EQUUS TOTAL RETURN INC
For the period ended Jun 30, 2024. Filed Aug 19, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 19, 2024
EQS$0.64+2.2%Stored close · as of Nov 4, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-15.
0001712543-24-000030
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-19.
0001712543-24-000057
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 46 previous paragraphs and 49 current paragraphs.
28 unchanged; 14 reworded; 6 added; 4 removed; 0 previous and 1 current paragraphs rearranged.
Tables are not compared: 1 previous and 1 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (6)
Current report
Morgan has undertaken significant capital expenditures for oil and gas development during the third and fourth quarters of 2023. During 2024, Morgan undertook an additional $5.5 million in capital expenditures, principally consisting of accruals and additional costs related to the development of its initial two wells. The company is expected to incur additional capital expenditures related to drilling and completion of additional wells later in 2024.
Current report
Employment and Housing. The U.S. added only 110,000 new jobs in July 2024, resulting in an increase in the unemployment rate to 4.3%, somewhat more than consensus expectations and raising concerns of a pending recession. The Congressional Budget Office is predicting a further increase to 4.7% before tapering off to 4.5% in 2025. Persistently high borrowing costs have constrained sales volumes of existing and new homes during 2023 and the first six months of 2024, although home prices continue to increase and have outpaced inflation. Recent negative economic data have resulted in downward pressure on mortgage rates, suggesting that acquisition and refinancing activity for 30-year mortgages will increase in the latter half of 2024 (Sources: Bureau of Labor Statistics; Freddie Mac).
Current report
It is possible the Fund will require loans, capital investment from one or more sources, or will be required to dispose of certain of its investments, to cover a potential cash shortfall. The Fund does not presently have any existing commitments to fund any such shortfall, should it occur, and cannot guarantee that it will be able to execute on such plans in the future.
Current report
Compensation expense was $0.5 million and $0.4 million for the three months ended June 30, 2024 and 2023, respectively and $0.9 million and $0.8 million for the six months ended June 30, 2024 and 2023, respectively,
Current report
General and administrative expenses were $0.06 million and $0.04 million for the three months ended June 30, 2024 and June 30, 2023, respectively, and $0.1 million and $0.7 million for the six months ended June 30, 2024 and June 30, 2023, respectively.
Current report
During the six months ended June 30, 2023, we made a $0.75 million debt investment in Morgan and also invested $1.00 in the equity of Morgan. We recorded a change in fair value of the equity of Morgan of $6.8 million. The increase was principally due to our expectation of Morgan drilling new wells and generating operating cash flow therefrom in the near future in the Bakken shale region where it holds leasehold acreage rights.
Removed paragraphs (4)
Previous report
Morgan has undertaken significant capital expenditures for oil and gas development during the third and fourth quarters of 2023 and is expected to continue to do so later in 2024. Morgan may secure capital for this purpose from Equus, from one or more institutional and private sources, or a combination of the foregoing.
Previous report
Employment and Housing. The U.S. unemployment rate increased slightly to 3.9% in April 2024 from 3.8% in March 2024, remaining largely unchanged since the first quarter of 2022 and substantially below the high of 14.5% in April 2020 when economic uncertainty associated with Covid-19 was at its peak. Economists are projecting an increase to 4.1% by the end of 2024 with a steady decline thereafter into 2026. Persistently high borrowing costs have constrained sales volumes of existing and new homes during 2023 and the first quarter of 2024, although home prices continue to increase and have outpaced inflation. (Sources: Bureau of Labor Statistics; Freddie Mac).
Previous report
Compensation expense was unchanged at $0.4 million for the three months ended March 31, 2024 and 2023, respectively.
Previous report
General and administrative expenses were comparable for the three months ended March 31, 2024 and 2023, and were $0.03 million for each quarterly period.
Reworded paragraphs (14)
Previous wording
Authorization to Withdraw BDC Election. In previous years, holders of a majority of the outstanding common stock of the Fund approved our cessation as a BDC under the 1940 Act and authorized our Board to cause the Fund’s withdrawal of its election to be classified as a BDC, effective as of a date designated by the Board and our Chief Executive Officer. Although this authorization has since expired, we expect to receive a further authorization from our shareholders later in 2024 as a consequence of our expressed intent to transform Equus into an operating company. Notwithstanding any such authorization to withdraw our BDC election, we will not submit any such withdrawal unless and until Equus has entered into a definitive agreement to effect a transformative transaction. Further, even if we are again authorized to withdraw our election as a BDC, we will require a subsequent affirmative vote from holders of a majority of our outstanding voting shares to enter into any such definitive agreement or change the nature of our business. While we are presently evaluating various opportunities that could enable us to accomplish this transformation, we cannot assure you that we will be able to do so within any particular time period or at all, and, although we expect that our shareholders will grant a further authorization, we do not expect to cause the Fund to withdraw its election to be classified as BDC prior to June 30, 2024. Moreover, we cannot assure you that the terms of any such transformative transaction would be acceptable to us.
Current wording
Authorization to Withdraw BDC Election. In previous years, holders of a majority of the outstanding common stock of the Fund approved our cessation as a BDC under the 1940 Act and authorized our Board to cause the Fund’s withdrawal of its election to be classified as a BDC, effective as of a date designated by the Board and our Chief Executive Officer. Although this authorization has since expired, we expect to receive a further authorization from our shareholders later in 2024 or in 2025 as a consequence of our expressed intent to transform Equus into an operating company. Notwithstanding any such authorization to withdraw our BDC election, we will not submit any such withdrawal unless and until Equus has entered into a definitive agreement to effect a transformative transaction. Further, even if we are again authorized to withdraw our election as a BDC, we will require a subsequent affirmative vote from holders of a majority of our outstanding voting shares to enter into any such definitive agreement or change the nature of our business. While we are presently evaluating various opportunities that could enable us to accomplish this transformation, we cannot assure you that we will be able to do so within any particular time period or at all, and, although we expect that our shareholders will grant a further authorization, we do not expect to cause the Fund to withdraw its election to be classified as BDC prior to September 30, 2024. Moreover, we cannot assure you that the terms of any such transformative transaction would be acceptable to us.
Previous wording
Impact of Economic and Geopolitical Events on the Oil and Gas Sector. Beginning in Q2 2022, crude prices began a steady decline following increases that were largely due to increased post-Covid demand and the buildup and subsequent invasion of Ukraine by Russian forces. Prices began to rise again in in the third quarter of 2023, retreated during the fourth quarter of 2023, and have increased significantly since the beginning of 2024 and stood at $83.17 as of March 31, 2024. Natural gas prices experienced high volatility in 2022 before collapsing in 2023 and have thereafter remained generally stable, finishing the first quarter of 2024 at $1.76 per MMBTU. Recent oil price stability and subsequent price increases have been significant factors in increased consolidation activity in the Permian Basin where Equus Energy holds most of its development rights, as well as in the Williston Basin region in North Dakota where Morgan holds its development rights. The U.S. Energy Information Administration has recently issued estimates of $82.15 and $80.30 for the average WTI price for the years 2024 and 2025, respectively.
Current wording
Impact of Economic and Geopolitical Events on the Oil and Gas Sector. Beginning in the second quarter of 2022, crude prices began a steady decline following increases that were largely due to increased post-Covid demand and the buildup and subsequent invasion of Ukraine by Russian forces. Prices began to rise again in in the third quarter of 2023, retreated during the fourth quarter of 2023, and have increased significantly since the beginning of 2024 and stood at $82.83 as of June 30, 2024. Natural gas prices experienced high volatility in 2022 before collapsing in 2023 and have thereafter remained generally stable, finishing the second quarter of 2024 at $2.42 per MMBTU. Recent oil price stability and subsequent price increases have been significant factors in increased consolidation activity in the Permian Basin where Equus Energy holds most of its development rights, as well as in the Williston Basin region in North Dakota where Morgan holds its development rights. The U.S. Energy Information Administration has recently issued estimates of $82.03 and $83.88 for the average WTI price per barrel of oil for the years 2024 and 2025, respectively.
Previous wording
The U.S. Economy. U.S. GDP increased at an annualized rate of 1.6% in the first quarter of 2024, significantly below consensus estimates of 2.5% for the period. This followed an increase of 3.4% on an annualized basis for the fourth quarter of 2023. The principal drivers of the decrease were decreased consumer spending, exports, and a downturn in government spending. The Conference Board is projecting slow growth at less than 1.0% in each of Q2 and Q3, 2024, and increasing to near 2.0% for 2025. (Sources: Bureau of Economic Analysis; The Conference Board).
Current wording
The U.S. Economy. U.S. GDP increased at an annualized rate of 2.8% in the second quarter of 2024, significantly above consensus estimates of 2.1% for the period. This followed an increase of 1.4% on an annualized basis for the first quarter of 2024. The principal drivers of the increase were increased consumer and government spending, as well as an increase in inventories. The Conference Board is projecting slow growth at approximately 1.0% in each of the third and fourth quarters of 2024 and increasing to near 2.0% for 2025. (Sources: Bureau of Economic Analysis; The Conference Board).
Previous wording
Consumer Prices. After experiencing substantial increases in 2022 and the first half of 2023, consumer prices have significantly decreased and have been largely stable, fluctuating between 3.0% and 3.7% thereafter. In April 2024, the Bureau of Labor Statistics reported an annualized inflation rate of 3.5%, an increase from January and February 2024’s rates of 3.1% and 3.2%, respectively. Housing and transportation prices remained a principal driver of inflation, but even the core inflation rate, which excludes energy and food prices, was stable at 3.8% for March 2024. Largely as a result of slowing of economic growth, most commentators are forecasting a decrease in the rate of inflation throughout the remainder of 2024 and into 2025. (Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; Trading Economics).
Current wording
Consumer Prices. After experiencing substantial increases in 2022 and into 2023, consumer price increases have significantly ebbed. As of June 30, 2024, the consumer price index was up 3.0% over the previous 12-month period, down from 3.3% in May 2024. Largely as a result of slowing of economic growth, most commentators are forecasting a decrease in the rate of inflation throughout the remainder of 2024 and into 2025. (Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; Trading Economics).
Previous wording
Interest Rates. Principally as a response to rising prices, the Federal Reserve began a series of federal funds rate increases in May 2022 which continued for ten consecutive meetings of the Federal Open Market Committee until July 2023, which set the rate at 5.5%, the highest in 22 years. No further increases have been made since, but the effect of such rate increases and inflationary pressures has been substantially increased borrowing costs, particularly for homebuyers and small businesses, as well as slower economic growth. Moreover, credit providers have also begun to require higher collateralization rates, with shorter maturities and higher fees than in the recent past. (Sources: Forbes; The Street).
Current wording
Interest Rates. Principally as a response to rising prices, the Federal Reserve began a series of federal funds rate increases in May 2022 which continued for ten consecutive meetings of the Federal Open Market Committee until July 2023, which set the rate at 5.5%, the highest in 22 years. With decreases in the consumer price index and increases in the U.S. unemployment rate, most analysts are expecting at least a 25 basis point decrease in the Federal Funds rate at the next meeting of the Federal Open Market Committee in September 2024. (Sources: Forbes; The Wall Street Journal).
Previous wording
Mergers and Acquisitions. After two consecutive years of declines, global merger and acquisition activity has begun to increase, with year-over-year increases in dealmaking up 10% in the first quarter of 2024 over the first quarter of 2023. Some industry commentators are predicting that consolidations will continue to increase in 2024, particularly in the areas of healthcare, technology, and energy. Higher interest rates and lower deal volumes have kept valuation multiples at levels consistent with previous years, which is expected to facilitate increased transaction activity through the remainder of the year. (Source: Pitchbook).
Current wording
Mergers and Acquisitions. After two consecutive years of declines, global merger and acquisition activity has begun to increase, with $555 billion in aggregate deal values during the first quarter of 2024 and a similar amount ($552 billion) in the second quarter of 2024, representing 8,551 separate transactions. Some industry commentators are predicting that consolidations will continue to increase in 2024, particularly in the areas of healthcare, technology, and energy. Higher interest rates and lower deal volumes have kept valuation multiples at levels consistent with previous years, which is expected to facilitate increased transaction activity through the remainder of the year. (Source: Pitchbook; S&P Global).
Previous wording
Private Equity. After experiencing a record year in 2021, private equity activity slowed in 2022 before increasing slightly in 2023. Although data for the first quarter of 2024 is not yet available, industry analysts are predicting artificial intelligence driven enterprises will top the list of acquisition priorities, along with energy infrastructure plays that benefit from federal incentives. (Source: Ernst & Young).
Current wording
Private Equity. Private equity activity, both in the U.S. and globally, slowed in 2022 and 2023 following the frenetic pace of 2020 and 2021. The first half of 2024, however showed a marked increase in aggregate deal value ($310 billion) as compared to the first half of 2023 ($250 billion), an increase of over 24%. Industry analysts are predicting artificial intelligence driven enterprises will top the list of acquisition priorities, along with energy infrastructure plays that benefit from federal incentives. (Source: Statista; S&P Global).
Previous wording
During the three months ended March 31, 2024, our net asset value decreased from $3.55 per share to $3.38 per share, a decrease of 4.8%. As of March 31, 2024, our common stock is trading at a 57.1% discount to our net asset value as compared to 59.2% as of December 31, 2023.
Current wording
During the six months ended June 30, 2024, our net asset value increased from $3.55 per share to $3.66 per share, an increase of 3.1%. As of June 30, 2024, our common stock is trading at a 63.9% discount to our net asset value as compared to 59.2% as of December 31, 2023.
Previous wording
We are evaluating the impact of current market conditions on our portfolio company valuations and their ability to provide current income. We believe we have followed valuation techniques in a reasonably consistent manner; however, we are cognizant of current market conditions that might affect future valuations of portfolio securities. In view of our present status as a BDC and our anticipated transformation into an operating company, we believe that our operating cash flow and cash on hand will be sufficient to meet operating requirements and to finance routine capital expenditures through the next twelve months.
Current wording
We are evaluating the impact of current market conditions on our portfolio company valuations and their ability to provide current income. We believe we have followed valuation techniques in a reasonably consistent manner; however, we are cognizant of current market conditions that might affect future valuations of portfolio securities.
Previous wording
Net investment loss was $2.4 million for the three months ended March 31, 2024 compared to $1.1 million for the three months ended March 31, 2023.
Current wording
Net investment loss was relatively unchanged at $0.9 million and $2.0 million respectively, for the three and six months ended June 30, 2024 and ended June 30, 2023.
Previous wording
Professional fees were $0.6 million for the three months ended March 31, 2024 as compared to $0.4 million for the three months ended March 31, 2023. The increase was principally due to additional professional services and overall fee increases.
Current wording
Professional fees were $0.4 million and $0.1 million for the three months ended June 30, 2024 and 2023, respectively and $0.9 million and $0.5 million for the six months ended June 30, 2024 and June 30, 2023 respectively. The increase was principally due to additional professional services and overall fee increases.
Previous wording
During the three months ended March 31, 2024, we made a $2.2 million follow-on debt investment in Morgan E&P, LLC (“Morgan”). We recorded a decrease of $1.35 million in the fair value of our equity holding in Morgan.
Current wording
During the six months ended June 30, 2024, we made a $2.2 million follow-on debt investment in Morgan E&P, LLC (“Morgan”). During this period, we also recorded an increase of $3.4 million in the fair value of our equity holding in Morgan. The increase was primarily due to the reclassification of a significant portion of Morgan’s proved reserves as proved developed producing, as well as the acquisition of approximately 810 additional net acres.
Previous wording
During the three months ended March 31, 2024, with respect to our holding in Equus Energy, LLC, we recorded no change in the fair value of this investment.
Current wording
During the six months ended June 30, 2024, with respect to our holding in Equus Energy, LLC, we recorded no change in the fair value of this investment.
Previous wording
In April 2024, our holding in $53.0 million in U.S. Treasury Bills matured and we repaid our margin loan.
Current wording
In July 2024, our holding in $54.0 million in U.S. Treasury Bills matured and we repaid our margin loan.
Rearranged current paragraphs (1)
Current report — wording carried from elsewhere
During the six months ended June 30, 2023, with respect to our holding in Equus Energy, LLC, we recorded no change in the fair value of this investment.