cpe-20220630

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 June 30, 2022

☐ 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)


Delaware		64-0844345
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,	Texas	77042
Address of Principal Executive Offices		Zip 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 Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

CPE

New 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 filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller 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 61,709,682 shares of common stock outstanding as of July 29, 2022.

For certain industry specific terms used in this Form 10-Q, please see “Glossary of Certain Terms” in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Annual Report”).

Table of Contents


Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets			3

Consolidated Statements of Operations			4

Consolidated Statements of Stockholders’ Equity			5

Consolidated Statements of Cash Flows			6

Notes to Consolidated Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21

Item 3. Quantitative and Qualitative Disclosures about Market Risk			29

Item 4. Controls and Procedures			30

Part II. Other Information

Item 1. Legal Proceedings			30

Item 1A. Risk Factors			30

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30

Item 3. Defaults Upon Senior Securities			31

Item 4. Mine Safety Disclosures			31

Item 5. Other Information			31

Item 6. Exhibits			31

Part I. Financial Information

Item 1. Financial Statements

Callon Petroleum Company

Consolidated Balance Sheets

(In thousands, except par and share amounts)

(Unaudited)


	June 30, 2022	December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$6,100	$9,882
Accounts receivable, net	360,955	232,436
Fair value of derivatives	—	22,381
Other current assets	37,960	30,745
Total current assets	405,015	295,444
Oil and natural gas properties, full cost accounting method:


Evaluated properties, net	3,573,282	3,352,821
Unevaluated properties	1,876,531	1,812,827
Total oil and natural gas properties, net	5,449,813	5,165,648

Other property and equipment, net	26,332	28,128

Deferred financing costs	14,961	18,125

Other assets, net	52,209	40,158
Total assets	$5,948,330	$5,547,503
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$606,093	$569,991


Fair value of derivatives	301,362	185,977
Other current liabilities	134,581	116,523
Total current liabilities	1,042,036	872,491
Long-term debt	2,516,337	2,694,115

Asset retirement obligations	57,427	54,458

Fair value of derivatives	21,251	11,409
Other long-term liabilities	51,942	49,262
Total liabilities	3,688,993	3,681,735
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 130,000,000 and 78,750,000 shares authorized; 61,715,672 and 61,370,684 shares outstanding, respectively	617	614
Capital in excess of par value	4,018,178	4,012,358
Accumulated deficit	(1,759,458)	(2,147,204)
Total stockholders’ equity	2,259,337	1,865,768
Total liabilities and stockholders’ equity	$5,948,330	$5,547,503

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

Callon Petroleum Company

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
Operating Revenues:
Oil	$619,812	$333,442	$1,173,061	$600,487
Natural gas	64,913	24,080	108,889	48,300
Natural gas liquids	75,530	36,625	143,148	65,982
Sales of purchased oil and gas	153,365	46,252	265,740	85,511
Total operating revenues	913,620	440,399	1,690,838	800,280

Operating Expenses:
Lease operating	72,940	46,460	140,268	86,913
Production and ad valorem taxes	44,873	21,958	82,551	40,397
Gathering, transportation and processing	23,267	20,031	44,042	38,012
Cost of purchased oil and gas	155,397	49,249	266,668	90,166
Depreciation, depletion and amortization	109,409	83,128	212,388	154,115
General and administrative	10,909	11,065	28,030	27,864

Merger, integration and transaction	—	—	769	—

Total operating expenses	416,795	231,891	774,716	437,467
Income From Operations	496,825	208,508	916,122	362,813

Other (Income) Expenses:
Interest expense, net of capitalized amounts	20,691	24,634	42,249	49,050
Loss on derivative contracts	81,648	190,463	439,948	404,986
Loss on extinguishment of debt	42,417	—	42,417	—
Other (income) expense	1,051	5,584	269	2,278
Total other expense	145,807	220,681	524,883	456,314

Income (Loss) Before Income Taxes	351,018	(12,173)	391,239	(93,501)
Income tax benefit (expense)	(3,009)	478	(3,493)	1,399
Net Income (Loss)	$348,009	($11,695)	$387,746	($92,102)

Net Income (Loss) Per Common Share:
Basic	$5.64	($0.25)	$6.30	($2.07)
Diluted	$5.62	($0.25)	$6.26	($2.07)

Weighted Average Common Shares Outstanding:
Basic	61,679	46,267	61,583	44,439
Diluted	61,909	46,267	61,956	44,439

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

Callon Petroleum Company

Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)


	Common		Capital in		Total
	Stock		Excess	Accumulated	Stockholders’
	Shares	$	of Par	Deficit	Equity
Balance at December 31, 2021	61,371	$614	$4,012,358	($2,147,204)	$1,865,768
Net income	—	—	—	39,737	39,737
Restricted stock units	6	—	2,790	—	2,790
Common stock issued for Primexx Acquisition	117	1	6,294	—	6,295

Balance at March 31, 2022	61,494	$615	$4,021,442	($2,107,467)	$1,914,590
Net income	—	—	—	348,009	348,009
Restricted stock units	244	2	(1,901)	—	(1,899)
Common stock issued for Primexx Acquisition	(22)	—	(1,363)	—	(1,363)

Balance at June 30, 2022	61,716	$617	$4,018,178	($1,759,458)	$2,259,337


	Common		Capital in		Total
	Stock		Excess	Accumulated	Stockholders’
	Shares	$	of Par	Deficit	Equity
Balance at December 31, 2020	39,759	$398	$3,222,959	($2,512,355)	$711,002
Net loss	—	—	—	(80,407)	(80,407)
Restricted stock units	13	—	2,609	—	2,609
Warrant exercises	6,385	64	134,754	—	134,818
Balance at March 31, 2021	46,157	$462	$3,360,322	($2,592,762)	$768,022
Net loss	—	—	—	(11,695)	(11,695)
Restricted stock units	132	1	960	—	961

Balance at June 30, 2021	46,289	$463	$3,361,282	($2,604,457)	$757,288

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

Callon Petroleum Company

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended June 30,
Cash flows from operating activities:	2022	2021
Net income (loss)	$387,746	($92,102)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization	212,388	154,115

Amortization of non-cash debt related items, net	3,201	4,508

Loss on derivative contracts	439,948	404,986
Cash paid for commodity derivative settlements, net	(287,922)	(127,571)
Loss on extinguishment of debt	42,417	—

Non-cash expense related to share-based awards	956	12,887


Other, net	5,200	4,511
Changes in current assets and liabilities:
Accounts receivable	(130,394)	(67,357)
Other current assets	(7,497)	(7,423)
Accounts payable and accrued liabilities	(18,940)	26,714
Cash received for settlements of contingent consideration arrangements, net	6,492	—

Net cash provided by operating activities	653,595	313,268
Cash flows from investing activities:
Capital expenditures	(413,939)	(251,003)
Acquisition of oil and gas properties	(15,945)	(2,215)

Proceeds from sales of assets	4,590	31,611
Cash paid for settlement of contingent consideration arrangement	(19,171)	—
Other, net	8,709	4,220
Net cash used in investing activities	(435,756)	(217,387)
Cash flows from financing activities:
Borrowings on Credit Facility	1,724,000	736,500
Payments on Credit Facility	(1,730,000)	(846,500)
Issuance of 7.50% Senior Notes due 2030	600,000	—
Redemption of 6.125% Senior Notes due 2024	(467,287)	—
Redemption of 9.00% Second Lien Senior Secured Notes due 2025	(339,507)	—



Cash received for settlement of contingent consideration arrangement	8,512	—


Payment of deferred financing costs	(10,542)	—


Other, net	(6,797)	(2,317)
Net cash used in financing activities	(221,621)	(112,317)
Net change in cash and cash equivalents	(3,782)	(16,436)
Balance, beginning of period	9,882	20,236
Balance, end of period	$6,100	$3,800

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

Index to the Notes to the Consolidated Financial Statements


1.	Description of Business and Basis of Presentation	8.	Fair Value Measurements
2.	Revenue Recognition	9.	Income Taxes
3.	Acquisitions and Divestitures	10.	Share-Based Compensation
4.	Property and Equipment, Net	11.	Stockholders’ Equity
5.	Earnings Per Share	12.	Accounts Receivable, Net
6.	Borrowings	13.	Accounts Payable and Accrued Liabilities
7.	Derivative Instruments and Hedging Activities	14.	Supplemental Cash Flow

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 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

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 extend the effective date through December 31, 2024; however, a final ruling has not been issued. As of June 30, 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 Credit Facility (as defined below).

Subsequent Events

The Company evaluates subsequent events through the date the financial statements are issued.

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 June 30, 2022 and December 31, 2021 of $274.5 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. 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 $31.8 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 $912.7 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						685,478
Unevaluated properties						278,222
Total assets acquired						$973,950

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						$912,698

Approximately $170.4 million and $308.5 million of revenues and $36.9 million and $65.7 million of direct operating expenses attributed to the Primexx Acquisition are included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2022, respectively.

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 $179.9 million. 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 June 30, 2022 and December 31, 2021, total property and equipment, net consisted of the following:


	June 30, 2022	December 31, 2021
Oil and natural gas properties, full cost accounting method	(In thousands)
Evaluated properties	$9,667,447	$9,238,823
Accumulated depreciation, depletion, amortization and impairments	(6,094,165)	(5,886,002)
Evaluated properties, net	3,573,282	3,352,821
Unevaluated properties
Unevaluated leasehold and seismic costs	1,570,069	1,557,453
Capitalized interest	306,462	255,374
Total unevaluated properties	1,876,531	1,812,827
Total oil and natural gas properties, net	$5,449,813	$5,165,648

Other property and equipment	$57,201	$58,367
Accumulated depreciation	(30,869)	(30,239)
Other property and equipment, net	$26,332	$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 $11.3 million and $12.1 million for the three months ended June 30, 2022 and 2021, respectively, and $22.9 million and $23.3 million for the six months ended June 30, 2022 and 2021, respectively.

The Company capitalized interest costs to unproved properties totaling $26.3 million and $23.9 million for the three months ended June 30, 2022 and 2021, respectively, and $51.8 million and $47.9 million for the six months ended June 30, 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 and six months ended June 30, 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 for those periods.

The following table sets forth the computation of basic and diluted earnings per share:


	Three Months Ended June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
	(In thousands, except per share amounts)



Net Income (Loss)	$348,009	($11,695)	$387,746	($92,102)
Basic weighted average common shares outstanding	61,679	46,267	61,583	44,439
Dilutive impact of restricted stock units	230	—	373	—

Diluted weighted average common shares outstanding	61,909	46,267	61,956	44,439

Net Income (Loss) Per Common Share
Basic	$5.64	($0.25)	$6.30	($2.07)
Diluted	$5.62	($0.25)	$6.26	($2.07)

Restricted stock units (1)	26	140	12	882
Warrants (1)	345	1,066	336	3,433

(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:


	June 30, 2022	December 31, 2021
	(In thousands)
6.125% Senior Notes due 2024	$—	$460,241
Senior Secured Revolving Credit Facility due 2024	779,000	785,000
9.00% Second Lien Senior Secured Notes due 2025	—	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
7.50% Senior Notes due 2030	600,000	—
Total principal outstanding	2,537,021	2,722,921
Unamortized premium on 6.125% Senior Notes	—	2,373
Unamortized discount on 9.00% Second Lien Notes	—	(14,852)
Unamortized premium on 8.25% Senior Notes	2,096	2,477
Unamortized deferred financing costs for Second Lien Notes	—	(2,910)
Unamortized deferred financing costs for Senior Unsecured Notes	(22,780)	(15,894)
Total carrying value of borrowings (1)	$2,516,337	$2,694,115

(1) Excludes unamortized deferred financing costs related to the Company’s senior secured revolving credit facility of $15.0 million and $18.1 million as of June 30, 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 June 30, 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 $779.0 million at a weighted-average interest rate of 4.16%, and letters of credit outstanding of $16.4 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 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.

Issuance of 7.50% Senior Notes and Redemption of 6.125% Senior Notes and Second Lien Notes

On June 9, 2022, the Company entered into a Purchase Agreement pursuant to which it agreed to issue and sell $600.0 million in aggregate principal amount of 7.50% senior unsecured notes due 2030 (the “7.50% Senior Notes”) in a private placement, which closed on June 24, 2022, for proceeds of approximately $588.0 million, net of underwriting discounts and commissions. The 7.50% Senior Notes mature on June 15, 2030 and interest is payable semi-annually each June 15 and December 15, commencing on December 15, 2022.

At any time prior to June 15, 2025, the Company may, from time to time, redeem up to 35% of the aggregate principal amount of the 7.50% Senior Notes in an amount of cash not greater than the net cash proceeds from certain equity offerings at the redemption price of 107.50% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption, if at least 65% of the aggregate principal amount of the 7.50% Senior Notes remains outstanding after such redemption and the redemption occurs within 180 days of the closing date of such equity offering. Prior to June 15, 2025, the Company may, at its option, on any one or more occasions, redeem all or a portion of the 7.50% Senior Notes at 100.00% of the principal amount plus an applicable make-whole premium and accrued and unpaid interest. On or after June 15, 2025, the Company may redeem all or a portion of the 7.50% Senior Notes at redemption prices decreasing annually from 103.75% to 100.00% of the principal amount redeemed plus accrued and unpaid interest. Upon the occurrence of certain kinds of change of control that are accompanied by a ratings decline, each holder of the 7.50%

Senior Notes may require the Company to repurchase all or a portion of such holder’s 7.50% Senior Notes for cash at a price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest.

Also on June 9, 2022, the Company directed the trustee of the 6.125% Senior Notes due 2024 (the “6.125% Senior Notes”) and the 9.00% Second Lien Senior Secured Notes due 2025 (the “Second Lien Notes”) to deliver redemption notices with respect to all $460.2 million of its outstanding 6.125% Senior Notes and all $319.7 million of its outstanding Second Lien Notes. On June 24, 2022, the Company deposited with the trustee the proceeds from the offering of the 7.50% Senior Notes, along with borrowings under the Credit Facility, to redeem all of its outstanding 6.125% Senior Notes and Second Lien Notes. The Company recognized a loss on extinguishment of debt of approximately $42.4 million in its consolidated statements of operations as a result of the redemptions, which primarily related to redemption premiums and the write-off of the remaining unamortized premium associated with the 6.125% Senior Notes, partially offset by the write-offs of the remaining unamortized discount associated with the Second Lien Notes and deferred financing costs.

Covenants

The Company’s credit agreement governing the Credit Facility and the indentures governing the 8.25% Senior Notes, the 6.375% Senior Notes, the 8.00% Senior Notes and the 7.50% Senior Notes (collectively, the “Senior Unsecured 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 June 30, 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, 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 June 30, 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 June 30, 2022
	Presented without		As Presented with
	Effects of Netting	Effects of Netting	Effects of Netting
	(In thousands)
Derivative Assets
Fair value of derivatives - current	$28,933	($28,933)	$—
Other assets, net	$11,485	($11,485)	$—

Derivative Liabilities
Fair value of derivatives - current	($330,295)	$28,933	($301,362)
Fair value of derivatives - non-current	($32,736)	$11,485	($21,251)


	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 June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
	(In thousands)
Loss on oil derivatives	$75,910	$177,033	$401,258	$326,594
Loss on natural gas derivatives	5,738	12,816	33,919	15,513
Loss on NGL derivatives	—	3,734	4,771	4,872
(Gain) loss on contingent consideration arrangements	—	(3,120)	—	2,617
Loss on September 2020 Warrants liability (1)	—	—	—	55,390
Loss on derivative contracts	$81,648	$190,463	$439,948	$404,986

(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 June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
	(In thousands)
Cash flows from operating activities
Cash paid on oil derivatives	($162,334)	($82,413)	($257,687)	($122,360)
Cash paid on natural gas derivatives	(21,808)	(1,906)	(26,452)	(3,275)
Cash paid on NGL derivatives	(2,255)	(1,090)	(3,783)	(1,936)
Cash paid for commodity derivative settlements, net	($186,397)	($85,409)	($287,922)	($127,571)
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 and natural gas derivative contracts as of June 30, 2022:


	For the Remainder	For the Full Year
Oil Contracts (WTI)	2022	2023
Swap Contracts
Total volume (Bbls)	3,634,000	1,538,500
Weighted average price per Bbl	$64.83	$81.04
Collar Contracts
Total volume (Bbls)	2,392,000	2,730,000
Weighted average price per Bbl
Ceiling (short call)	$70.12	$87.15
Floor (long put)	$60.00	$71.92






Short Call Swaption Contracts (1)
Total volume (Bbls)	—	1,825,000
Weighted average price per Bbl	$—	$72.00











Oil Contracts (Midland Basis Differential)
Swap Contracts
Total volume (Bbls)	1,196,000	—
Weighted average price per Bbl	$0.50	$—

(1) 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)	6,150,000	—
Weighted average price per MMBtu	$3.62	$—
Collar Contracts
Total volume (MMBtu)	5,510,000	6,640,000
Weighted average price per MMBtu
Ceiling (short call)	$5.96	$6.60
Floor (long put)	$4.21	$4.48




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.


	June 30, 2022		December 31, 2021
	Principal Amount	Fair Value	Principal Amount	Fair Value
	(In thousands)
6.125% Senior Notes	$—	$—	$460,241	$455,639
9.00% Second Lien Notes	—	—	319,659	343,633
8.25% Senior Notes	187,238	183,025	187,238	184,429
6.375% Senior Notes	320,783	295,409	320,783	309,556
8.00% Senior Notes	650,000	625,144	650,000	663,000
7.50% Senior Notes