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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        For The Quarterly Period Ended March 31, 2020
or
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        For the transition period from ____________ to ____________
Commission File Number 001-14039

Callon Petroleum Company
(Exact Name of Registrant as Specified in Its Charter)

Delaware64-0844345
State or Other Jurisdiction of
Incorporation or Organization
I.R.S. Employer Identification No.
One Briarlake Plaza
2000 W. Sam Houston Parkway S., Suite 2000
Houston,Texas77042
Address of Principal Executive OfficesZip Code

(281)589-5200
Registrant’s Telephone Number, Including Area Code
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, $0.01 par valueCPENew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No

The Registrant had 396,996,703 shares of common stock outstanding as of April 30, 2020.



Table of Contents

Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Part II. Other Information

2


GLOSSARY OF CERTAIN TERMS

All defined terms under Rule 4-10(a) of Regulation S-X shall have their prescribed meanings when used in this report. As used in this document:

ASU: accounting standards update.
Bbl:  barrel or barrels of oil or natural gas liquids.
Boe:  barrel of oil equivalent, determined by using the ratio of one Bbl of oil or NGLs to six Mcf of natural gas.  The ratio of one barrel of oil or NGLs to six Mcf of natural gas is commonly used in the industry and represents the approximate energy equivalence of oil or NGLs to natural gas, and does not represent the economic equivalency of oil and NGLs to natural gas. The sales price of a barrel of oil or NGLs is considerably higher than the sales price of six Mcf of natural gas.
Boe/d:  Boe per day.
Btu:  a British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit.
Completion: the process of treating a drilled well followed by the installation of permanent equipment for the production of oil or natural gas or, in the case of a dry hole, the reporting of abandonment to the appropriate agency.
Cushing: an oil delivery point that serves as the benchmark oil price for West Texas Intermediate.
FASB: Financial Accounting Standards Board.
GAAP: Generally Accepted Accounting Principles in the United States.
Henry Hub: a natural gas pipeline delivery point that serves as the benchmark natural gas price underlying NYMEX natural gas futures contracts.
Horizontal drilling: a drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at an angle within a specified interval.
LOE:  lease operating expense.
MBbls:  thousand barrels of oil.
MBoe:  thousand Boe.
Mcf:  thousand cubic feet of natural gas.
MEH: Magellan East Houston, a delivery point in Houston, Texas that serves as a benchmark for crude oil.
MMBoe:  million Boe.
MMBtu:  million Btu.
MMcf:  million cubic feet of natural gas.
NGL or NGLs:  natural gas liquids, such as ethane, propane, butanes and natural gasoline that are extracted from natural gas production streams.
NYMEX:  New York Mercantile Exchange.
Oil: includes crude oil and condensate.
OPEC: Organization of Petroleum Exporting Countries.
Proved reserves: Those reserves which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced, or the operator must be reasonably certain that it will commence the project, within a reasonable time.
The area of the reservoir considered as proved includes all of the following:
a.The area identified by drilling and limited by fluid contacts, if any, and
b.Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.
Reserves that can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when both of the following occur:
a.Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based, and
b.The project has been approved for development by all necessary parties and entities, including governmental entities.
Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12‑month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
3




Realized price: the cash market price less all expected quality, transportation and demand adjustments.
Royalty interest: an interest that gives an owner the right to receive a portion of the resources or revenues without having to carry any costs of development.
RSU: restricted stock units.
SEC:  United States Securities and Exchange Commission.
Waha: a delivery point in West Texas that serves as the benchmark for natural gas.
Working interest: an operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production and requires the owner to pay a share of the costs of drilling and production operations.
WTI: West Texas Intermediate grade crude oil, used as a pricing benchmark for sales contracts and NYMEX oil futures contracts.
With respect to information relating to our working interest in wells or acreage, “net” oil and gas wells or acreage is determined by multiplying gross wells or acreage by our working interest therein. Unless otherwise specified, all references to wells and acres are gross. 
4


Part I.  Financial Information
Item 1.  Financial Statements
Callon Petroleum Company
Consolidated Balance Sheets
(In thousands, except par and share amounts)
(Unaudited)
 March 31, 2020December 31, 2019
ASSETS 
Current assets:  
Cash and cash equivalents$14,800  $13,341  
Accounts receivable, net93,006  209,463  
Fair value of derivatives224,665  26,056  
Other current assets24,280  19,814  
Total current assets356,751  268,674  
Oil and natural gas properties, full cost accounting method:  
Evaluated properties5,036,095  4,682,994  
Unevaluated properties1,809,104  1,986,124  
Total oil and natural gas properties, net6,845,199  6,669,118  
Operating lease right-of-use assets56,050  63,908  
Other property and equipment, net33,216  35,253  
Deferred tax asset51,250  115,720  
Deferred financing costs21,383  22,233  
Fair value of derivatives1,983  9,216  
Other assets, net14,129  10,716  
   Total assets$7,379,961  $7,194,838  
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
Accounts payable and accrued liabilities$525,326  $511,622  
Operating lease liabilities37,686  42,858  
Fair value of derivatives4,851  71,197  
Other current liabilities15,905  26,570  
Total current liabilities583,768  652,247  
Long-term debt3,250,912  3,186,109  
Operating lease liabilities35,746  37,088  
Asset retirement obligations50,531  48,860  
Deferred tax liability    
Fair value of derivatives4,257  32,695  
Other long-term liabilities11,844  14,531  
Total liabilities3,937,058  3,971,530  
Commitments and contingencies
Stockholders’ equity:  
Common stock, $0.01 par value, 525,000,000 shares authorized; 396,738,180 and 396,600,022 shares outstanding, respectively
3,967  3,966  
Capital in excess of par value3,201,105  3,198,076  
Retained earnings237,831  21,266  
Total stockholders’ equity3,442,903  3,223,308  
Total liabilities and stockholders’ equity$7,379,961  $7,194,838  

The accompanying notes are an integral part of these consolidated financial statements.
5



Callon Petroleum Company
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended March 31,
 20202019
Operating revenues:  
Oil$265,767  $141,098  
Natural gas6,029  11,949  
Natural gas liquids18,123    
Total operating revenues289,919  153,047  
Operating Expenses:  
Lease operating52,383  24,067  
Production and ad valorem taxes19,680  10,813  
Gathering, transportation and processing14,378    
Depreciation, depletion and amortization131,463  60,184  
General and administrative8,325  14,777  
Merger and integration expenses15,830    
Other operating  157  
Total operating expenses242,059  109,998  
Income From Operations47,860  43,049  
Other (Income) Expenses:  
Interest expense, net of capitalized amounts20,478  738  
(Gain) loss on derivative contracts(251,969) 67,260  
Other income(1,262) (257) 
Total other (income) expense(232,753) 67,741  
Income (Loss) Before Income Taxes280,613  (24,692) 
Income tax (expense) benefit(64,048) 5,149  
Net Income (Loss)216,565  (19,543) 
Preferred stock dividends  (1,824) 
Income (Loss) Available to Common Stockholders$216,565  ($21,367) 
Income (Loss) Available to Common Stockholders Per Common Share:  
Basic$0.55  ($0.09) 
Diluted$0.55  ($0.09) 
Weighted Average Common Shares Outstanding: 
Basic396,682  227,784  
Diluted396,836  227,784  

The accompanying notes are an integral part of these consolidated financial statements.





6


Callon Petroleum Company
Consolidated Statements of Stockholders’ Equity
(In thousands, except per share amounts)
(Unaudited)
PreferredCommonCapital inTotal
StockStockExcessRetainedStockholders'
Shares$Shares$of ParEarningsEquity
Balance at 12/31/2019  $  396,600  $3,966  $3,198,076  $21,266  $3,223,308  
Net income—  —  —  —  —  216,565  216,565  
   Restricted stock—  —  138  1  3,141  —  3,142  
   Other—  —  —  —  (112) —  (112) 
Balance at 3/31/2020  $  396,738  $3,967  $3,201,105  $237,831  $3,442,903  

PreferredCommonCapital inTotal
StockStockExcessAccumulatedStockholders'
Shares$Shares$of ParDeficitEquity
Balance at 12/31/20181,459  $15  227,583  $2,276  $2,477,278  ($34,361) $2,445,208  
Net loss—  —  —  —  —  (19,543) (19,543) 
   Shares issued pursuant to employee benefit plans—  —  24  —  154  —  154  
   Restricted stock—  —  277  3  4,447  —  4,450  
   Preferred stock dividend—  —  —  —  —  (1,824) (1,824) 
Balance at 3/31/20191,459  $15  227,884  $2,279  $2,481,879  ($55,728) $2,428,445  

The accompanying notes are an integral part of these consolidated financial statements.

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Callon Petroleum Company
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 Three Months Ended March 31,
Cash flows from operating activities:20202019
Net income (loss)$216,565  ($19,543) 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation, depletion and amortization131,463  60,913  
Amortization of non-cash debt related items407  738  
Deferred income tax (benefit) expense64,048  (5,149) 
(Gain) loss on derivative contracts(251,969) 67,260  
Cash (paid) received for commodity derivative settlements2,613  (290) 
Loss on sale of other property and equipment  28  
Non-cash expense related to equity share-based awards3,776  4,545  
Change in the fair value of liability share-based awards(6,748) 1,881  
Payments to settle asset retirement obligations  (664) 
Payments for cash-settled restricted stock unit awards(754) (1,296) 
Other, net890    
Changes in current assets and liabilities:
Accounts receivable115,873  (5,390) 
Other current assets(781) (2,294) 
Current liabilities(83,688) (26,003) 
Other  (177) 
Net cash provided by operating activities191,695  74,559  
Cash flows from investing activities:  
Capital expenditures(224,448) (193,211) 
Acquisitions  (27,947) 
Proceeds from sale of assets10,240  13,879  
Cash paid for settlements of contingent consideration arrangements, net(40,000)   
Other, net(158)   
Net cash used in investing activities(254,366) (207,279) 
Cash flows from financing activities:  
Borrowings on senior secured revolving credit facility4,291,000  220,000  
Payments on senior secured revolving credit facility(4,226,000) (90,000) 
Payment of preferred stock dividends  (1,824) 
Payment of deferred financing costs(275)   
Tax withholdings related to restricted stock units(313) (1,025) 
Other, net(282)   
Net cash provided by financing activities64,130  127,151  
Net change in cash and cash equivalents1,459  (5,569) 
Balance, beginning of period13,341  16,051  
Balance, end of period$14,800  $10,482  

The accompanying notes are an integral part of these consolidated financial statements.
8


Index to the Notes to the Consolidated Financial Statements
9.
10.Share-based Compensation
3.11.
4.Property and Equipment, Net12.
Accounts Receivable, Net
5.13.Accounts Payable and Accrued Liabilities
6.14.Supplemental Cash Flow
7.15.Subsequent Events
8.

Note 1 - Description of Business and Basis of Presentation
Description of business
Callon 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 Shale, which the Company entered into through its acquisition of Carrizo Oil & Gas, Inc. (“Carrizo”) in late 2019. The Company’s primary operations in the Permian Basin 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 Shale.
Basis of presentation
The accompanying unaudited interim consolidated financial statements include the accounts of the Company after elimination of intercompany transactions and balances and 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 accounting principles generally accepted in the U.S. (“GAAP”). In the opinion of management, these financial statements include all adjustments (consisting of normal recurring accruals and adjustments) 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 had no material impact on prior period amounts. However, the comparability of certain 2020 amounts to prior periods could be impacted as a result of the Carrizo Acquisition in December 2019.
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, 2019 (“2019 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 2019 Annual Report.
Three-stream reporting. Effective January 1, 2020, certain of our natural gas processing agreements were modified to allow the Company to take title to NGLs resulting from the processing of our natural gas. As a result, sales and reserve volumes, prices, and revenues for NGLs and natural gas are presented separately for periods subsequent to January 1, 2020. For periods prior to January 1, 2020, except for sales and reserve volumes, prices, and revenues specifically associated with the Carrizo Acquisition, as defined below, sales and reserve volumes, prices, and revenues for NGLs were presented with natural gas.
See “Note 2 - Revenue Recognition” for additional information regarding the impact of three-stream reporting on our current results.
Recently Adopted Accounting Standards
None that had a material impact on our financial statements.
Recently issued ASUs
Income Taxes. In December 2019, the FASB released Accounting Standards Update No. 2019-12 (ASU 2019-12): Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The amended standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We do not expect the adoption of this standard to have a material impact on our financial statements.
9


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
Oil sales
Under the Company’s oil sales contracts it sells oil production at the point of delivery and collects an agreed upon index price, net of pricing differentials. The Company recognizes revenue when control transfers to the purchaser at the point of delivery at the net price received.
Natural gas sales
Effective January 1, 2020, certain of our natural gas processing agreements were modified to allow the Company to take title to NGLs resulting from the processing of our natural gas. As a result, sales and reserve volumes, prices, and revenues for NGLs and natural gas are presented separately for periods subsequent to January 1, 2020. For periods prior to January 1, 2020, except for sales and reserve volumes, prices, and revenues specifically associated with Carrizo, sales and reserve volumes, prices, and revenues for NGLs were presented with natural gas.
Under the Company’s natural gas sales processing contracts, it delivers natural gas to a midstream processing entity which gathers and processes the natural gas and remits proceeds to the Company for the resulting sale of NGLs and residue gas. We evaluate whether the processing entity is the principal or the agent in the transaction for each of our natural gas processing agreements and have concluded that we maintain control through processing or we have the right to take residue gas and/or NGLs in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the product. We recognize revenue when control transfers to the purchaser at the delivery point based on the contractual index price received.
Contractual fees associated with gathering, processing, treating and compression, as well as any transportation fees incurred to deliver the product to the purchaser, for the majority of the Company’s natural gas processing agreements were previously recorded as a reduction of revenue. As a result of the modifications to certain of the Company’s natural gas processing agreements, as well as the natural gas processing agreements assumed in the Carrizo Acquisition, the Company now recognizes revenue for natural gas and NGLs on a gross basis with gathering, transportation and processing fees recognized separately as “Gathering, transportation and processing” in its consolidated statements of operations as the Company maintains control throughout processing. These changes impact the comparability of 2020 with prior periods. For the three months ended March 31, 2019, $2.4 million of gathering, transportation, and processing fees were recognized as a reduction to natural gas revenues in the consolidated statement of operations.
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, 2020 and December 31, 2019 of $66.2 million and $165.3 million, respectively, are presented in “Accounts receivable, net” in the consolidated balance sheets.
Transaction price allocated to remaining performance obligations
For the Company’s product sales that have a contract term greater than one year, it utilized the practical expedient in ASC 606, which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation, therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
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
2020 Acquisitions and Divestitures
The Company did not have any material acquisitions or divestitures for the three months ended March 31, 2020.
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2019 Acquisitions and Divestitures
Carrizo Oil & Gas, Inc. Merger. On December 20, 2019, the Company completed its acquisition of Carrizo in an all-stock transaction (the “Merger” or the “Carrizo Acquisition”). Under the terms of the Merger, each outstanding share of Carrizo common stock was converted into 1.75 shares of the Company’s common stock. The Company issued approximately 168.2 million shares of common stock at a price of $4.55 per share, resulting in total consideration paid by the Company to the former Carrizo shareholders of approximately $765.4 million. In connection with the closing of the Merger, the Company funded the redemption of Carrizo’s 8.875% Preferred Stock, repaid the outstanding principal under Carrizo’s revolving credit facility and assumed all of Carrizo’s senior notes.
The Merger 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, including final tax returns that provide the underlying tax basis of Carrizo’s assets and liabilities. 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 purchase price to the assets acquired and liabilities assumed as of the acquisition date.
Preliminary Purchase
Price Allocation
(In thousands)
Consideration:
Fair value of the Company’s common stock issued$765,373  
Total consideration$765,373  
Liabilities:
Accounts payable$37,657  
Revenues and royalties payable52,449  
Operating lease liabilities - current29,924  
Fair value of derivatives - current61,015  
Other current liabilities88,547  
Long-term debt1,984,135  
Operating lease liabilities - non-current30,070  
Asset retirement obligation26,151  
Fair value of derivatives - non-current26,960  
Other long-term liabilities17,260  
Common stock warrants10,029  
Total liabilities assumed$2,364,197  
Assets:
Accounts receivable, net$48,479  
Fair value of derivatives - current17,451  
Other current assets4,945  
Evaluated oil and natural gas properties2,133,280  
Unevaluated properties689,391  
Other property and equipment9,614  
Fair value of derivatives - non-current4,518  
Deferred tax asset159,320  
Operating lease right-of-use-assets59,994  
Other long term assets2,578  
Total assets acquired$3,129,570  
Approximately $161.4 million of revenues and $52.2 million of direct operating expenses attributed to the Carrizo Acquisition were included in the Company’s consolidated statements of operations for the period from the three months ended March 31, 2020.
Pro Forma Operating Results (Unaudited). The following unaudited pro forma combined condensed financial data for the year ended December 31, 2019 was derived from the historical financial statements of the Company giving effect to the Merger, as if it had
11


occurred on January 1, 2018. The below information reflects pro forma adjustments for the issuance of the Company’s common stock in exchange for Carrizo’s outstanding shares of common stock, as well as pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including (i) the Company’s common stock issued to convert Carrizo’s outstanding shares of common stock and equity awards as of the closing date of the Merger, (ii) the depletion of Carrizo’s fair-valued proved oil and natural gas properties and (iii) the estimated tax impacts of the pro forma adjustments.
Additionally, pro forma earnings were adjusted to exclude acquisition-related costs incurred by the Company of approximately $58.8 million for the year ended December 31, 2019 and acquisition-related costs incurred by Carrizo that totaled approximately $15.6 million for the year ended December 31, 2019. The pro forma results of operations do not include any cost savings or other synergies that may result from the Merger or any estimated costs that have been or will be incurred by the Company to integrate the Carrizo assets. The pro forma financial data does not include the pro forma results of operations for any other acquisitions made during the periods presented, as they were primarily acreage acquisitions and their results were not deemed material.
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 Merger taken place on January 1, 2018 and is not intended to be a projection of future results.
For the Year Ended
December 31, 2019
(In thousands)
Revenues$1,620,357  
Income from operations614,668  
Net income369,777  
Basic earnings per common share0.89  
Diluted earnings per common share0.89  
During the first quarter of 2020, in conjunction with the Carrizo Acquisition, the Company incurred costs totaling $15.8 million comprised of severance costs of $3.0 million and other merger and integration expenses of $12.8 million. Through March 31, 2020, the Company has incurred cumulative costs associated with the Carrizo Acquisition of $90.2 million comprised of severance costs of $31.8 million and other merger and integration expenses of $58.4 million. As of March 31, 2020, $26.0 million remained accrued and is included as a component of “Accounts payable and accrued liabilities” in the consolidated balance sheets.
Ranger Divestiture. In the second quarter of 2019, the Company completed its divestiture of certain non-core assets in the southern Midland Basin (the “Ranger Asset Divestiture”) for net cash proceeds of $244.9 million. The transaction also provided for potential additional contingent consideration in payments of up to $60.0 million based on West Texas Intermediate average annual pricing over a three-year period. See “Note 7 - Derivative Instruments and Hedging Activities” and “Note 8 - Fair Value Measurements” for further discussion of this contingent consideration arrangement. The divestiture encompasses the Ranger operating area in the southern Midland Basin which includes approximately 9,850 net Wolfcamp acres with an average 66% working interest. The net cash proceeds were recognized as a reduction of evaluated oil and gas properties with no gain or loss recognized.
Note 4 - Property and Equipment, Net
As of March 31, 2020 and December 31, 2019, total property and equipment, net consisted of the following:
March 31, 2020December 31, 2019
Oil and natural gas properties, full cost accounting method(In thousands)
Evaluated properties$7,686,019  $7,203,482  
Accumulated depreciation, depletion, amortization and impairments(2,649,924) (2,520,488) 
Net evaluated oil and natural gas properties5,036,095  4,682,994  
Unevaluated properties
Unevaluated leasehold and seismic costs1,659,262  1,843,725  
Capitalized interest149,842  142,399  
Total unevaluated properties1,809,104  1,986,124  
Total oil and natural gas properties, net$6,845,199  $6,669,118  
Other property and equipment$66,108  $67,202  
Accumulated depreciation(32,892) (31,949) 
Other property and equipment, net$33,216  $35,253  
The Company capitalized internal costs of employee compensation and benefits, including stock-based compensation, directly associated with acquisition, exploration and development activities totaling $7.5 million and $10.7 million for the three months ended
12


March 31, 2020 and 2019, respectively. The Company capitalized interest costs to unproved properties totaling $24.0 million and $19.8 million for the three months ended March 31, 2020 and 2019, respectively.
As a result of the recent downturn in the oil and gas industry as well as in the broader macroeconomic environment, the Company analyzed its unevaluated leasehold giving consideration to its updated exploration program as well as to the remaining lease term of certain unevaluated leaseholds. The Company transferred $180.5 million from unevaluated leasehold to evaluated properties during the three months ended March 31, 2020 primarily as a result of the analysis described above.
Note 5 - Earnings Per Share
Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders 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 shares outstanding during the periods presented, as calculated using the treasury stock method, unless their effect is anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended March 31,
 20202019
(In thousands, except per share amounts)
Net income (loss)$216,565  ($19,543) 
Preferred stock dividends (1)
  (1,824) 
Income (loss) available to common stockholders$216,565  ($21,367) 
      
Basic weighted average common shares outstanding396,682  227,784  
Dilutive impact of restricted stock154    
Diluted weighted average common shares outstanding396,836  227,784  
      
Income (Loss) Available to Common Stockholders Per Common Share
Basic$0.55  ($0.09) 
Diluted$0.55  ($0.09) 
      
Restricted stock (2)
3,700  356  

(1) The Company redeemed all outstanding shares of its 10% Series A Cumulative Preferred Stock (“Preferred Stock”) on July 18, 2019 and all dividends ceased to accrue upon redemption.
(2) Shares excluded from the diluted earnings per share calculation because their effect would be anti-dilutive.
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Note 6 - Borrowings
The Company’s borrowings consisted of the following:
March 31, 2020December 31, 2019
(In thousands)
Senior Secured Revolving Credit Facility due 2024$1,350,000  $1,285,000  
6.25% Senior Notes due 2023
650,000  650,000  
6.125% Senior Notes due 2024
600,000  600,000  
8.25% Senior Notes due 2025
250,000  250,000  
6.375% Senior Notes due 2026
400,000  400,000  
Total principal outstanding3,250,000  3,185,000  
Unamortized premium on 6.125% Senior Notes
5,063  5,344  
Unamortized premium on 6.25% Senior Notes
4,503  4,838  
Unamortized premium on 8.25% Senior Notes
5,047  5,286  
Unamortized deferred financing costs for Senior Notes(13,701) (14,359) 
Total carrying value of borrowings (1)
$3,250,912  $3,186,109  

(1) Excludes unamortized deferred financing costs related to the Company’s senior secured revolving credit facility of $21.4 million and $22.2 million as of March 31, 2020 and December 31, 2019, respectively, which are classified in “Other long-term assets, net” in the consolidated balance sheets.
Senior secured revolving credit facility
The Company has a senior secured revolving credit facility with a syndicate of lenders that, as of March 31, 2020, had a borrowing base of $2.5 billion, with an elected commitment amount of $2.0 billion, borrowings outstanding of $1.35 billion at a weighted-average interest rate of 2.83%, and letters of credit outstanding of $17.7 million. The credit agreement governing the revolving credit facility provides for interest-only payments until December 20, 2024 (subject to springing maturity dates of (i) January 14, 2023 if the 6.25% Senior Notes are outstanding at such time and (ii) July 2, 2024 if the 6.125% Senior Notes are outstanding at such time), when the credit agreement matures and any outstanding borrowings are due. 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. The revolving credit facility is secured by first preferred mortgages covering the Company’s major producing properties. The capitalized terms which are not defined in this description, or in the description in “Note 15 - Subsequent Events”, of the revolving credit facility shall have the meaning given to such terms in the credit agreement.
On May 7, 2020 the Company entered into the first amendment to its credit agreement governing the revolving credit facility. See “Note 15 - Subsequent Events” for further discussion.
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 0.25% to 1.25%, 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 1.25% to 2.25%. At any time the Leverage Ratio, as defined in the credit agreement, is greater than 3.00 to 1.00, the base rate and Eurodollar loans are increased by 0.25%. 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” in the consolidated statements of operations.
Restrictive covenants
The Company’s credit agreement contains certain covenants including restrictions on additional indebtedness, payment of cash dividends and 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, of no more than 4.00 to 1.00 and (2) a Current Ratio of not less than 1.00 to 1.00. The Company was in compliance with these covenants at March 31, 2020.
The credit agreement also places restrictions on the Company and certain of its subsidiaries with respect to 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.
The credit agreement is subject to customary events of default. If an event of default occurs and is continuing, the lenders may elect to accelerate amounts due under the credit agreement (except in the case of a bankruptcy event of default, in which case such amounts will automatically become due and payable).
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Note 7 - Derivative Instruments and Hedging Activities
Objectives and strategies for using derivative instruments
The Company is exposed to fluctuations in oil and natural gas 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 and natural gas 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, 2020, the Company has outstanding commodity derivative instruments with fifteen 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.
Financial statement presentation and settlements
Settlements of the Company’s commodity derivative instruments are based on the difference between the contract price or prices specified in the derivative instrument and a benchmark price, such as the NYMEX price. To determine the fair value of the Company’s derivative instruments, the Company utilizes present value methods that include assumptions about commodity prices based on those observed in underlying markets. See “Note 8 - Fair Value Measurements” for additional information regarding fair value.
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Contingent consideration arrangements
Ranger Divestiture. The Company’s Ranger Divestiture provides for potential contingent consideration to be received by the Company if commodity prices exceed specified thresholds in each of the next several years. See “Note 3 - Acquisitions and Divestitures” and “Note 8 - Fair Value Measurements” for further discussion. This contingent consideration arrangement is summarized in the table below (in thousands except for per Bbl amounts):
Year
Threshold (1)
Contingent Receipt - Annual
Threshold (1)
Contingent Receipt - AnnualPeriod Cash Flow OccursStatement of Cash Flows Presentation
Remaining Contingent Receipt - Aggregate Limit (3)
Divestiture Date Fair Value
$8,512  
Actual Settlement2019Greater than $60/Bbl, less than $65/Bbl$
Equal to or greater than $65/Bbl
$1Q20N/A
Remaining Potential Settlements2020-2021Greater than $60/Bbl, less than $65/Bbl$9,000
Equal to or greater than $65/Bbl
$20,833
(2)
(2)
$41,666  

(1) The price used to determine whether the specified thresholds have been met is the average of the final monthly settlements for each month during each annual period end for NYMEX Light Sweet Crude Oil Futures, as reported by the CME Group Inc.
(2) Cash received for settlements of contingent consideration arrangements are classified as cash flows from financing activities up to the divestiture date fair value with any excess classified as cash flows from operating activities. Therefore, if the commodity price threshold is reached, $8.5 million of the next contingent receipt will be presented in cash flows from financing activities with the remainder, as well as all subsequent contingent receipts, presented in cash flows from operating activities.
(3) The specified pricing threshold for 2019 was not met. As such, approximately $41.7 million remains for potential settlements in future years.
As a result of the Carrizo Acquisition, the Company assumed all contingent consideration arrangements previously entered into by Carrizo. These contingent consideration arrangements are summarized below:
Contingent ExL Consideration
Year
Threshold (1)
Period
Cash Flow
Occurs
Statement of
Cash Flows Presentation
Contingent
Payment -
Annual
Remaining Contingent
Payments -
Aggregate Limit
Acquisition
Date
Fair Value
(In thousands)
($69,171) 
Actual Settlement(2)(3)
2019$50.00  1Q20Investing($50,000) 
Remaining Potential Settlements2020-2021$50.00  
(2)
(2)
($25,000) ($25,000) 

(1) The price used to determine whether the specified threshold for each year has been met is the average daily closing spot price per barrel of WTI crude oil as measured by the U.S. Energy Information Administration (“U.S. EIA”).
(2) Cash paid for settlements related to 2019 are classified as cash flows used in investing activities as the cash payment was made soon after the acquisition date. Due to the extended time frame over which the 2020 and 2021 contingent arrangements could settle, any future payments would be considered financing arrangements. As such, cash settlements of those contingent consideration arrangements would be classified as cash flows from financing activities up to the acquisition date fair value with any excess classified as cash flows from operating activities. Therefore, if the commodity price threshold were reached, $19.2 million of the final contingent payment would be presented in cash flows used in financing activities with the remainder presented in operating cash flows.
(3) In January 2020, the Company paid $50.0 million as the specified pricing threshold was met. Only $25.0 million remains for potential settlements in future years.
Additionally, as part of the Carrizo Acquisition, the Company acquired contingent consideration arrangements where the Company could receive payments if certain pricing thresholds are met in 2020, which range between $53.00 - $60.00 per barrel of oil or $3.18 - $3.30 per MMBtu of natural gas. In January 2020, the Company received $10.0 million as the specified pricing thresholds were met for certain of the contingent consideration arrangements. As such, the aggregate limit of the remaining contingent receipts is $13.0 million and would be settled in January 2021 based on the specified pricing thresholds for 2020.
Derivatives not designated as hedging instruments
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 a gain or loss on derivative contracts in the consolidated statements of operations. As previously discussed, the Company’s commodity derivative contracts are subject to master netting arrangements. The Company’s policy is to present the fair value of derivative contracts on a net
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basis in the consolidated balance sheet.