Note 1 - Description of Business and Basis of Presentation
Description of Business
Callon Petroleum Company is an independent oil and natural gas company focused on the acquisition, exploration and development of high-quality assets in the leading oil plays of South and West Texas. As used herein, the “Company,” “Callon,” “we,” “us,” and “our” refer to Callon Petroleum Company and its predecessors and subsidiaries unless the context requires otherwise.
The Company’s activities are primarily focused on horizontal development in the Midland and Delaware Basins, both of which are part of the larger Permian Basin in West Texas, as well as the Eagle Ford in South Texas. The Company’s primary operations in the Permian reflect a high-return, oil-weighted drilling inventory with multiple prospective horizontal development intervals and are complemented by a well-established and repeatable cash flow-generating business in the Eagle Ford.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements include the accounts of the Company after elimination of intercompany transactions and balances. These financial statements have been prepared pursuant to the rules and regulations of the SEC and therefore do not include all disclosures required for financial statements prepared in conformity with GAAP. In the opinion of management, these financial statements reflect all normal, recurring adjustments and accruals considered necessary to present fairly, in all material respects, the Company’s interim financial position, results of operations and cash flows. However, the results of operations for the periods presented are not necessarily indicative of the results of operations that may be expected for the full year. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications did not have a material impact on prior period financial statements.
Significant Accounting Policies
The Company’s significant accounting policies are described in “Note 2 - Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Annual Report”) and are supplemented by the notes included in this Quarterly Report on Form 10-Q. The financial statements and related notes included in this report should be read in conjunction with the Company’s 2021 Annual Report.
Recently Adopted Accounting Standards
Debt. In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 was issued to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. The guidance is to be applied using either a modified retrospective or a fully retrospective method. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company adopted ASU 2020-06 on January 1, 2022. The adoption of ASU 2020-06 did not have a material impact to the Company’s consolidated financial statements or disclosures.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) followed by ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), issued in January 2021 to provide clarifying guidance regarding the scope of Topic 848. ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Generally, the guidance is to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. ASU 2020-04 and ASU 2021-01 are effective for all entities through December 31, 2022. In April 2022, the FASB proposed to defer the effective date from December 31, 2022 to December 31, 2024, however a final ruling has not been issued. As of March 31, 2022, the Company has not elected to use the optional guidance and continues to evaluate the options provided by ASU 2020-04 and ASU 2021-01. Please refer to “Note 6 –
Borrowings” for discussion of the use of the adjusted LIBO rate in connection with borrowings under the Company’s senior secured revolving credit facility.
Subsequent Events
The Company evaluates subsequent events through the date the financial statements are issued. See “Note 15 - Subsequent Events” for further discussion.
Note 2 - Revenue Recognition
Revenue from Contracts with Customers
The Company recognizes oil, natural gas, and NGL production revenue at the point in time when control of the product transfers to the purchaser, which differs depending on the applicable contractual terms. Transfer of control also drives the presentation of gathering, transportation and processing in the consolidated statements of operations. See “Note 3 - Revenue Recognition” of the Notes to Consolidated Financial Statements in the 2021 Annual Report for more information regarding the types of contracts under which oil, natural gas, and NGL production revenue is generated.
Accounts Receivable from Revenues from Contracts with Customers
Net accounts receivable include amounts billed and currently due from revenues from contracts with customers of our oil and natural gas production, which had a balance at March 31, 2022 and December 31, 2021 of $262.4 million and $171.8 million, respectively, and are presented in “Accounts receivable, net” in the consolidated balance sheets.
Prior Period Performance Obligations
The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for sales may not be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. The Company records the differences between estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. The Company has existing internal controls for its revenue estimation process and related accruals, and any identified differences between its revenue estimates and actual revenue received historically have not been significant.
Note 3 - Acquisitions and Divestitures
2021 Acquisitions and Divestitures
Primexx Acquisition
On October 1, 2021, the Company closed on the acquisition of certain producing oil and gas properties, undeveloped acreage and associated infrastructure assets in the Delaware Basin from Primexx Resource Development, LLC (“Primexx”) and BPP Acquisition, LLC (“BPP”) for an adjusted purchase price of approximately $444.8 million in cash, inclusive of the deposit paid at signing, 8.84 million shares of the Company’s common stock and approximately $25.2 million paid upon final closing for total consideration of $880.8 million (the “Primexx Acquisition”), subject to potential adjustments for applicable indemnification claims as discussed below. The Company funded the cash portion of the total consideration with borrowings under its Credit Facility, as defined below. Of the 8.84 million shares of the Company’s common stock issued upon closing, 2.6 million shares were held in escrow pursuant to the purchase and sale agreements with Primexx and BPP (collectively, the “Primexx PSAs”). Pursuant to the Primexx PSAs, 50% of the shares held in escrow were released six months after the closing date, which was on April 1, 2022, and the remaining shares will be released twelve months after the closing date, which will be on October 1, 2022, in each case subject to holdback for the satisfaction of any applicable indemnification claims that may be made under the Primexx PSAs.
Also, pursuant to the Primexx PSAs, certain interest owners exercised their option to sell their interest in the properties included in the Primexx Acquisition to the Company for consideration structured similarly to the Primexx Acquisition, for an incremental purchase price totaling approximately $33.1 million, net of customary purchase price adjustments, of which $10.7 million closed during the first quarter of 2022.
The Primexx Acquisition was accounted for as a business combination; therefore, the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated acquisition date fair values with information available at that time. A combination of a discounted cash flow model and market data was used by a third-party specialist in determining the fair value of the oil and gas properties. Significant inputs into the calculation included future commodity prices, estimated volumes of oil and gas reserves, expectations for timing and amount of future development and operating costs, future plugging and abandonment costs and a
risk adjusted discount rate. Certain data necessary to complete the purchase price allocation is not yet available. The Company expects to complete the purchase price allocation during the 12-month period following the acquisition date.
The following table sets forth the Company’s preliminary allocation of the total estimated consideration of $914.0 million to the assets acquired and liabilities assumed as of the acquisition date.
| | | | | | | | |
| | Preliminary Purchase Price Allocation |
| | (In thousands) |
Assets: | | |
Other current assets | | $10,250 | |
Evaluated oil and natural gas properties | | 686,393 | |
Unevaluated properties | | 278,602 | |
Total assets acquired | | $975,245 | |
| | |
Liabilities: | | |
Suspense payable | | $16,447 | |
Other current liabilities | | 33,482 | |
Asset retirement obligation | | 1,898 | |
Other long-term liabilities | | 9,425 | |
Total liabilities assumed | | $61,252 | |
| | |
Total consideration | | $913,993 | |
Approximately $138.1 million of revenues and $28.8 million of direct operating expenses attributed to the Primexx Acquisition are included in the Company’s consolidated statements of operations for the three months ended March 31, 2022.
Pro Forma Operating Results (Unaudited). The following unaudited pro forma combined condensed financial data for the year ended December 31, 2021 was derived from the historical financial statements of the Company giving effect to the Primexx Acquisition, as if it had occurred on January 1, 2020. The below information reflects pro forma adjustments for the issuance of the Company’s common stock and the borrowings under the Credit Facility as total consideration, as well as pro forma adjustments based on available information and certain assumptions that the Company believes provide a reasonable basis for reflecting the significant pro forma effects directly attributable to the Primexx Acquisition.
The pro forma consolidated statements of operations data has been included for comparative purposes only and is not necessarily indicative of the results that might have occurred had the Primexx Acquisition taken place on January 1, 2020 and is not intended to be a projection of future results.
| | | | | | | | | | |
| | For the Year Ended |
| | December 31, 2021 | | |
| | (In thousands) |
Revenues | | $2,294,893 | | | |
Income from operations | | 1,151,493 | | | |
Net income | | 482,690 | | | |
Basic earnings per common share | | $8.37 | | | |
Diluted earnings per common share | | $8.13 | | | |
Non-Core Asset Divestitures
During 2021, we completed divestitures of certain non-core assets in the Delaware Basin, Midland Basin, and Eagle Ford Shale as well as the divestiture of certain non-core water infrastructure for total net proceeds of $181.8 million, subject to post-closing adjustments. The aggregate net proceeds for each of the 2021 divestitures were recognized as a reduction of evaluated oil and gas properties with no gain or loss recognized as the divestitures did not significantly alter the relationship between capitalized costs and estimated proved reserves. For additional discussion, see “Note 4 - Acquisitions and Divestitures” of the Notes to Consolidated Financial Statements in the 2021 Annual Report.
Note 4 - Property and Equipment, Net
As of March 31, 2022 and December 31, 2021, total property and equipment, net consisted of the following:
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
Oil and natural gas properties, full cost accounting method | | (In thousands) |
Evaluated properties | | $9,412,921 | | | $9,238,823 | |
Accumulated depreciation, depletion, amortization and impairments | | (5,986,765) | | | (5,886,002) | |
Evaluated properties, net | | 3,426,156 | | | 3,352,821 | |
Unevaluated properties | | | | |
Unevaluated leasehold and seismic costs | | 1,567,076 | | | 1,557,453 | |
Capitalized interest | | 280,714 | | | 255,374 | |
Total unevaluated properties | | 1,847,790 | | | 1,812,827 | |
Total oil and natural gas properties, net | | $5,273,946 | | | $5,165,648 | |
| | | | |
Other property and equipment | | $59,428 | | | $58,367 | |
Accumulated depreciation | | (30,443) | | | (30,239) | |
Other property and equipment, net | | $28,985 | | | $28,128 | |
The Company capitalized internal costs of employee compensation and benefits, including share-based compensation, directly associated with acquisition, exploration and development activities totaling $11.6 million and $11.2 million for the three months ended March 31, 2022 and 2021, respectively.
The Company capitalized interest costs to unproved properties totaling $25.5 million and $24.0 million for the three months ended March 31, 2022 and 2021, respectively.
Note 5 - Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding for the periods presented. The calculation of diluted earnings per share includes the potential dilutive impact of non-vested restricted stock units and unexercised warrants outstanding during the periods presented, as calculated using the treasury stock method, unless their effect is anti-dilutive. For the three months ended March 31, 2021, the Company reported a net loss. As a result, the calculation of diluted weighted average common shares outstanding excluded all potentially dilutive common shares outstanding.
The following table sets forth the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| (In thousands, except per share amounts) | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net Income (Loss) | $39,737 | | | ($80,407) | | | | | |
Basic weighted average common shares outstanding | 61,487 | | | 42,590 | | | | | |
Dilutive impact of restricted stock units | 578 | | | — | | | | | |
| | | | | | | |
Diluted weighted average common shares outstanding | 62,065 | | | 42,590 | | | | | |
| | | | | | | |
Net Income (Loss) Per Common Share | | | | | | | |
Basic | $0.65 | | | ($1.89) | | | | | |
Diluted | $0.64 | | | ($1.89) | | | | | |
| | | | | | | |
Restricted stock units (1) | 3 | | | 702 | | | | | |
Warrants (1) | 327 | | | 5,826 | | | | | |
(1) Shares excluded from the diluted earnings per share calculation because their effect would be anti-dilutive.
Note 6 - Borrowings
The Company’s borrowings consisted of the following:
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | (In thousands) |
6.125% Senior Notes due 2024 | | $460,241 | | | $460,241 | |
Senior Secured Revolving Credit Facility due 2024 | | 712,000 | | | 785,000 | |
9.00% Second Lien Senior Secured Notes due 2025 | | 319,659 | | | 319,659 | |
8.25% Senior Notes due 2025 | | 187,238 | | | 187,238 | |
6.375% Senior Notes due 2026 | | 320,783 | | | 320,783 | |
8.00% Senior Notes due 2028 | | 650,000 | | | 650,000 | |
Total principal outstanding | | 2,649,921 | | | 2,722,921 | |
Unamortized premium on 6.125% Senior Notes | | 2,157 | | | 2,373 | |
Unamortized discount on 9.00% Second Lien Senior Secured Notes | | (13,591) | | | (14,852) | |
Unamortized premium on 8.25% Senior Notes | | 2,287 | | | 2,477 | |
Unamortized deferred financing costs for Second Lien Notes | | (2,663) | | | (2,910) | |
Unamortized deferred financing costs for Senior Notes | | (14,829) | | | (15,894) | |
Total carrying value of borrowings (1) | | $2,623,282 | | | $2,694,115 | |
(1) Excludes unamortized deferred financing costs related to the Company’s senior secured revolving credit facility of $16.5 million and $18.1 million as of March 31, 2022 and December 31, 2021, respectively, which are classified in “Deferred financing costs” in the consolidated balance sheets.
Senior Secured Revolving Credit Facility
The Company has a senior secured revolving credit facility with a syndicate of lenders (the “Credit Facility”) that, as of March 31, 2022, had a maximum credit amount of $5.0 billion, a borrowing base and elected commitment amount of $1.6 billion, with borrowings outstanding of $712.0 million at a weighted-average interest rate of 2.74%, and letters of credit outstanding of $23.0 million. The credit agreement governing the Credit Facility provides for interest-only payments until December 20, 2024 when the credit agreement matures and any outstanding borrowings are due. The Credit Facility is subject to specified springing maturity dates if more than $100.0 million principal amount of the 9.00% Second Lien Senior Secured Notes due 2025 (the “Second Lien Notes”) and 6.125% Senior Notes are outstanding. The Credit Facility is secured by first preferred mortgages covering the Company’s major producing properties.
The borrowing base under the credit agreement is subject to regular redeterminations in the spring and fall of each year, as well as special redeterminations described in the credit agreement, which in each case may reduce the amount of the borrowing base. On May 2, 2022, as part of the Company’s spring 2022 redetermination, the borrowing base and elected commitment amount of $1.6 billion were reaffirmed.
Borrowings outstanding under the credit agreement bear interest at the Company’s option at either (i) a base rate for a base rate loan plus a margin between 1.00% to 2.00%, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.50% and the adjusted LIBO rate plus 1.00%, or (ii) an adjusted LIBO rate for a Eurodollar loan plus a margin between 2.00% to 3.00%. The Company also incurs commitment fees at rates ranging between 0.375% to 0.500% on the unused portion of lender commitments, which are included in “Interest expense, net of capitalized amounts” in the consolidated statements of operations.
Covenants
The Company’s credit agreement governing the Credit Facility, the 6.125% Senior Notes, the 8.25% Senior Notes, the 6.375% Senior Notes and the 8.00% Senior Notes (collectively, the “Senior Unsecured Notes”) and the Second Lien Notes limit the Company and certain of its subsidiaries with respect to the amount of additional indebtedness, liens, dividends and other payments to shareholders, repurchases or redemptions of the Company’s common stock, redemptions of senior notes, investments, acquisitions, mergers, asset dispositions, transactions with affiliates, hedging transactions and other matters, along with maintenance of certain financial ratios.
Under the credit agreement, the Company must maintain the following financial covenants determined as of the last day of the quarter: (1) a Leverage Ratio (as defined in the credit agreement governing the Credit Facility) of no more than 4.00 to 1.00 and (2) a Current Ratio (as defined in the credit agreement governing the Credit Facility) of not less than 1.00 to 1.00. The Company was in compliance with these covenants at March 31, 2022.
The credit agreement and indentures are subject to customary events of default. If an event of default occurs and is continuing, the holders or lenders may elect to accelerate amounts due (except in the case of a bankruptcy event of default, in which case such amounts will automatically become due and payable).
Note 7 - Derivative Instruments and Hedging Activities
Objectives and Strategies for Using Derivative Instruments
The Company is exposed to fluctuations in oil, natural gas and NGL prices received for its production. Consequently, the Company believes it is prudent to manage the variability in cash flows on a portion of its oil, natural gas and NGL production. The Company utilizes a mix of collars, swaps, and put and call options to manage fluctuations in cash flows resulting from changes in commodity prices. The Company does not use these instruments for speculative or trading purposes.
Counterparty Risk and Offsetting
The Company typically has numerous commodity derivative instruments outstanding with a counterparty that were executed at various dates, for various contract types, commodities and time periods. This often results in both commodity derivative asset and liability positions with that counterparty. The Company nets its commodity derivative instrument fair values executed with the same counterparty to a single asset or liability pursuant to International Swap Dealers Association Master Agreements (“ISDA Agreements”), which provide for net settlement over the term of the contract and in the event of default or termination of the contract. In general, if a party to a derivative transaction incurs an event of default, as defined in the applicable agreement, the other party will have the right to demand the posting of collateral, demand a cash payment transfer or terminate the arrangement.
As of March 31, 2022, the Company has outstanding commodity derivative instruments with ten counterparties to minimize its credit exposure to any individual counterparty. All of the counterparties to the Company’s commodity derivative instruments are also lenders under the Company’s credit agreement. Therefore, each of the Company’s counterparties allow the Company to satisfy any need for margin obligations associated with commodity derivative instruments where the Company is in a net liability position with the collateral securing the credit agreement, thus eliminating the need for independent collateral posting.
Because each of the Company’s counterparties has an investment grade credit rating, the Company believes it does not have significant credit risk and accordingly does not currently require its counterparties to post collateral to support the net asset positions of its commodity derivative instruments. Although the Company does not currently anticipate nonperformance from its counterparties, it continually monitors the credit ratings of each counterparty.
While the Company monitors counterparty creditworthiness on an ongoing basis, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, the Company may not realize the benefit of some of its derivative instruments under lower commodity prices while continuing to be obligated under higher commodity price contracts subject to any right of offset under the agreements. Counterparty credit risk is considered when determining the fair value of a derivative instrument. See “Note 8 - Fair Value Measurements” for further discussion.
Contingent Consideration Arrangements
The Company met certain oil pricing thresholds for 2021 associated with certain contingent consideration arrangements described in “Note 8 - Derivative Instruments and Hedging Activities” of the Notes to Consolidated Financial Statements in its 2021 Annual Report. Cash received or paid for settlements of contingent consideration arrangements are classified as cash flows from financing activities or cash flows from investing activities, respectively, up to the divestiture or acquisition date fair value, respectively, with any excess classified as cash flows from operating activities. As a result, the Company received $20.8 million, of which $8.5 million is presented in cash flows from financing activities with the remaining $12.3 million presented in cash flows from operating activities, and paid $25.0 million, of which $19.2 million is presented in cash flows from investing activities with the remaining $5.8 million presented in cash flows from operating activities, in the first quarter of 2022. Both of these contingent consideration arrangements expired at the end of 2021.
Financial Statement Presentation and Settlements
The Company records its derivative instruments at fair value in the consolidated balance sheets and records changes in fair value as “(Gain) loss on derivative contracts” in the consolidated statements of operations. Settlements are also recorded as “(Gain) loss on derivative contracts” in the consolidated statements of operations. The Company presents the fair value of derivative contracts on a net basis in the consolidated balance sheets as they are subject to master netting arrangements. The following presents the impact of this presentation to the Company’s recognized assets and liabilities for the periods indicated:
| | | | | | | | | | | | | | | | | |
| As of March 31, 2022 |
| Presented without | | | | As Presented with |
| Effects of Netting | | Effects of Netting | | Effects of Netting |
| (In thousands) |
Derivative Assets | | | | | |
Fair value of derivatives - current | $10,939 | | | ($10,939) | | | $— | |
Other assets, net | $15,773 | | | ($15,773) | | | $— | |
| | | | | |
Derivative Liabilities | | | | | |
Fair value of derivatives - current (1) | ($403,867) | | | $10,939 | | | ($392,928) | |
Fair value of derivatives - non-current | ($50,207) | | | $15,773 | | | ($34,434) | |
(1) Includes approximately $0.9 million of deferred premiums, which will be paid as the applicable contracts settle.
| | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Presented without | | | | As Presented with |
| Effects of Netting | | Effects of Netting | | Effects of Netting |
| (In thousands) |
Assets | | | | | |
Commodity derivative instruments | $25,469 | | | ($23,921) | | | $1,548 | |
Contingent consideration arrangements | 20,833 | | | — | | | 20,833 | |
Fair value of derivatives - current | $46,302 | | | ($23,921) | | | $22,381 | |
Commodity derivative instruments | $1,119 | | | ($869) | | | $250 | |
Contingent consideration arrangements | — | | | — | | | — | |
Other assets, net | $1,119 | | | ($869) | | | $250 | |
| | | | | |
Liabilities | | | | | |
Commodity derivative instruments (1) | ($184,898) | | | $23,921 | | | ($160,977) | |
Contingent consideration arrangements | (25,000) | | | — | | | (25,000) | |
Fair value of derivatives - current | ($209,898) | | | $23,921 | | | ($185,977) | |
Commodity derivative instruments | ($12,278) | | | $869 | | | ($11,409) | |
Contingent consideration arrangements | — | | | — | | | — | |
| | | | | |
Fair value of derivatives - non-current | ($12,278) | | | $869 | | | ($11,409) | |
(1) Includes approximately $2.9 million of deferred premiums, which will be paid as the applicable contracts settle.
The components of “Loss on derivative contracts” are as follows for the respective periods: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| (In thousands) |
Loss on oil derivatives | $325,348 | | | $149,561 | | | | | |
Loss on natural gas derivatives | 28,181 | | | 2,697 | | | | | |
Loss on NGL derivatives | 4,771 | | | 1,138 | | | | | |
Loss on contingent consideration arrangements | — | | | 5,737 | | | | | |
Loss on September 2020 Warrants liability (1) | — | | | 55,390 | | | | | |
Loss on derivative contracts | $358,300 | | | $214,523 | | | | | |
(1) Further details of the Company’s September 2020 Warrants and the loss on the associated September 2020 Warrants liability are described in “Note 7 - Borrowings”, “Note 8 - Derivative Instruments and Hedging Activities” and “Note 9 - Fair Value Measurements” of the Notes to Consolidated Financial Statements in its 2021 Annual Report.
The components of “Cash paid for commodity derivative settlements, net” and “Cash received (paid) for settlements of contingent consideration arrangements, net” are as follows for the respective periods:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| (In thousands) |
Cash flows from operating activities | | | | | | | |
Cash paid on oil derivatives | ($95,353) | | | ($39,947) | | | | | |
Cash paid on natural gas derivatives | (4,644) | | | (1,369) | | | | | |
Cash paid on NGL derivatives | (1,528) | | | (846) | | | | | |
Cash paid for commodity derivative settlements, net | ($101,525) | | | ($42,162) | | | | | |
Cash received for settlements of contingent consideration arrangements, net | $6,492 | | | $— | | | | | |
| | | | | | | |
Cash flows from investing activities | | | | | | | |
Cash paid for settlement of contingent consideration arrangement | ($19,171) | | | $— | | | | | |
| | | | | | | |
Cash flows from financing activities | | | | | | | |
Cash received for settlement of contingent consideration arrangement | $8,512 | | | $— | | | | | |
Derivative Positions
Listed in the tables below are the outstanding oil, natural gas and NGL derivative contracts as of March 31, 2022:
| | | | | | | | | | | |
| For the Remainder | | For the Full Year |
Oil Contracts (WTI) | 2022 | | 2023 |
Swap Contracts | | | |
Total volume (Bbls) | 3,676,000 | | (1) | 905,000 | |
Weighted average price per Bbl | $62.77 | | (1) | $71.20 | |
Collar Contracts | | | |
Total volume (Bbls) | 4,712,500 | | | 2,096,500 | |
Weighted average price per Bbl | | | |
Ceiling (short call) | $68.77 | | | $80.25 | |
Floor (long put) | $57.83 | | | $69.48 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Short Call Swaption Contracts (2) | | | |
Total volume (Bbls) | — | | | 1,825,000 | |
Weighted average price per Bbl | $— | | | $72.00 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Oil Contracts (Midland Basis Differential) | | | |
Swap Contracts | | | |
Total volume (Bbls) | 1,787,500 | | | — | |
Weighted average price per Bbl | $0.50 | | | $— | |
| | | |
Oil Contracts (Argus Houston MEH) | | | |
Collar Contracts | | | |
Total volume (Bbls) | 227,500 | | | — | |
Weighted average price per Bbl | | | |
Ceiling (short call) | $63.15 | | | $— | |
Floor (long put) | $51.25 | | | $— | |
(1) In March 2022, the Company entered into certain offsetting WTI swaps for the second quarter of 2022 to reduce its exposure to rising oil prices. Those offsetting swaps resulted in a recognized loss of approximately $39.3 million which will be settled in the second quarter of 2022 as the applicable contracts settle.
(2) The 2023 short call swaption contracts have exercise expiration dates of December 30, 2022.
| | | | | | | | | | | | |
| For the Remainder | | For the Full Year | |
Natural Gas Contracts (Henry Hub) | 2022 | | 2023 | |
Swap Contracts | | | | |
Total volume (MMBtu) | 10,700,000 | | | — | | |
Weighted average price per MMBtu | $3.62 | | | $— | | |
Collar Contracts | | | | |
Total volume (MMBtu) | 6,110,000 | | | 2,700,000 | | |
Weighted average price per MMBtu | | | | |
Ceiling (short call) | $4.51 | | | $5.56 | | |
Floor (long put) | $3.68 | | | $4.58 | | |
| | | | |
| | | | |
| | | | |
| | | | |
Natural Gas Contracts (Waha Basis Differential) | | | | |
Swap Contracts | | | | |
Total volume (MMBtu) | 1,220,000 | | | 6,080,000 | | |
Weighted average price per MMBtu | ($0.75) | | | ($0.75) | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Note 8 - Fair Value Measurements
Accounting guidelines for measuring fair value establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1 – Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Other inputs that are observable directly or indirectly such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.
Fair Value of Financial Instruments
Cash, Cash Equivalents, and Restricted Investments. The carrying amounts for these instruments approximate fair value due to the short-term nature or maturity of the instruments.
Debt. The carrying amount of borrowings outstanding under the Credit Facility approximates fair value as the borrowings bear interest at variable rates and are reflective of market rates. The following table presents the principal amounts of the Company’s Second Lien Notes and Senior Unsecured Notes with the fair values measured using quoted secondary market trading prices which are designated as Level 2 within the valuation hierarchy. See “Note 6 - Borrowings” for further discussion.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | Principal Amount | | Fair Value | | Principal Amount | | Fair Value |
| | (In thousands) |
6.125% Senior Notes | | $460,241 | | | $456,789 | | | $460,241 | | | $455,639 | |
9.00% Second Lien Notes | | 319,659 | | | 339,638 | | | 319,659 | | | 343,633 | |
8.25% Senior Notes | | 187,238 | | | 189,110 | | | 187,238 | | | 184,429 | |
6.375% Senior Notes | | 320,783 | | | 317,575 | | | 320,783 | | | 309,556 | |
8.00% Senior Notes | | 650,000 | | | 684,125 | | | 650,000 | | | 663,000 | |
Total | | $1,937,921 | | | $1,987,237 | | | $1,937,921 | | | $1,956,257 | |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Certain assets and liabilities are reported at fair value on a recurring basis in the consolidated balance sheets. The following methods and assumptions were used to estimate fair value:
Commodity Derivative Instruments. The fair value of commodity derivative instruments is derived using a third-party income approach valuation model that utilizes market-corroborated inputs that are observable over the term of the commodity derivative contract. The Company’s fair value calculations also incorporate an estimate of the counterparties’ default risk for commodity derivative assets and an estimate of the Company’s default risk for commodity derivative liabilities. As the inputs in the model are substantially observable over the term of the commodity derivative contract and there is a wide availability of quoted market prices for similar commodity derivative contracts, the Company designates its commodity derivative instruments as Level 2 within the fair value hierarchy. See “Note 7 - Derivative Instruments and Hedging Activities” for further discussion.
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Commodity derivative assets | $— | | | $— | | | $— | |
| | | | | |
Commodity derivative liabilities (1) | — | | | (427,362) | | | — | |
| | | | | |
| | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Assets | | | | | |
Commodity derivative instruments | $— | | | $1,798 | | | $— | |
Contingent consideration arrangements | — | | | 20,833 | | | — | |
Liabilities | | | | | |
Commodity derivative instruments (2) | — | | | (172,386) | | | — | |
Contingent consideration arrangements | — | | | (25,000) | | | — | |
| | | | | |
Total net assets (liabilities) | $— | | | ($174,755) | | | $— | |
(1) Includes approximately $0.9 million of deferred premiums, which will be paid as the applicable contracts settle.
(2) Includes approximately $2.9 million of deferred premiums, which will be paid as the applicable contracts settle.
There were no transfers between any of the fair value levels during any period presented.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Acquisitions. The fair value of assets acquired and liabilities assumed are measured as of the acquisition date by a third-party valuation specialist using a combination of income and market approaches, which are not observable in the market and are therefore designated as Level 3 inputs. Significant inputs include expected discounted future cash flows from estimated reserve quantities, estimates for timing and costs to produce and develop reserves, oil and natural gas forward prices, and a risk-adjusted discount rate. See “Note 3 - Acquisitions and Divestitures” for additional discussion.
Asset Retirement Obligations. The Company measures the fair value of asset retirement obligations as of the date a well begins drilling or when production equipment and facilities are installed using a discounted cash flow model based on inputs that are not observable in the market and therefore are designated as Level 3 within the valuation hierarchy. Significant inputs to the fair value measurement of asset retirement obligations include estimates of the costs of plugging and abandoning oil and gas wells, removing production equipment and facilities, restoring the surface of the land as well as estimates of the economic lives of the oil and gas wells and future inflation rates.
Note 9 - Income Taxes
The Company provides for income taxes at the statutory rate of 21%. Reported income tax benefit (expense) differs from the amount of income tax benefit (expense) that would result from applying domestic federal statutory tax rates to pretax income (loss). These differences primarily relate to non-deductible executive compensation expenses, restricted stock windfalls, changes in valuation allowances, and state income taxes.
For both the three months ended March 31, 2022 and 2021, the Company’s effective income tax rate was approximately 1%. The primary differences between the effective tax rates for the three months ended March 31, 2022 and 2021 and the statutory rate resulted from the valuation allowance recorded against the Company’s net deferred tax assets beginning in the second quarter of 2020 and the effect of state income taxes.
Deferred Tax Asset Valuation Allowance
Management monitors company-specific, oil and natural gas industry and worldwide economic factors and assesses the likelihood that
the Company’s net deferred tax assets will be utilized prior to their expiration. A significant item of objective negative evidence considered was the cumulative historical three-year pre-tax loss and a net deferred tax asset position at March 31, 2022, driven primarily by the impairments of evaluated oil and gas properties recognized beginning in the second quarter of 2020 and continuing through the fourth quarter of 2020. This limits the ability to consider other subjective evidence such as the Company’s potential for future growth. Since the second quarter of 2020, based on the evaluation of the evidence available, the Company concluded that it is more likely than not that the net deferred tax assets will not be realized. As a result, the Company has recorded a valuation allowance, reducing the net deferred tax assets as of March 31, 2022 to zero. As long as the Company continues to conclude that the valuation
allowance against its net deferred tax assets is necessary, the Company does not expect to have no significant deferred income tax expense or benefit.
The Company will continue to evaluate whether the valuation allowance is needed in future reporting periods. The valuation allowance will remain until the Company can conclude that the net deferred tax assets are more likely than not to be realized. Future events or new evidence which may lead the Company to conclude that it is more likely than not its net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings, improvements in crude oil prices, and taxable events that could result from one or more transactions. The valuation allowance does not preclude the Company from utilizing the tax attributes if it recognizes taxable income. As long as the Company continues to conclude that the valuation allowance against its net deferred tax assets is necessary, the Company will have no significant deferred income tax expense or benefit.
Note 10 - Share-Based Compensation
RSU Equity Awards
The following table summarizes activity for restricted stock units that may be settled in common stock (“RSU Equity Awards”) for the three months ended March 31, 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | RSU Equity Awards (In thousands) | | Weighted Average Grant-Date Fair Value Per Share |
Unvested at beginning of the period | | 968 | | | $34.04 | |
Granted | | 328 | | | $60.63 | |
Vested | | (10) | | | $53.38 | |
Forfeited | | (11) | | | $33.36 | |
Unvested at end of the period | | 1,275 | | | $40.73 | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Grant activity for the three months ended March 31, 2022 primarily consisted of RSU Equity Awards granted to executives and employees as part of the annual grant of long-term equity incentive awards with a weighted-average grant date fair value of $60.63.
The aggregate fair value of RSU Equity Awards that vested during the three months ended March 31, 2022 was $0.5 million. As of March 31, 2022, unrecognized compensation costs related to unvested RSU Equity Awards were $37.3 million and will be recognized over a weighted average period of 2.5 years.
Cash-Settled Awards
No restricted stock units that may be settled in cash (“Cash-Settled RSU Awards”) or cash-settled stock appreciation rights (“Cash SARs”) were granted to employees during the three months ended March 31, 2022 and 2021. The following table summarizes the Company’s liabilities for cash-settled awards and the classification in the consolidated balance sheets for the periods indicated:
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | (In thousands) |
Cash SARs | | $10,324 | | | $7,884 | |
Cash-Settled RSU Awards | | 4,563 | | | 1,382 | |
Other current liabilities | | 14,887 | | | 9,266 | |
| | | | |
Cash-Settled RSU Awards | | 1,972 | | | 6,366 | |
Other long-term liabilities | | 1,972 | | | 6,366 | |
Total Cash-Settled RSU Awards | | $16,859 | | | $15,632 | |
Share-Based Compensation Expense (Benefit), Net
Share-based compensation expense associated with the RSU Equity Awards, Cash-Settled RSU Awards, and Cash SARs, net of amounts capitalized, is included in “General and administrative” in the consolidated statements of operations. The following table presents share-based compensation expense (benefit), net for each respective period:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
| | (In thousands) |
RSU Equity Awards | | $3,366 | | | $2,608 | | | | | |
Cash-Settled RSU Awards | | 237 | | | 4,442 | | | | | |
Cash SARs | | 2,440 | | | 4,866 | | | | | |
| | 6,043 | | | 11,916 | | | | | |
Less: amounts capitalized to oil and gas properties | | (1,877) | | | (4,308) | | | | | |
Total share-based compensation expense (benefit), net | | $4,166 | | | $7,608 | | | | | |
See “Note 10 - Share-Based Compensation” of the Notes to Consolidated Financial Statements in the 2021 Annual Report for details of the Company’s equity-based incentive plans.
Note 11 - Stockholders’ Equity
Warrant Exercises
During the three months ended March 31, 2021, certain holders of the September 2020 Warrants and the November 2020 Warrants provided notice and exercised all of their outstanding warrants. As a result of the exercises, the Company issued a total of 6.4 million shares of its common stock in exchange for 8.4 million outstanding warrants determined on a net share settlement basis. See “Note 7 - Borrowings” of the Notes to Consolidated Financial Statements in the Company’s 2021 Annual Report for additional details regarding the September 2020 Warrants and the November 2020 Warrants.
Note 12 - Accounts Receivable, Net
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (In thousands) |
Oil and natural gas receivables | $262,389 | | | $171,837 | |
Joint interest receivables | 21,044 | | | 13,751 | |
Other receivables | 66,388 | | | 49,053 | |
Total | 349,821 | | | 234,641 | |
Allowance for credit losses | (2,228) | | | (2,205) | |
Total accounts receivable, net | $347,593 | | | $232,436 | |
Note 13 - Accounts Payable and Accrued Liabilities
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (In thousands) |
Accounts payable | $134,690 | | | $151,836 | |
Revenues and royalties payable | 277,368 | | | 294,143 | |
Accrued capital expenditures | 56,388 | | | 64,412 | |
Accrued interest | 47,994 | | | 59,600 | |
Total accounts payable and accrued liabilities | $516,440 | | | $569,991 | |
Note 14 - Supplemental Cash Flow
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (In thousands) |
Supplemental cash flow information: | | | |
Interest paid, net of capitalized amounts | $25,144 | | | $12,983 | |
Income taxes paid | — | | | — | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $7,382 | | | $8,065 | |
Investing cash flows from operating leases | 6,189 | | | 6,005 | |
Non-cash investing and financing activities: | | | |
Change in accrued capital expenditures | ($8,897) | | | $18,903 | |
Change in asset retirement costs | 289 | | | 1,151 | |
ROU assets obtained in exchange for lease liabilities: | | | |
Operating leases | $8,505 | | | $6,476 | |
Note 15 - Subsequent Events
Credit Agreement Reaffirmation
On May 2, 2022, as part of the Company’s spring 2022 redetermination, the borrowing base and elected commitment amount of $1.6 billion were reaffirmed.
Special Note Regarding Forward Looking Statements
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements in this Form 10-Q by words such as “anticipate,” “project,” “intend,” “estimate,” “expect,” “believe,” “predict,” “budget,” “projection,” “goal,” “plan,” “forecast,” “target” or similar expressions.
All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements, including such things as:
•our oil and natural gas reserve quantities, and the discounted present value of these reserves;
•the amount and nature of our capital expenditures;
•our future drilling and development plans and our potential drilling locations;
•the timing and amount of future capital and operating costs;
•production decline rates from our wells being greater than expected;
•commodity price risk management activities and the impact on our average realized prices;
•business strategies and plans of management;
•our ability to efficiently integrate recent acquisitions; and
•prospect development and property acquisitions.
We caution you that the forward-looking statements contained in this Form 10-Q are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil and natural gas. We disclose these and other important factors that could cause our actual results to differ materially from our expectations under “Risk Factors” in Part I, Item 1A of our 2021 Annual Report. These factors include:
•the volatility of oil, natural gas and NGL prices or a prolonged period of low oil, natural gas or NGL prices;
•general economic conditions including the availability of credit and access to existing lines of credit;
•changes in the supply of and demand for oil and natural gas, including as a result of the COVID-19 pandemic and various governmental actions taken to mitigate its impact or actions by, or disputes among, members of OPEC and other oil and natural gas producing countries, such as Russia, with respect to production levels or other matters related to the price of oil;
•the uncertainty of estimates of oil and natural gas reserves;
•impairments;
•the impact of competition;
•the availability and cost of seismic, drilling, completions and other equipment, waste and water disposal infrastructure, and personnel;
•operating hazards inherent in the exploration for and production of oil and natural gas;
•difficulties encountered during the exploration for and production of oil and natural gas;
•the potential impact of future drilling on production from existing wells;
•difficulties encountered in delivering oil and natural gas to commercial markets;
•the uncertainty of our ability to attract capital and obtain financing on favorable terms;
•compliance with, or the effect of changes in, the extensive governmental regulations regarding the oil and natural gas business including those related to climate change and greenhouse gases;
•the impact of government regulation, including regulation of hydraulic fracturing and water disposal wells;
•any increase in severance or similar taxes;
•the financial impact of accounting regulations and critical accounting policies;
•the comparative cost of alternative fuels;
•credit risk relating to the risk of loss as a result of non-performance by our counterparties;
•cyberattacks on the Company or on systems and infrastructure used by the oil and natural gas industry;
•weather conditions; and
•risks associated with acquisitions.
Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. Additional risks or uncertainties that are not currently known to us, that we currently deem to be immaterial, or that could apply to any company could also materially adversely affect our business, financial condition, or future results. Any forward-looking statement speaks only as of the date of which such statement is made and the Company undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law.
In addition, we caution that reserve engineering is a process of estimating oil and natural gas accumulated underground and cannot be measured exactly. Accuracy of reserve estimates depend on a number of factors including data available at the point in time, engineering interpretation of the data, and assumptions used by the reserve engineers as it relates to price and cost estimates and recoverability. New results of drilling, testing, and production history may result in revisions of previous estimates and, if significant,
would impact future development plans. As such, reserve estimates may differ from actual results of oil and natural gas quantities ultimately recovered.
Except as required by applicable law, all forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.