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Nov. 5, 2020, 3:46 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:

? the easing of COVID-19 and the return to pre-existing conditions following the ultimate recovery therefrom;

? 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, 2019, those described under Part II. Item 1A. Risk Factors included herein this Form 10-Q and the following:

? that the Partnership's development of its oil and gas properties may not be successful or that the Partnership's operations on such properties may not be successful;

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.

Index

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, 2019.

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, 2020, the Partnership owned an approximate 25% non-operated working interest in 243 producing wells, an estimated approximate 18% non-operated working interest in 21 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 -4.23% and Oasis Petroleum North America, LLC ("Oasis") /zigman2/quotes/204672233/delayed ZA:OAS 0.00% , 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 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 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 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 2019 and the first quarter of 2020, the Partnership elected to participate in the drilling and completion of 43 new wells in the Sanish field. Twenty-two (22) of these 43 wells have been completed and were producing at September 30, 2020; the Partnership has an approximate non-operated working interest of 23% in these 22 wells. The Partnership has an estimated approximate non-operated working interest of 18% in the remaining 21 wells that are in-process as of September 30, 2020. In total, the Partnership's estimated share of capital expenditures for the drilling and completion of these 43 wells is approximately $63 million, of which approximately $42 million was incurred as of September 30, 2020. Due to the factors described below in "Current Price Environment," Whiting suspended its Sanish field drilling program during the second quarter of 2020. See additional detail in "Oil and Natural Gas Properties" below.

Drilling Program, Oil Demand, Liquidity and Going Concern Considerations

In conjunction with the Whiting drilling program described above, the Partnership had incurred approximately $42 million in capital expenditures through September 30, 2020, which was primarily funded by availability under the Partnership's $40 million revolving credit facility ("Credit Facility", described in "Financing" below). However, the Partnership used all availability under its Credit Facility by March 31, 2020, and as of June 30, 2020, the Partnership had approximately $20 million in accrued operating and capital expenditures due to Whiting. New production from completed wells was expected to enhance the Partnership's operating performance throughout 2020, providing incremental cash flow from operations to fund the Partnership's investment in its undrilled acreage. Subsequent to the Partnership's election to participate in Whiting's drilling program, several factors, described in "Current Price Environment" below, have had and are anticipated to have an adverse impact on the Partnership's business and its financial condition. Due to these severe negative impacts to the global oil and gas industry, Whiting declared bankruptcy under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas on April 1, 2020, then subsequently suspended its Sanish field drilling program during the second quarter of 2020.

Index

In July 2020, the Partnership entered into a loan agreement for a one year, $15 million term loan ("Affiliate Loan") that matures on July 21, 2021 (see "Financing" below). The Partnership used proceeds from the Affiliate Loan plus cash on hand to pay the Partnership's accrued operating and capital expenditures due to Whiting, which totaled approximately $19 million at the time of payment. In addition to the Affiliate Loan, the Partnership entered into a letter agreement ("Letter Agreement") with its lender group for its Credit Facility. The Letter Agreement, among other items, waived the non-compliance of certain covenants under the Credit Facility; however, the Letter Agreement changed the maturity date of the Credit Facility from September 30, 2022 to July 31, 2021. In October 2020, the Partnership made a principal payment on the Affiliate Loan of $5 million; therefore, the Partnership's outstanding debt obligations at the date of filing of this Form 10-Q total $50 million and mature within one year of the filing of this Form 10-Q.

The Partnership's ability to continue as a going concern is dependent on several factors including, but not limited to, (i) the Partnership's ability to comply with its obligations under its loan agreements; (ii) refinancing its existing debt and/or securing additional capital; (iii) an increase in demand for oil and natural gas as the global economy recovers from the effects of the COVID-19 pandemic and the existing oversupply of oil in the United States; and (iv) an increase in oil and natural gas market prices, which will improve the Partnership's cash flow generated from operations. The Partnership can provide no assurance that it will be able to achieve any of these objectives. Refinancing its existing debt or securing additional capital may not be available on favorable terms to the Partnership, if it is available at all. There also can be no assurance that economic activity and oil and natural gas market conditions, including commodity prices, will return to pre-COVID-19 levels, or that the Partnership will be able to meet its operational obligations. If the Partnership is unable to refinance or repay its debt obligations or is unable to meet its operational obligations, the Partnership could be required to liquidate certain of its assets used for collateral to satisfy these obligations, which create the substantial doubt that exists about the ability of the Partnership to continue as a going concern for one year after the date these financial statements are issued.

Current Price Environment

Historically, worldwide oil and natural gas prices and markets have been subject to significant change and volatility and will continue to be in the future. Since first being reported in December 2019, COVID-19 spread worldwide, forcing governments around the world to take drastic measures to halt the outbreak. These measures included significant restrictions on travel, forced quarantines, stay-at-home requirements and the closure of businesses in many industries, creating extreme volatility in capital markets and the global economy. Because of COVID-19's impact to the global economy, demand for fossil fuels substantially declined during the first quarter of 2020, and demand remained depressed during the second quarter of 2020. Although prices for oil and natural gas stabilized in June 2020 and throughout the third quarter of 2020, prices remain below pre-COVID-19 levels and are not anticipated to return to pre-COVID-19 levels during 2020.

In addition to the outbreak of COVID-19 during the first quarter of 2020, Saudi Arabia and Russia, two of the largest worldwide producers of crude oil, engaged in a price war during March and April 2020. Russia did not participate in production cuts coordinated by the Organization of the Petroleum Exporting Countries ("OPEC"), which led to Saudi Arabia lowering crude oil prices and both countries substantially increasing daily output of crude oil. The increase in Saudi and Russian oil output along with sustained production by other global producers, including the United States, has stressed the oil and gas industry's capacity to store excess oil and gas. Despite Saudi Arabia, Russia, the United States and other OPEC members reaching an agreement in April 2020 to cut daily production, congested supply chain channels and excess crude oil and natural gas inventory are expected to weigh negatively on commodity prices while demand remains low during COVID-19.

These factors led to oil prices falling to 20-year lows in April 2020, when the average daily NYMEX futures closing prices for the month was $16.70. In response to lower commodity prices and reduced demand, operators within the United States altered drilling programs and the related forecasted capital expenditures for those programs, and implemented other cost-saving measures, such as curtailing production or shutting in producing wells, during the second quarter of 2020. While operators have since returned significant inventory of existing wells to production, the nature and timing of drilling new wells remains uncertain. The Partnership's revenues and cash flow from operations are highly sensitive to changes in oil and natural gas prices and to levels of production. As a result, sustained lower prices have and will continue to impact the amount of capital the Partnership has available for the development of its undrilled wellsites. In addition to commodity price fluctuations, despite the addition of new wells discussed above, the Partnership faces the challenge of natural production volume declines. As reservoirs are depleted, oil and natural gas production from Partnership wells will decrease.

Index

The following table lists average NYMEX prices for oil and natural gas for the three and nine months ended September 30, 2020 and 2019.







                                    Three Months Ended September 30,           Percent            Nine Months Ended September 30,           Percent
                                      2020                     2019             Change             2020                     2019            Change
        Average market
        closing prices (1)
           Oil (per Bbl)        $          40.91         $          56.44          -27.5 %   $          38.22         $          57.01          -33.0 %
           Natural gas (per
        Mcf)                    $           2.00         $           2.38          -16.0 %   $           1.87         $           2.62          -28.6 %
        


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 ("NGL" or "NGLs"), (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, 2020 and 2019.







                                                Three Months Ended September 30,                                                 Nine Months Ended September 30,
                                                   Percent of                       Percent of      Percent                        Percent of                        Percent of      Percent
                                     2020           Revenue           2019           Revenue         Change          2020           Revenue            2019           Revenue         Change
        Total revenues            $ 9,650,268            100.0 %   $ 7,339,109            100.0 %       31.5 %   $ 25,506,320            100.0 %   $ 26,748,113            100.0 %       -4.6 %
        Production expenses         2,825,472             29.3 %     2,228,933             30.4 %       26.8 %      6,997,839             27.4 %      7,977,046             29.8 %      -12.3 %
        Production taxes              777,012              8.1 %       558,288              7.6 %       39.2 %      2,185,903              8.6 %      2,132,056              8.0 %        2.5 %
        Depreciation,
        depletion, amortization
        and accretion               6,112,621             63.3 %     2,767,479             37.7 %      120.9 %     16,575,336             65.0 %      9,403,364             35.2 %       76.3 %
        General, administration
        and other expense             379,569              3.9 %       281,308              3.8 %       34.9 %      1,300,003              5.1 %      1,043,293              3.9 %       24.6 %
        Production (BOE):
        Oil                           245,522                          134,533                          82.5 %        760,284                           457,259                          66.3 %
        Natural gas                    52,789                           34,343                          53.7 %        123,978                           116,857                           6.1 %
        Natural gas liquids            44,573                           24,807                          79.7 %        112,797                            99,726                          13.1 %
          Total                       342,884                          193,683                          77.0 %        997,059                           673,842                          48.0 %
        Average sales price per
        unit:
        Oil (per Bbl)             $     33.35                      $     49.43                         -32.5 %   $      29.48                      $      49.45                         -40.4 %
        Natural gas (per Mcf)            2.01                             2.08                          -3.4 %           1.87                              2.95                         -36.6 %
        Natural gas liquids
        (per Bbl)                       18.53                            10.49                          76.6 %          15.08                             20.75                         -27.3 %
        Combined (per BOE)              28.14                            37.89                         -25.7 %          25.58                             39.69                         -35.6 %
        Average unit cost per
        BOE:
        Production expenses              8.24                            11.51                         -28.4 %           7.02                             11.84                         -40.7 %
        Production taxes                 2.27                             2.88                         -21.4 %           2.19                              3.16                         -30.7 %
        Depreciation,
        depletion, amortization
        and accretion                   17.83                            14.29                          24.8 %          16.62                             13.95                          19.1 %
        Capital expenditures      $   416,882                      $ 5,957,663                                   $ 18,564,273                      $  7,808,174
        


Index

Oil, Natural Gas and NGL Revenues

For the three months ended September 30, 2020, revenues for oil, natural gas and NGL sales were $9.7 million. Revenues for the sale of crude oil were $8.2 million, which resulted in a realized price of $33.35 per barrel. Revenues for the sale of natural gas were $0.6 million, which resulted in a realized price of $2.01 per Mcf. Revenues for the sale of NGLs were $0.8 million, which resulted in a realized price of $18.53 per BOE of sold production. 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 nine months ended September 30, 2020, revenues for oil, natural gas and NGL sales were $25.5 million. Revenues for the sale of crude oil were $22.4 million, which resulted in a realized price of $29.48 per barrel. Revenues for the sale of natural gas were $1.4 million, which resulted in a realized price of $1.87 per Mcf. Revenues for the sale of NGLs were $1.7 million, which resulted in a realized price of $15.08 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.

The realized prices per barrel of oil above are based upon the NYMEX benchmark price less a cost to distribute the oil, or the differential. Oil price differentials primarily represent the transportation costs in moving produced oil at the wellhead to a refinery and are based on the availability of pipeline, rail and other transportation methods out of the Sanish field. Due to produced oil from the Sanish field exceeding demand and reduced storage capacity available at refineries, the Partnership's oil price differential increased during the second quarter of 2020. However, as market supply and demand imbalances began to stabilize in July 2020, the Partnership's oil price differential returned to historical levels during the third quarter of 2020. In July 2020, a federal judge ruled that two significant pipelines that transport oil and natural gas from North Dakota fields, including the Sanish field, must suspend operations due to environmental review and disputes over right to use land owned by Native Americans (this ruling was later stayed on appeal and the case remains active in court). If use of the region pipelines is suspended at a future date, the Partnership anticipates its differential would increase. Realized sales prices for natural gas and NGLs were also negatively impacted in 2020 due to processing and transportation constraints, discussed above in "Current Price Environment" and below in "Production Expenses", as product leaves the Sanish field.

The Partnership's results for the three and nine months ended September 30, 2020 were negatively impacted by the Partnership's realized sales prices for oil, natural gas and NGLs, which decreased in line with market commodity prices described in "Current Price Environment" above, in comparison to the same periods of 2019. However, the Partnership's increase in sold production volumes for the three and nine months ended September 30, 2020 helped offset the negative impact of lower realized sales prices. The Partnership has completed 22 new wells since the fourth quarter of 2019, which led to increases in the Partnership's sold production volumes of oil, natural gas and NGLs when compared to the same periods of 2019 (during the third quarter of 2019, production from some of the Partnership's existing producing wells was temporarily suspended to allow for the commencement of drilling wells now complete on the Partnership's acreage). In addition, the Partnership's operators did not curtail production or shut-in a significant number of producing wells during the second quarter of 2020, so the Partnership has benefited from stable production throughout 2020. Sold production for the Sanish Field Assets was approximately 3,700 BOE per day and 3,600 BOE per day for the three and nine months ended September 30, 2020, respectively, while sold production was approximately 2,100 BOE and 2,500 BOE per day for the three and nine months ended September 30, 2019, respectively.

If commodity prices fall from current levels and operators are unable to produce, process and sell oil and natural gas at economical prices, the operators in the Sanish field may curtail daily production, shut-in producing wells or seek other cost-cutting measures, and could continue so long as producing is uneconomical. Consequently, any of these measures could significantly impact the Partnership's oil, natural gas and NGL production. If certain wells are shut-in, there can be no assurance regarding how they will produce if and when they are brought back on-line. Further, production is dependent on the investment in existing wells and the development of new wells. The Partnership has 21 wells currently in various stages of drilling and completion, and the timing of completion of these wells is unknown at this time. Therefore, the Partnership will experience natural production declines until market conditions improve and the 21 in-process wells are completed.

Index

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, 2020 and 2019, production expenses were $2.8 million and $2.2 million, respectively, and production expenses per BOE of sold production were $8.24 and $11.51, respectively. For the nine months ended September 30, 2020 and 2019, production expenses were $7.0 million and $8.0 . . .

Nov 05, 2020

COMTEX_374006526/2041/2020-11-05T15:45:59

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/zigman2/quotes/204602363/composite
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Volume: 490,799
Jan. 15, 2021 4:00p
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Market Cap
$965.45 million
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$3.11M
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