cpe-20220930

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 September 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 61,608,521 shares of common stock outstanding as of October 28, 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			30

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)


	September 30, 2022	December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$4,350	$9,882
Accounts receivable, net	285,591	232,436
Fair value of derivatives	14,744	22,381
Other current assets	46,243	30,745
Total current assets	350,928	295,444
Oil and natural gas properties, full cost accounting method:


Evaluated properties, net	3,789,530	3,352,821
Unevaluated properties	1,847,912	1,812,827
Total oil and natural gas properties, net	5,637,442	5,165,648

Other property and equipment, net	26,071	28,128

Deferred financing costs	13,504	18,125

Other assets, net	71,994	40,158
Total assets	$6,099,939	$5,547,503
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$594,279	$569,991


Fair value of derivatives	48,697	185,977
Other current liabilities	151,021	116,523
Total current liabilities	793,997	872,491
Long-term debt	2,373,358	2,694,115

Asset retirement obligations	59,583	54,458

Fair value of derivatives	9,604	11,409
Other long-term liabilities	54,395	49,262
Total liabilities	3,290,937	3,681,735
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 130,000,000 and 78,750,000 shares authorized; 61,607,450 and 61,370,684 shares outstanding, respectively	616	614
Capital in excess of par value	4,018,241	4,012,358
Accumulated deficit	(1,209,855)	(2,147,204)
Total stockholders’ equity	2,809,002	1,865,768
Total liabilities and stockholders’ equity	$6,099,939	$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 September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
Operating Revenues:
Oil	$575,852	$409,293	$1,748,913	$1,009,780
Natural gas	81,018	36,519	189,907	84,819
Natural gas liquids	67,548	58,097	210,696	124,079
Sales of purchased oil and gas	111,459	48,653	377,199	134,164
Total operating revenues	835,877	552,562	2,526,715	1,352,842

Operating Expenses:
Lease operating	76,121	42,706	216,389	129,619
Production and ad valorem taxes	43,290	26,070	125,841	66,467
Gathering, transportation and processing	27,575	20,875	71,617	58,887
Cost of purchased oil and gas	111,439	49,392	378,107	139,558
Depreciation, depletion and amortization	122,833	89,890	335,221	244,005
General and administrative	14,022	9,503	42,052	37,367

Merger, integration and transaction	—	3,018	769	3,018

Total operating expenses	395,280	241,454	1,169,996	678,921
Income From Operations	440,597	311,108	1,356,719	673,921

Other (Income) Expenses:
Interest expense, net of capitalized amounts	19,468	27,736	61,717	76,786
(Gain) loss on derivative contracts	(134,850)	107,169	305,098	512,155
(Gain) loss on extinguishment of debt	—	(2,420)	42,417	(2,420)
Other (income) expense	2,861	4,305	3,130	6,583
Total other (income) expense	(112,521)	136,790	412,362	593,104

Income Before Income Taxes	553,118	174,318	944,357	80,817
Income tax expense	(3,515)	(2,416)	(7,008)	(1,017)
Net Income	$549,603	$171,902	$937,349	$79,800

Net Income Per Common Share:
Basic	$8.91	$3.71	$15.21	$1.77
Diluted	$8.88	$3.65	$15.14	$1.69

Weighted Average Common Shares Outstanding:
Basic	61,703	46,290	61,624	45,063
Diluted	61,870	47,096	61,927	47,119

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
Net income	—	—	—	549,603	549,603
Restricted stock units	1	—	3,893	—	3,893
Common stock issued for Primexx Acquisition	(110)	(1)	(3,830)	—	(3,831)
Balance at September 30, 2022	61,607	$616	$4,018,241	($1,209,855)	$2,809,002


	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
Net income	—	—	—	171,902	171,902
Restricted stock units	2	—	3,839	—	3,839

Balance at September 30, 2021	46,291	$463	$3,365,121	($2,432,555)	$933,029

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

Callon Petroleum Company

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
Cash flows from operating activities:	2022	2021
Net income	$937,349	$79,800
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization	335,221	244,005

Amortization of non-cash debt related items, net	4,263	7,166
Deferred income tax expense	1,626	—
(Gain) loss on derivative contracts	305,098	512,155
Cash paid for commodity derivative settlements, net	(433,518)	(238,378)
(Gain) loss on extinguishment of debt	42,417	(2,420)

Non-cash expense related to share-based awards	1,055	11,984


Other, net	8,704	11,006
Changes in current assets and liabilities:
Accounts receivable	(58,915)	(83,227)
Other current assets	(12,229)	(8,701)
Accounts payable and accrued liabilities	(8,693)	74,443
Cash received for settlements of contingent consideration arrangements, net	6,492	—

Net cash provided by operating activities	1,128,870	607,833
Cash flows from investing activities:
Capital expenditures	(754,225)	(427,552)
Acquisition of oil and gas properties	(18,114)	(67,236)

Proceeds from sales of assets	9,313	35,415
Cash paid for settlement of contingent consideration arrangement	(19,171)	—
Other, net	13,497	4,206
Net cash used in investing activities	(768,700)	(455,167)
Cash flows from financing activities:
Borrowings on Prior Credit Facility	2,535,000	1,236,500
Payments on Prior Credit Facility	(2,684,000)	(1,498,500)
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)	—
Redemption of 6.25% Senior Notes	—	(542,755)
Issuance of 8.00% Senior Notes due 2028	—	650,000


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


Payment of deferred financing costs	(11,623)	(12,168)


Other, net	(6,797)	(2,280)
Net cash used in financing activities	(365,702)	(169,203)
Net change in cash and cash equivalents	(5,532)	(16,537)
Balance, beginning of period	9,882	20,236
Balance, end of period	$4,350	$3,699

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.	Accounts Receivable, Net
5.	Earnings Per Share	12.	Accounts Payable and Accrued Liabilities
6.	Borrowings	13.	Supplemental Cash Flow
7.	Derivative Instruments and Hedging Activities	14.	Subsequent Events

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 September 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 Prior Credit Facility (as defined below) prior to the amendment and restatement thereof in October 2022.

Subsequent Events

The Company evaluates subsequent events through the date the financial statements are issued. See “Note 14 - Subsequent Events” for further discussion.

Note 2 - Revenue Recognition

Revenue from Contracts with Customers

The Company recognizes oil, natural gas, and NGL production revenue at the point in time when control of the product transfers to the purchaser, which differs depending on the applicable contractual terms. Transfer of control also drives the presentation of gathering, transportation and processing in the consolidated statements of operations. See “Note 3 - Revenue Recognition” of the Notes to Consolidated Financial Statements in the 2021 Annual Report for more information regarding the types of contracts under which oil, natural gas, and NGL production revenue is generated.

Accounts Receivable from Revenues from Contracts with Customers

Net accounts receivable include amounts billed and currently due from revenues from contracts with customers of our oil and natural gas production, which had a balance at September 30, 2022 and December 31, 2021 of $219.7 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, 1.3 million of the shares held in escrow were released to the sellers six months after the closing date, which was on April 1, 2022. In early October 2022, the remaining 1.2 million shares were released to the sellers, net of shares that were released to the Company for the satisfaction of indemnification claims made under the Primexx PSAs and subsequently retired.

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. The Company does not anticipate any further changes to the purchase price allocation and expects to complete in the fourth quarter of 2022.

The following table sets forth the Company’s preliminary allocation of the total estimated consideration of $908.9 million to the assets acquired and liabilities assumed as of the acquisition date.


						Preliminary Purchase Price Allocation
						(In thousands)
Assets:
Other current assets						$8,174
Evaluated oil and natural gas properties						695,838
Unevaluated properties						278,370
Total assets acquired						$982,382

Liabilities:
Suspense payable						$16,447
Other current liabilities						45,745
Asset retirement obligation						1,898
Other long-term liabilities						9,425
Total liabilities assumed						$73,515

Total consideration						$908,867

Approximately $137.6 million and $446.1 million of revenues and $39.2 million and $104.9 million of direct operating expenses attributed to the Primexx Acquisition are included in the Company’s consolidated statements of operations for the three and nine months ended September 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 September 30, 2022 and December 31, 2021, total property and equipment, net consisted of the following:


	September 30, 2022	December 31, 2021
Oil and natural gas properties, full cost accounting method	(In thousands)
Evaluated properties	$10,004,257	$9,238,823
Accumulated depreciation, depletion, amortization and impairments	(6,214,727)	(5,886,002)
Evaluated properties, net	3,789,530	3,352,821
Unevaluated properties
Unevaluated leasehold and seismic costs	1,525,085	1,557,453
Capitalized interest	322,827	255,374
Total unevaluated properties	1,847,912	1,812,827
Total oil and natural gas properties, net	$5,637,442	$5,165,648

Other property and equipment	$40,094	$58,367
Accumulated depreciation	(14,023)	(30,239)
Other property and equipment, net	$26,071	$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 $12.7 million and $10.4 million for the three months ended September 30, 2022 and 2021, respectively, and $35.6 million and $33.7 million for the nine months ended September 30, 2022 and 2021, respectively.

The Company capitalized interest costs to unproved properties totaling $27.5 million and $26.1 million for the three months ended September 30, 2022 and 2021, respectively, and $79.3 million and $74.0 million for the nine months ended September 30, 2022 and 2021, respectively.

Note 5 - Earnings Per Share

Basic earnings per share is computed by dividing net income 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.

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


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
	(In thousands, except per share amounts)



Net Income	$549,603	$171,902	$937,349	$79,800
Basic weighted average common shares outstanding	61,703	46,290	61,624	45,063
Dilutive impact of restricted stock units	167	305	303	244
Dilutive impact of warrants	—	501	—	1,812
Diluted weighted average common shares outstanding	61,870	47,096	61,927	47,119

Net Income Per Common Share
Basic	$8.91	$3.71	$15.21	$1.77
Diluted	$8.88	$3.65	$15.14	$1.69

Restricted stock units (1)	100	8	28	28
Warrants (1)	481	481	416	481

(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:


	September 30, 2022	December 31, 2021
	(In thousands)
6.125% Senior Notes due 2024	$—	$460,241
Senior Secured Revolving Credit Facility due 2024 (1)	636,000	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	2,394,021	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	1,905	2,477
Unamortized deferred financing costs for 9.00% Second Lien Notes	—	(2,910)
Unamortized deferred financing costs for Senior Unsecured Notes	(22,568)	(15,894)
Total carrying value of borrowings (2)	$2,373,358	$2,694,115

(1) On October 19, 2022, the Company entered into the Credit Agreement, as defined below, which extended the maturity date from 2024 to 2027. See below for additional details.

(2) Excludes unamortized deferred financing costs related to the Company’s senior secured revolving credit facility of $13.5 million and $18.1 million as of September 30, 2022 and December 31, 2021, respectively, which are classified in “Deferred financing costs” in the consolidated balance sheets.

Senior Secured Revolving Credit Facility

As of September 30, 2022, the Company had a senior secured revolving credit facility with a syndicate of lenders (the “Prior Credit Facility”) that had a maximum credit amount of $5.0 billion, a borrowing base and elected commitment amount of $1.6 billion, with borrowings outstanding of $636.0 million at a weighted-average interest rate of 5.30%, and letters of credit outstanding of $16.4 million. The credit agreement governing the Prior Credit Facility provided for interest-only payments until December 20, 2024 when the credit agreement was to mature and any outstanding borrowings would have been due.

Borrowings outstanding under the credit agreement governing the Prior Credit Facility 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.

On October 19, 2022, the Company entered into the Amended & Restated Credit Agreement (the “Credit Agreement” and the senior secured revolving credit facility thereunder, the “Credit Facility”) on substantially similar terms as those in the credit agreement governing the Prior Credit Facility. The Credit Agreement, among other things, extended the term to provide for interest-only payments until October 19, 2027 when the Credit Agreement matures and any outstanding borrowings are due, established a borrowing base of $2.0 billion, with an elected commitment amount of $1.5 billion, replaced all provisions and related definitions regarding LIBOR with a Secured Overnight Financing Rate based benchmark rate (“SOFR”), and decreased the maximum leverage ratio from 4.00 to 1.00 to 3.50 to 1.00.

Borrowings outstanding under the credit agreement governing the Credit Facility bear interest at the Company’s option at either (i) a base rate for a base rate loan plus a margin between 0.75% to 1.75%, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.50%, and the SOFR plus 0.1% (“Adjusted SOFR”) for a one month period plus 1.00%, or (ii) an Adjusted SOFR plus a margin between 1.75% to 2.75%. There were no changes to the commitment fee rates on the unused portion of lender commitments in the Credit Agreement.

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 Credit Facility is, and the Prior Credit Facility was, secured by first preferred mortgages covering the Company’s major producing properties.

Issuance of 7.50% Senior Notes and Redemption of 6.125% Senior Notes and 9.00% Second Lien Notes

On June 24, 2022, the Company issued and sold $600.0 million in aggregate principal amount of 7.50% senior unsecured notes due 2030 (the “7.50% Senior Notes”) in a private placement for proceeds of approximately $588.0 million, net of initial purchasers’ discounts and commissions. Also on June 24, 2022, the Company used the proceeds from the offering of the 7.50% Senior Notes, along with borrowings under its credit facility, to redeem all of its outstanding 6.125% Senior Notes and 9.00% Second Lien Notes (the “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.

Covenants

The Company’s 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 governing the Credit Facility, 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 3.50 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 September 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 September 30, 2022, the Company has outstanding commodity derivative instruments with nine 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 facility. 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 well as settlements during the period, 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 September 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	$74,016	($59,272)	$14,744
Other assets, net	$13,520	($12,131)	$1,389

Derivative Liabilities
Fair value of derivatives - current	($107,969)	$59,272	($48,697)
Fair value of derivatives - non-current	($21,735)	$12,131	($9,604)


	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 “(Gain) loss on derivative contracts” are as follows for the respective periods:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
	(In thousands)
(Gain) loss on oil derivatives	($157,731)	$67,198	$243,527	$393,792
Loss on natural gas derivatives	22,881	33,026	56,800	48,539
Loss on NGL derivatives	—	10,242	4,771	15,114
Gain on contingent consideration arrangements	—	(3,297)	—	(680)
Loss on September 2020 Warrants liability (1)	—	—	—	55,390
(Gain) loss on derivative contracts	($134,850)	$107,169	$305,098	$512,155

(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 September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
	(In thousands)
Cash flows from operating activities
Cash paid on oil derivatives	($117,024)	($98,752)	($374,711)	($221,112)
Cash paid on natural gas derivatives	(28,572)	(9,592)	(55,024)	(12,867)
Cash paid on NGL derivatives	—	(2,463)	(3,783)	(4,399)
Cash paid for commodity derivative settlements, net	($145,596)	($110,807)	($433,518)	($238,378)
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 September 30, 2022:


	For the Remainder	For the Full Year	For the Full Year
Oil Contracts (WTI)	2022	2023	2024
Swap Contracts
Total volume (Bbls)	1,978,000	1,722,500	—
Weighted average price per Bbl	$67.29	$81.46	$—
Collar Contracts (Three-Way Collars)
Total volume (Bbls)	—	1,825,000	—
Weighted average price per Bbl
Ceiling (short call)	$—	$90.00	$—
Floor (long put)	$—	$70.00	$—
Floor (short put)	$—	$