drilling and marketing activities;

? the Partnership's business strategy;

? estimated future distributions;

? estimated future capital expenditures;

? sales of the Partnership's properties and other liquidity events;

? competitive strengths and goals; and

? other similar matters.

These forward-looking statements reflect the Partnership's current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside the Partnership's control that may cause actual results to differ materially from those projected. Such factors include, but are not limited to, those described under "Risk Factors" in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2018 and the following:

? that the Partnership's strategy of acquiring oil and gas properties on attractive terms and developing those properties may not be successful or that the Partnership's operations on properties acquired may not be successful;

? general economic, market, or business conditions;

? changes in laws or regulations;

? the risk that the wells in which the Partnership acquires an interest are productive, but do not produce enough revenue to return the investment made;

? the risk that the wells the Partnership drills do not find hydrocarbons in commercial quantities or, even if commercial quantities are encountered, that actual production is lower than expected on the productive life of wells is shorter than expected;

? current credit market conditions and the Partnership's ability to obtain long-term financing or refinancing debt for the Partnership's drilling activities in a timely manner and on terms that are consistent with what the Partnership projects;

? uncertainties concerning the price of oil and natural gas, which may decrease and remain low for prolonged periods; and

? the risk that any hedging policy the Partnership employs to reduce the effects of changes in the prices of the Partnership's production will not be effective.

Although the Partnership believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Partnership cannot assure investors that its expectations will be attained or that any deviations will not be material. Investors are cautioned that forward-looking statements speak only as of the date they are made and that, except as required by law, the Partnership undertakes no obligation to update these forward-looking statements to reflect any future events or circumstances. All subsequent written or oral forward-looking statements attributable to the Partnership or to individuals acting on its behalf are expressly qualified in their entirety by this section.

The following discussion and analysis should be read in conjunction with the Partnership's Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the information contained in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2018.

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Overview

The Partnership was formed as a Delaware limited partnership. The general partner is Energy 11 GP, LLC (the "General Partner"). The initial capitalization of the Partnership of $1,000 occurred on July 9, 2013. The Partnership began offering common units of limited partner interest (the "common units") on a best-efforts basis on January 22, 2015, the date the Partnership's initial Registration Statement on Form S-1 (File No. 333-197476) was declared effective by the SEC. The Partnership completed its best-efforts offering on April 24, 2017. Total common units sold were approximately 19.0 million for gross proceeds of $374.2 million and proceeds net of offering costs of $349.6 million.

As of September 30, 2019, the Partnership owned an approximate 25-26% non-operated working interest in 222 currently producing wells, 12 wells in various stages of the drilling and completion process and future development sites in the Sanish field located in Mountrail County, North Dakota (collectively, the "Sanish Field Assets"). Substantially all of the Sanish Field Assets are operated by Whiting Petroleum Corporation ("Whiting") /zigman2/quotes/204602363/composite WLL -2.78% and Oasis Petroleum North America, LLC ("Oasis") /zigman2/quotes/207530975/composite OAS +1.66% , two publicly traded oil and gas companies and two of the largest producers in the basin.

The Partnership has no officers, directors or employees. Instead, the General Partner manages the day-to-day affairs of the Partnership. All decisions regarding the management of the Partnership made by the General Partner are made by the Board of Directors of the General Partner and its officers.

The Partnership was formed to acquire and develop oil and gas properties located onshore in the United States. On December 18, 2015, the Partnership completed its first purchase ("Acquisition No. 1") in the Sanish field, acquiring an approximate 11% non-operated working interest in the Sanish Field Assets for approximately $159.6 million. On January 11, 2017, the Partnership closed on its second purchase ("Acquisition No. 2") in the Sanish field, acquiring an additional approximate 11% non-operated working interest in the Sanish Field Assets for approximately $128.5 million. On March 31, 2017, the Partnership closed on its third purchase ("Acquisition No. 3") in the Sanish field, acquiring an additional approximate average 10.5% non-operated working interest in 82 of the Partnership's then 216 existing producing wells and 150 of the Partnership's then 253 future development locations in the Sanish Field Assets for approximately $52.4 million.

During 2018, six wells were completed by the Partnership's operators. Two wells were completed by and are being operated by Whiting; the Partnership has an approximate 29% non-operated working interest in these two wells. The other four wells were completed by and are operated by Oasis; the Partnership has an approximate 8% non-operated working interest in these four wells. In total, the Partnership's capital expenditures for the drilling and completion of these six wells were approximately $7.8 million.

During the nine months ended September 30, 2019, the Partnership elected to participate in the drilling and completion of 19 new wells. In total, capital expenditures for the drilling and completion of the 19 wells discussed above are estimated to be approximately $31 million, and the Partnership will have an average approximate non-operated working interest of 22% in these 19 wells upon completion.

As of September 30, 2019, one well has been completed and drilling activities have commenced for 12 of the remaining 18 wells. The Partnership has incurred approximately $7.1 million in capital expenditures for these 13 wells as of September 30, 2019. The remaining 18 wells are expected to be completed over the next one to six months from September 30, 2019.

Current Price Environment

Oil, natural gas and natural gas liquids ("NGL") prices are determined by many factors outside of the Partnership's control. Historically, world-wide oil and natural gas prices and markets have been subject to significant change and may continue to be in the future. Factors contributing to world-wide commodity pricing volatility include real or perceived geopolitical risks in oil-producing regions of the world, particularly the Middle East; forecasted levels of global economic growth combined with forecasted global supply; supply levels of oil and natural gas due to exploration and development activities in the United States; actions taken by the Organization of Petroleum Exporting Countries; and the strength of the U.S. dollar in international currency markets. In addition to commodity price fluctuations, the Partnership faces the challenge of natural production volume declines. As reservoirs are depleted, oil and natural gas production from Partnership wells will decrease.

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The following table lists average NYMEX prices for oil and natural gas for the three and nine months ended September 30, 2019 and 2018.







                                   Three Months Ended                           Nine Months Ended
                                      September 30,            Percent            September 30,            Percent
                                   2019           2018          Change          2019          2018         Change
        Average market
        closing prices (1)
        Oil (per Bbl)           $    56.44      $   69.57          -18.9 %   $    57.01     $   66.85          -14.7 %
        Natural gas (per Mcf)   $     2.38      $    2.93          -18.8 %   $     2.62     $    2.94          -10.9 %
        


The Partnership's revenues are highly sensitive to changes in oil and natural gas prices and to levels of production. Future growth is dependent on the Partnership's ability to add reserves in excess of production. Dependent on available cash flow, the Partnership intends to seek opportunities to invest in its existing producing wells, drill new wells on existing leasehold sites like the six wells discussed above drilled in 2018 and the 12 wells currently in progress at September 30, 2019 discussed above.

Results of Operations

In evaluating financial condition and operating performance, the most important indicators on which the Partnership focuses are (1) total quarterly sold production in barrel of oil equivalent ("BOE") units, (2) average sales price per unit for oil, natural gas and natural gas liquids, (3) production costs per BOE and (4) capital expenditures.

The following is a summary of the results from operations, including production, of the Partnership's non-operated working interest for the three and nine months ended September 30, 2019 and 2018.







                                                 Three Months Ended September 30,                                                 Nine Months Ended September 30,
                                                   Percent of                        Percent of      Percent                        Percent of                        Percent of      Percent
                                     2019           Revenue            2018           Revenue         Change          2019           Revenue            2018           Revenue         Change
        Total revenues            $ 7,339,109            100.0 %   $ 15,688,888            100.0 %      -53.2 %   $ 26,748,113            100.0 %   $ 42,179,944            100.0 %      -36.6 %
        Production expenses         2,228,933             30.4 %      2,914,785             18.6 %      -23.5 %      7,977,046             29.8 %      8,536,265             20.2 %       -6.6 %
        Production taxes              558,288              7.6 %      1,365,925              8.7 %      -59.1 %      2,132,056              8.0 %      3,657,937              8.7 %      -41.7 %
        Depreciation,
        depletion, amortization
        and accretion               2,767,479             37.7 %      4,481,712             28.6 %      -38.2 %      9,403,364             35.2 %     12,705,908             30.1 %      -26.0 %
        General, administration
        and other expense             281,308              3.8 %        343,955              2.2 %      -18.2 %      1,043,293              3.9 %      1,042,228              2.5 %        0.1 %
        Sold production (BOE):
        Oil                           134,533                           218,368                         -38.4 %        457,259                           612,220                         -25.3 %
        Natural gas                    34,343                            39,889                         -13.9 %        116,857                           109,669                           6.6 %
        Natural gas liquids            24,807                            40,293                         -38.4 %         99,726                           109,383                          -8.8 %
          Total                       193,683                           298,550                         -35.1 %        673,842                           831,272                         -18.9 %
        Average sales price per
        unit:
        Oil (per Bbl)             $     49.43                      $      62.28                         -20.6 %   $      49.45                      $      59.46                         -16.8 %
        Natural gas (per Mcf)            2.08                              3.13                         -33.5 %           2.95                              3.39                         -13.0 %
        Natural gas liquids
        (per Bbl)                       10.49                             33.25                         -68.5 %          20.75                             32.38                         -35.9 %
        Combined (per BOE)              37.89                             52.55                         -27.9 %          39.69                             50.74                         -21.8 %
        Average unit cost per
        BOE:
        Production expenses             11.51                              9.76                          17.9 %          11.84                             10.27                          15.3 %
        Production taxes                 2.88                              4.58                         -37.1 %           3.16                              4.40                         -28.2 %
        Depreciation,
        depletion, amortization
        and accretion                   14.29                             15.01                          -4.8 %          13.95                             15.28                          -8.7 %
        Capital expenditures      $ 5,957,663                      $    440,618                                   $  7,808,174                      $  7,204,900
        


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Oil, Natural Gas and NGL Revenues

For the three months ended September 30, 2019, revenues for oil, natural gas and NGL sales were $7.3 million. Revenues for the sale of crude oil were $6.6 million, which resulted in a realized price of $49.43 per barrel. Revenues for the sale of natural gas were $0.4 million, which resulted in a realized price of $2.08 per Mcf. Revenues for the sale of NGLs were $0.3 million, which resulted in a realized price of $10.49 per BOE of sold production. For the three months ended September 30, 2018, revenues for oil, natural gas and NGL sales were $15.7 million. Revenues for the sale of crude oil were $13.6 million, which resulted in a realized price of $62.28 per barrel. Revenues for the sale of natural gas were $0.7 million, which resulted in a realized price of $3.13 per Mcf. Revenues for the sale of NGLs were $1.3 million, which resulted in a realized price of $33.25 per BOE of sold production.

For the nine months ended September 30, 2019, revenues for oil, natural gas and NGL sales were $26.7 million. Revenues for the sale of crude oil were $22.6 million, which resulted in a realized price of $49.45 per barrel. Revenues for the sale of natural gas were $2.1 million, which resulted in a realized price of $2.95 per Mcf. Revenues for the sale of NGLs were $2.1 million, which resulted in a realized price of $20.75 per BOE of sold production. For the nine months ended September 30, 2018, revenues for oil, natural gas and NGL sales were $42.2 million. Revenues for the sale of crude oil were $36.4 million, which resulted in a realized price of $59.46 per barrel. Revenues for the sale of natural gas were $2.2 million, which resulted in a realized price of $3.39 per Mcf. Revenues for the sale of NGLs were $3.5 million, which resulted in a realized price of $32.38 per BOE of sold production.

The Partnership's results for the nine-month period ended September 30, 2019 were negatively impacted by decreases in commodity prices for oil, natural gas and NGLs, in comparison to the same period of 2018. In addition, sold oil production volumes were lower in the third quarter and nine-month period ended September 30, 2019 when compared to the same periods of 2018, which was the result of (i) natural production declines; (ii) production from some of the Partnership's existing producing wells being temporarily suspended in the second and third quarters of 2019 due to the commencement of drilling new wells on the Partnership's acreage; and (iii) the Partnership completing six new wells in 2018, of which all six were producing as of September 30, 2018. Production volumes per day fluctuate due to the timing of well completions; new wells often have high levels of production immediately following completion, then decline to more consistent levels. The completion of the six wells increased sold production for the three- and nine-month periods ended September 30, 2018.

Sold production of the Partnership's natural gas has increased for the nine months ended September 30, 2019, when compared to the same period of 2018. A customer's gas plant was temporarily shut down for maintenance during the second quarter of 2018, which negatively impacted sold production volumes of the Partnership's natural gas during 2018.

Production for the Sanish Field Assets was approximately 2,100 BOE and 2,500 BOE per day for the three and nine months ended September 30, 2019, while sold production for the Sanish Field Assets was approximately 3,200 BOE and 3,100 BOE for the three and nine months ended September 30, 2018. Production is dependent on the investment in existing wells and the development of new wells. If the Partnership or its operators are unable or it is not cost beneficial to invest in existing wells or develop new wells, production will decline. See discussion of the Partnership's investment in new wells in 2019 below.

Operating Costs and Expenses

Production Expenses

Production expenses are daily costs incurred by the Partnership to bring oil and natural gas out of the ground and to market, along with the daily costs incurred to maintain producing properties. Such costs include field personnel compensation, salt water disposal, utilities, maintenance, repairs and servicing expenses related to the Partnership's oil and natural gas properties, along with the gathering and processing contract in effect for the extraction, transportation and treatment of natural gas.

For the three months ended September 30, 2019 and 2018, production expenses were $2.2 million and $2.9 million, respectively, and production expenses per BOE of sold production were $11.51 and $9.76, respectively. For the nine months ended September 30, 2019 and 2018, production expenses were $8.0 million and $8.5 million, respectively, and production expenses per BOE of sold production were $11.84 and $10.27, respectively. The decrease in sold production volumes along with fixed lease operating expenses contributed to the increase in production expenses per BOE of sold production for the three and nine months ended September 30, 2019, compared to same periods in 2018.

Production Taxes

Taxes on the production and extraction of oil and gas are regulated and set by North Dakota tax authorities. Production taxes for the three months ended September 30, 2019 and 2018 were $0.6 million (7.6% of revenue) and $1.4 million (8.7% of revenue), respectively. Production taxes for the nine months ended September 30, 2019 and 2018 were $2.1 million (8.0% of revenue) and $3.7 million (8.7% of revenue), respectively. Production taxes as a percentage of revenue may fluctuate dependent upon the ratio of sales of natural gas and NGL to total sales. Taxes on the sale of gas and NGL products are less than taxes levied on the sale of oil.

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Depreciation, Depletion, Amortization and Accretion ("DD&A")

DD&A of capitalized drilling and development costs of producing oil, natural gas and NGL properties are computed using the unit-of-production method on a field basis based on total estimated proved developed oil, natural gas and NGL reserves. Costs of acquiring proved properties are depleted using the unit-of-production method on a field basis based on total estimated proved developed and undeveloped reserves. DD&A for the three months ended September 30, 2019 and 2018 was $2.8 million and $4.5 million, and DD&A per BOE of sold production was $14.29 and $15.01, respectively. DD&A for the nine months ended September 30, 2019 and 2018 was $9.4 million and $12.7 million, and DD&A per BOE of sold production was $13.95 and $15.28, respectively.

The decrease in 2019 DD&A expense per BOE of production compared to 2018 DD&A expense per BOE of production is primarily due to the increase of the Partnership's estimated proved undeveloped reserves resulting from changes in the future drill schedule.

General and Administrative Costs

General and administrative costs for the three months ended September 30, 2019 and 2018 were $0.3 million in both periods. General and administrative costs for the nine months ended September 30, 2019 and 2018 were $1.0 million in both periods. The principal components of general and administrative expense are accounting, legal and consulting fees.

Gain (Loss) on Derivatives

In September 2019, the Partnership entered into a derivative contract (costless collar) with the objective to manage the commodity price risk on a portion of anticipated oil production for the six-month period from October 1, 2019 to March 31, 2020. As of September 30, 2019, the Partnership's derivative contract (costless collar) was in a gain position based upon the contract's estimated fair market value at the balance sheet date. Based upon the estimated fair value of the derivative contract as of September 30, 2019, the Partnership recorded a mark-to-market gain of approximately $0.5 million. Changes in the fair value of the unsettled derivative contracts represent mark-to-market gains and losses and are recorded on the Partnership's consolidated statements of operations. The mark-to-market gain recorded by the Partnership in the third quarter of 2019 does not represent an actual settlement and no payment was made to the counterparty during the third quarter of 2019.

In December 2017, January 2018 and March 2018, the Partnership entered into derivative contracts (costless collars) to manage the commodity price risk on a portion of anticipated 2018 oil production. The Partnership's loss on derivative instruments for the three months ended September 30, 2018 was approximately $40,000. The loss is comprised of (i) $1.10 million of losses on settled derivatives during the period, offset by (ii) $1.06 million of a mark-to-market gain on derivative instruments outstanding at period end. The Partnership's recognized losses on settled derivatives of $1.1 million represented 108,000 barrels of produced oil, resulting in a loss of $10.19 per barrel of oil. The Partnership's loss on derivative instruments for the nine months ended September 30, 2018 was $2.9 million. The loss is comprised of (i) $2.5 million of losses on settled derivatives during the period, and (ii) $0.4 million of a mark-to-market loss incurred on derivative instruments outstanding at period end. The Partnership's recognized losses on settled derivatives of $2.5 million represented 324,000 barrels of produced oil, resulting in a loss of $7.82 per barrel of oil.

The table below summarizes the Partnership's outstanding derivative contracts (costless collars - purchased put options and written call options) on the Partnership's oil production from October 1, 2019 to March 31, 2020.

Costless Collar Volumes (Bbl) Floor / Ceiling Prices ($)

Interest Expense, Net

Interest expense, net, for the three months ended September 30, 2019 and 2018 was $0.2 million in both periods. Interest expense, net, for the nine months ended September 30, 2019 and 2018 was $0.6 million in both periods. The primary component of Interest expense, net, during the three- and nine-month periods ended September 30, 2019 and 2018 was interest expense on the Credit Facility. Although interest rates have declined, the Partnership expects its interest expense to increase in the fourth quarter of 2019 due to an increase in outstanding borrowings.

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Supplemental Non-GAAP Measure

The Partnership uses "Adjusted EBITDAX", defined as earnings before (i) interest expense, net; (ii) income taxes; (iii) depreciation, depletion, amortization and accretion; (iv) exploration expenses; and (v) (gain)/loss on the mark-to-market of derivative instruments, as a key supplemental measure of its operating performance. This non-GAAP financial measure should be considered along with, but not as alternatives to, net income, operating income, cash flow from operating activities or other measures of financial performance presented in accordance with GAAP. Adjusted EBITDAX is not necessarily indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions. Although Adjusted EBITDAX, as calculated by the Partnership, may not be comparable to Adjusted EBITDAX as reported by other companies that do not define such terms exactly as the Partnership defines such terms, the Partnership believes this supplemental measure is useful to investors when comparing the Partnership's results between periods and with other energy companies.

The Partnership believes that the presentation of Adjusted EBITDAX is important to provide investors with additional information (i) to provide an important supplemental indicator of the operational performance of the Partnership's business without regard to financing methods and capital structure, and (ii) to measure the operational performance of the Partnership's operators.

The following table reconciles the Partnership's GAAP net income to Adjusted EBITDAX for the three and nine months ended September 30, 2019 and 2018.







                                           Three Months     Three Months       Nine Months       Nine Months
                                              Ended             Ended             Ended             Ended
                                            September       September 30,     September 30,     September 30,
                                             30, 2019           2018              2019              2018
        Net income                         $  1,794,044     $   6,360,110     $   6,093,081     $  12,720,479
        Interest expense, net                   207,847           183,480           598,063           574,127
        Depreciation, depletion,
        amortization and accretion            2,767,479         4,481,712         9,403,364        12,705,908
        . . .
        


Nov 08, 2019

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/zigman2/quotes/204602363/composite
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Volume: 16.86M
April 9, 2020 2:31p
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$33.04 million
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$2.76M
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/zigman2/quotes/207530975/composite
US : U.S.: Nasdaq
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+0.0053 +1.66%
Volume: 32.67M
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$103.59 million
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$3.19M
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