sm-20210630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐ 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 001-31539

SM ENERGY COMPANY

(Exact name of registrant as specified in its charter)

Delaware

41-0518430

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

1775 Sherman Street, Suite 1200, Denver, Colorado

80203

(Address of principal executive offices)

(Zip Code)

(303) 861-8140

(Registrant’s telephone number, including area code)

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	SM	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, a 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 ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 21, 2021, the registrant had 121,220,862 shares of common stock outstanding.

TABLE OF CONTENTS


Item		Page
	Cautionary Information about Forward-Looking Statements	3

	Part I	4

Item 1.	Financial Statements (unaudited)	4

	Condensed Consolidated Balance Sheets June 30, 2021, and December 31, 2020	4

	Condensed Consolidated Statements of Operations Three and Six Months Ended June 30, 2021, and 2020	5

	Condensed Consolidated Statements of Comprehensive Loss Three and Six Months Ended June 30, 2021, and 2020	6

	Condensed Consolidated Statements of Stockholders’ Equity Continuous Quarterly Presentation Ended June 30, 2021, and 2020	7

	Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2021, and 2020	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	40

	Part II	41

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 6.	Exhibits	42

	Signatures	43

Cautionary Information about Forward-Looking Statements

This Report on Form 10-Q (“Form 10-Q” or “this report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements included in this report, other than statements of historical facts, that address activities, conditions, events, or developments with respect to our financial condition, results of operations, business prospects or economic performance that we expect, believe, or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “budget,” “could,” “estimate,” “expect,” “forecast,” “intend,” “pending,” “plan,” “potential,” “project,” “target,” “will,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements appear throughout this report, and include statements about such matters as:

•the impacts of the global COVID-19 pandemic (“Pandemic”) on us, our industry, our financial condition, and our results of operations;

•the amount and nature of future capital expenditures and the availability of liquidity and capital resources to fund capital expenditures;

•any changes to the borrowing base or aggregate lender commitments under our Sixth Amended and Restated Credit Agreement, as amended (“Credit Agreement”);

•our outlook on future crude oil, natural gas, and natural gas liquids (also referred to throughout this report as “oil,” “gas,” and “NGLs,” respectively) prices, well costs, service costs, production costs, and general and administrative costs;

•our drilling and completion activities and other exploration and development activities, our ability to obtain permits and governmental approvals, and plans by us, our joint development partners, and/or other third-party operators;

•possible or expected acquisitions and divestitures, including the possible divestiture or farmout of, or joint development of, certain properties;

•oil, gas, and NGL reserve estimates and estimates of both future net revenues and the present value of future net revenues associated with those reserve estimates;

•our expected future production volumes, identified drilling locations, as well as drilling prospects, inventories, projects and programs;

•cash flows, liquidity, interest and related debt service expenses, changes in our effective tax rate, and our ability to repay debt in the future;

•business strategies and other plans and objectives for future operations, including plans for expansion and growth of operations or to defer capital investment, plans with respect to future dividend payments, and our outlook on our future financial condition or results of operations; and

•other similar matters, such as those discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this report.

Our forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments, and other factors that we believe are appropriate under the circumstances. These statements are subject to known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from any future results or performance expressed or implied by the forward-looking statements. Factors that may cause our financial condition, results of operations, business prospects or economic performance to differ from expectations include the factors discussed in the Risk Factors section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”).

We caution you that forward-looking statements are not guarantees of future performance and actual results or performance may be materially different from those expressed or implied in forward-looking statements. The forward-looking statements in this report speak only as of the filing of this report. Although we may from time to time voluntarily update our prior forward-looking statements, we disclaim any commitment to do so except as required by applicable securities laws.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)


	June 30, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	10
Accounts receivable	229,512		162,455
Derivative assets	31,303		31,203
Prepaid expenses and other	8,595		10,001
Total current assets	269,410		203,669
Property and equipment (successful efforts method):
Proved oil and gas properties	9,107,281		8,608,522
Accumulated depletion, depreciation, and amortization	(5,244,367)		(4,886,973)
Unproved oil and gas properties	656,848		714,602
Wells in progress	153,734		233,498

Other property and equipment, net of accumulated depreciation of $75,328 and $63,662, respectively	41,313		32,217
Total property and equipment, net	4,714,809		4,701,866
Noncurrent assets:
Derivative assets	13,534		23,150
Other noncurrent assets	55,245		47,746
Total noncurrent assets	68,779		70,896
Total assets	$	5,052,998	$	4,976,431
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	496,285	$	371,670

Derivative liabilities	545,062		200,189
Other current liabilities	10,321		11,880
Total current liabilities	1,051,668		583,739
Noncurrent liabilities:
Revolving credit facility	52,500		93,000
Senior Notes, net	2,139,625		2,121,319


Asset retirement obligations	85,390		83,325


Derivative liabilities	116,273		22,331
Other noncurrent liabilities	55,033		56,557
Total noncurrent liabilities	2,448,821		2,376,532

Commitments and contingencies (note 6)

Stockholders’ equity:
Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 120,970,853 and 114,742,304 shares, respectively	1,210		1,147
Additional paid-in capital	1,838,859		1,827,914
Retained earnings (deficit)	(274,745)		200,697
Accumulated other comprehensive loss	(12,815)		(13,598)
Total stockholders’ equity	1,552,509		2,016,160
Total liabilities and stockholders’ equity	$	5,052,998	$	4,976,431

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

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Operating revenues and other income:
Oil, gas, and NGL production revenue	$	562,569	$	169,790	$	985,734	$	524,023

Other operating income (loss)	1,280		(158)		21,961		1,343
Total operating revenues and other income	563,849		169,632		1,007,695		525,366
Operating expenses:
Oil, gas, and NGL production expense	125,456		80,445		226,386		199,997
Depletion, depreciation, amortization, and asset retirement obligation liability accretion	204,714		180,856		371,674		414,345
Exploration	8,714		9,787		18,037		21,136

Impairment	8,750		8,750		17,500		998,513
General and administrative	24,639		27,227		49,353		54,674
Net derivative (gain) loss	370,348		167,200		715,037		(378,140)
Other operating expense, net	1,852		8,046		1,253		8,612
Total operating expenses	744,473		482,311		1,399,240		1,319,137
Loss from operations	(180,624)		(312,679)		(391,545)		(793,771)
Interest expense	(39,536)		(40,354)		(79,407)		(81,866)
Gain (loss) on extinguishment of debt	(2,144)		227,281		(2,144)		239,476
Other non-operating expense, net	(853)		(185)		(1,224)		(679)
Loss before income taxes	(223,157)		(125,937)		(474,320)		(636,840)
Income tax benefit	162		36,685		56		135,693
Net loss	$	(222,995)	$	(89,252)	$	(474,264)	$	(501,147)

Basic weighted-average common shares outstanding	118,357		113,008		116,568		113,015
Diluted weighted-average common shares outstanding	118,357		113,008		116,568		113,015
Basic net loss per common share	$	(1.88)	$	(0.79)	$	(4.07)	$	(4.43)
Diluted net loss per common share	$	(1.88)	$	(0.79)	$	(4.07)	$	(4.43)
Dividends per common share	$	—	$	—	$	0.01	$	0.01

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

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(in thousands)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Net loss	$	(222,995)	$	(89,252)	$	(474,264)	$	(501,147)
Other comprehensive income, net of tax:
Pension liability adjustment	592		188		783		378
Total other comprehensive income, net of tax	592		188		783		378
Total comprehensive loss	$	(222,403)	$	(89,064)	$	(473,481)	$	(500,769)

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

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share data and dividends per share)


				Additional Paid-in Capital				Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Common Stock					Retained Earnings (Deficit)
	Shares	Amount
Balances, December 31, 2020	114,742,304	$	1,147	$	1,827,914	$	200,697	$	(13,598)	$	2,016,160
Net loss	—	—		—		(251,269)		—		(251,269)
Other comprehensive income	—	—		—		—		191		191
Cash dividends declared, $0.01 per share	—	—		—		(1,147)		—		(1,147)


Stock-based compensation expense	—	—		5,737		—		—		5,737


Balances, March 31, 2021	114,742,304	$	1,147	$	1,833,651	$	(51,719)	$	(13,407)	$	1,769,672
Net loss	—	—		—		(222,995)		—		(222,995)
Other comprehensive income	—	—		—		—		592		592
Cash dividends, $0.01 per share	—	—		—		(31)		—		(31)
Issuance of common stock under Employee Stock Purchase Plan	252,665	3		1,312		—		—		1,315

Stock-based compensation expense	57,795	1		3,955		—		—		3,956
Issuance of common stock through cashless exercise of Warrants	5,918,089	59		(59)		—		—		—

Balances, June 30, 2021	120,970,853	$	1,210	$	1,838,859	$	(274,745)	$	(12,815)	$	1,552,509


				Additional Paid-in Capital				Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Common Stock					Retained Earnings
	Shares	Amount
Balances, December 31, 2019	112,987,952	$	1,130	$	1,791,596	$	967,587	$	(11,319)	$	2,748,994
Net loss	—	—		—		(411,895)		—		(411,895)
Other comprehensive income	—	—		—		—		190		190
Cash dividends declared, $0.01 per share	—	—		—		(1,130)		—		(1,130)

Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings	730	—		(3)		—		—		(3)
Stock-based compensation expense	—	—		5,561		—		—		5,561


Balances, March 31, 2020	112,988,682	$	1,130	$	1,797,154	$	554,562	$	(11,129)	$	2,341,717
Net loss	—	—		—		(89,252)		—		(89,252)
Other comprehensive income	—	—		—		—		188		188

Issuance of common stock under Employee Stock Purchase Plan	297,013	3		944		—		—		947

Stock-based compensation expense	267,576	3		5,709		—		—		5,712

Issuance of Warrants	—	—		21,520		—		—		21,520

Balances, June 30, 2020	113,553,271	$	1,136	$	1,825,327	$	465,310	$	(10,941)	$	2,280,832

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

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	For the Six Months Ended June 30,
	2021		2020
Cash flows from operating activities:
Net loss	$	(474,264)	$	(501,147)
Adjustments to reconcile net loss to net cash provided by operating activities:

Depletion, depreciation, amortization, and asset retirement obligation liability accretion	371,674		414,345
Impairment	17,500		998,513
Stock-based compensation expense	9,693		11,273
Net derivative (gain) loss	715,037		(378,140)
Derivative settlement gain (loss)	(266,707)		215,965
Amortization of debt discount and deferred financing costs	9,445		8,578
(Gain) loss on extinguishment of debt	2,144		(239,476)
Deferred income taxes	(214)		(136,268)
Other, net	(13,377)		(3,918)
Net change in working capital	31,092		(57,254)





Net cash provided by operating activities	402,023		332,471

Cash flows from investing activities:

Capital expenditures	(370,177)		(310,209)
Other, net	221		92
Net cash used in investing activities	(369,956)		(310,117)

Cash flows from financing activities:
Proceeds from revolving credit facility	944,000		841,000
Repayment of revolving credit facility	(984,500)		(770,500)
Net proceeds from Senior Notes	393,583		—
Cash paid to repurchase Senior Notes	(385,296)		(81,826)
Debt issuance costs related to 10.0% Senior Secured Notes due 2025	—		(10,491)
Net proceeds from sale of common stock	1,315		947
Dividends paid	(1,178)		(1,130)
Other	(1)		(354)
Net cash used in financing activities	(32,077)		(22,354)

Net change in cash, cash equivalents, and restricted cash	(10)		—
Cash, cash equivalents, and restricted cash at beginning of period	10		10
Cash, cash equivalents, and restricted cash at end of period	$	—	$	10

Supplemental schedule of additional cash flow information and non-cash activities:
Operating activities:
Cash paid for interest, net of capitalized interest	$	(74,864)	$	(82,313)

Investing activities:
Increase (decrease) in capital expenditure accruals and other	$	28,987	$	(28,896)
Non-cash financing activities (1)

____________________________________________

(1) Please refer to Note 5 - Long-Term Debt for discussion of the debt transactions executed during the six months ended June 30, 2021, and 2020.

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

SM ENERGY COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Summary of Significant Accounting Policies

Description of Operations

SM Energy Company, together with its consolidated subsidiaries (“SM Energy” or the “Company”), is an independent energy company engaged in the acquisition, exploration, development, and production of oil, gas, and NGLs in the state of Texas.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Quarterly Report on Form 10-Q, and Regulation S-X. These financial statements do not include all information and notes required by GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the 2020 Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year. In connection with the preparation of the Company’s unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of June 30, 2021, and through the filing of this report. Additionally, certain prior period amounts have been reclassified to conform to current period presentation in the accompanying unaudited condensed consolidated financial statements.

Significant Accounting Policies

The significant accounting policies followed by the Company are set forth in Note 1 - Summary of Significant Accounting Policies in the 2020 Form 10-K and are supplemented by the notes to the unaudited condensed consolidated financial statements included in this report. These unaudited condensed consolidated financial statements should be read in conjunction with the 2020 Form 10-K.

Recently Issued Accounting Standards

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), and in January 2021, issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), 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. As of June 30, 2021, 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 5 - Long-Term Debt for discussion of the use of the London Interbank Offered Rate (“LIBOR”) in connection with borrowings under the Credit Agreement.

There are no other ASUs that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures that have been issued but not yet adopted by the Company as of June 30, 2021, or through the filing of this report.

Note 2 - Revenue from Contracts with Customers

The Company recognizes its share of revenue from the sale of produced oil, gas, and NGLs from its Midland Basin and South Texas assets. Oil, gas, and NGL production revenue presented within the accompanying unaudited condensed consolidated statements of operations (“accompanying statements of operations”) is reflective of the revenue generated from contracts with customers.

The tables below present oil, gas, and NGL production revenue by product type for each of the Company’s operating areas for the three and six months ended June 30, 2021, and 2020:



	Midland Basin						South Texas						Total
	Three Months Ended June 30,						Three Months Ended June 30,						Three Months Ended June 30,
	2021			2020			2021			2020			2021			2020

	(in thousands)
Oil production revenue	$	404,492		$	114,358		$	31,876		$	5,158		$	436,368		$	119,516
Gas production revenue	51,435			11,921			36,900			22,942			88,335			34,863
NGL production revenue	112			45			37,754			15,366			37,866			15,411
Total	$	456,039		$	126,324		$	106,530		$	43,466		$	562,569		$	169,790
Relative percentage	81		%	74		%	19		%	26		%	100		%	100		%

____________________________________________

Note: Amounts may not calculate due to rounding.


	Midland Basin						South Texas						Total
	Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020			2021			2020

	(in thousands)
Oil production revenue	$	690,597		$	390,494		$	51,548		$	20,715		$	742,145		$	411,209
Gas production revenue	109,241			23,255			68,752			52,318			177,993			75,573
NGL production revenue	212			103			65,384			37,138			65,596			37,241
Total	$	800,050		$	413,852		$	185,684		$	110,171		$	985,734		$	524,023
Relative percentage	81		%	79		%	19		%	21		%	100		%	100		%

____________________________________________

Note: Amounts may not calculate due to rounding.

The Company recognizes oil, gas, and NGL production revenue at the point in time when custody and title (“control”) of the product transfers to the purchaser, which differs depending on the applicable contractual terms. Transfer of control drives the presentation of transportation, gathering, processing, and other post-production expenses (“fees and other deductions”) within the accompanying statements of operations. Fees and other deductions incurred by the Company prior to control transfer are recorded within the oil, gas, and NGL production expense line item on the accompanying statements of operations. When control is transferred at or near the wellhead, sales are based on a wellhead market price that is impacted by fees and other deductions incurred by the purchaser subsequent to the transfer of control. Please refer to Note 2 - Revenue from Contracts with Customers in the 2020 Form 10-K for more information regarding the types of contracts under which oil, gas, and NGL production revenue is generated.

Significant judgments made in applying the guidance in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, relate to the point in time when control transfers to purchasers in gas processing arrangements with midstream processors. The Company does not believe that significant judgments are required with respect to the determination of the transaction price, including amounts that represent variable consideration, as volume and price carry a low level of estimation uncertainty given the precision of volumetric measurements and the use of index pricing with generally predictable differentials. Accordingly, the Company does not consider estimates of variable consideration to be constrained.

The Company’s performance obligations arise upon the production of hydrocarbons from wells in which the Company has an ownership interest. The performance obligations are considered satisfied upon control transferring to a purchaser at the wellhead, inlet, or tailgate of the midstream processor’s processing facility, or other contractually specified delivery point. The time period between production and satisfaction of performance obligations is generally less than one day, therefore there are no material unsatisfied or partially unsatisfied performance obligations at the end of the reporting period.

Revenue is recorded in the month when performance obligations are satisfied. However, settlement statements from the purchasers of hydrocarbons and the related cash consideration are received 30 to 90 days after production has occurred. As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the product. Estimated revenue due to the Company is recorded within the accounts receivable line item on the accompanying unaudited condensed consolidated balance sheets (“accompanying balance sheets”) until payment is received. The accounts receivable balances from contracts with customers within the accompanying balance sheets as of June 30, 2021, and

December 31, 2020, were $173.3 million and $108.9 million, respectively. To estimate accounts receivable from contracts with customers, the Company uses knowledge of its properties, historical performance, contractual arrangements, index pricing, quality and transportation differentials, and other factors as the basis for these estimates. Differences between estimates and actual amounts received for product sales are recorded in the month that payment is received from the purchaser.

Note 3 - Equity

On June 17, 2020, the Company issued warrants to purchase up to an aggregate of approximately 5.9 million shares, or approximately five percent of its then outstanding common stock, at an exercise price of $0.01 per share (“Warrants”).

Upon issuance, the $21.5 million fair value of the Warrants was recorded in additional paid-in capital on the accompanying balance sheets, and was determined using a stochastic Monte Carlo simulation using geometric Brownian motion (“GBM Model”). The Company evaluated the Warrants under authoritative accounting guidance and determined that they should be classified as equity instruments, with no recurring fair value measurement required. There have been no changes to the initial carrying amount of the Warrants since issuance.

The Warrant Agreement, dated June 17, 2020 (“Warrant Agreement”), provides that the Warrants are exercisable any time from and after the Triggering Date, as subsequently defined, until June 30, 2023. The Triggering Date is defined by the Warrant Agreement as the first trading day following five consecutive trading days on which the product of the number of shares of common stock issued and outstanding on four of the five trading days multiplied by the closing price per share of common stock for each such trading day exceeds $1.0 billion (“Triggering Date”). The Warrants are indexed to the Company’s common stock and are required to be settled through physical settlement or net share settlement, if exercised. The Triggering Date occurred on January 15, 2021, and the Warrants became and will remain exercisable at the election of the holders until their expiration on June 30, 2023.

During the second quarter of 2021, the Company issued 5,918,089 shares of common stock as a result of the cashless exercise of 5,922,260 Warrants at a weighted-average share price of $15.45 per share, as determined under the terms of the Warrant Agreement. At the request of stockholders and pursuant to the Company’s obligations under the Warrant Agreement, a registration statement covering the resale of a majority of these shares was filed with the U.S. Securities and Exchange Commission on June 11, 2021.

Note 4 - Income Taxes

The provision for income taxes for the three and six months ended June 30, 2021, and 2020, consisted of the following:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020

	(in thousands)
Current portion of income tax (expense) benefit:
Federal	$	—		$	—		$	—		$	—
State	—			(236)			(158)			(575)
Deferred portion of income tax benefit	162			36,921			214			136,268
Income tax benefit	$	162		$	36,685		$	56		$	135,693

Effective tax rate	0.1		%	29.1		%	—		%	21.3		%

Recorded income tax expense or benefit differs from the amount that would be provided by applying the statutory United States federal income tax rate to income or loss before income taxes. These differences primarily relate to the effect of state income taxes, excess tax benefits and deficiencies from stock-based compensation awards, tax limitations on the compensation of covered individuals, changes in valuation allowances, the cumulative impact of other smaller permanent differences, and can also reflect the cumulative effect of an enacted tax rate change, in the period of enactment, on the Company’s net deferred tax asset and liability balance. The quarterly rate and the resulting income tax benefit can also be affected by the proportional impacts of forecasted net income or loss and the correlative effect on the valuation allowance for each period presented, as reflected in the table above.

For all years before 2017, the Company is generally no longer subject to United States federal or state income tax examinations by tax authorities.

Note 5 - Long-Term Debt

The following table summarizes the Company’s total outstanding balance on its revolving credit facility, Senior Secured Notes net of unamortized discount and deferred financing costs, and Senior Unsecured Notes net of unamortized deferred financing costs, as of June 30, 2021, and December 31, 2020:


	As of June 30, 2021		As of December 31, 2020

	(in thousands)
Revolving credit facility	$	52,500	$	93,000
Senior Secured Notes (1)	467,807		460,656
Senior Unsecured Notes (1)	1,671,818		1,660,663
Total	$	2,192,125	$	2,214,319

____________________________________________

(1) Senior Secured Notes and Senior Unsecured Notes are defined below.

Credit Agreement

The Company’s Credit Agreement, which is scheduled to mature on September 28, 2023, provides for a senior secured revolving credit facility with a maximum loan amount of $2.5 billion. As of June 30, 2021, the borrowing base and aggregate lender commitments under the Credit Agreement were $1.1 billion. The next scheduled borrowing base redetermination date is October 1, 2021. On June 8, 2021, the Company entered into a sixth amendment (“Sixth Amendment”) to the Credit Agreement to amend certain definitions and covenants relating to the Company's ability to issue permitted refinancing debt and repurchase or redeem outstanding indebtedness to facilitate the Tender Offer and the 2022 Senior Notes Redemption, each as defined below.

Interest and commitment fees associated with the revolving credit facility are accrued based on a borrowing base utilization grid set forth in the Credit Agreement as presented in Note 5 - Long-Term Debt in the 2020 Form 10-K. At the Company’s election, borrowings under the Credit Agreement may be in the form of Eurodollar, Alternate Base Rate (“ABR”), or Swingline loans. Eurodollar loans accrue interest at LIBOR, plus the applicable margin from the utilization grid, and ABR and Swingline loans accrue interest at a market-based floating rate, plus the applicable margin from the utilization grid. Commitment fees are accrued on the unused portion of the aggregate lender commitment amount at rates from the utilization grid and are included in the interest expense line item on the accompanying statements of operations.

The Credit Agreement specifies that if LIBOR is no longer a widely used benchmark rate, or if it is no longer used for determining interest rates for loans in the United States, a replacement interest rate that fairly reflects the cost to the lenders of funding loans shall be established by the Administrative Agent, as defined in the Credit Agreement, in consultation with the Company. Please refer to Note 1 - Summary of Significant Accounting Policies for discussion of FASB ASU 2020-04 and ASU 2021-01, which provides guidance related to reference rate reform.

The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Agreement as of July 21, 2021, June 30, 2021, and December 31, 2020:


	As of July 21, 2021		As of June 30, 2021		As of December 31, 2020

	(in thousands)
Revolving credit facility (1)	$	99,000	$	52,500	$	93,000
Letters of credit (2)	—		—		42,000
Available borrowing capacity	1,001,000		1,047,500		965,000
Total aggregate lender commitment amount	$	1,100,000	$	1,100,000	$	1,100,000

____________________________________________

(1) Unamortized deferred financing costs attributable to the revolving credit facility are presented as a component of the other noncurrent assets line item on the accompanying balance sheets and totaled $3.5 million and $4.3 million as of June 30, 2021, and December 31, 2020, respectively. These costs are being amortized over the term of the revolving credit facility on a straight-line basis.

(2) Letters of credit outstanding reduce the amount available under the revolving credit facility on a dollar-for-dollar basis.

Senior Notes

Q2 2021 Senior Notes Transactions. On June 23, 2021, the Company issued $400.0 million in aggregate principal amount of its 6.5% Senior Notes at par with a maturity date of July 15, 2028 (“2028 Senior Notes”). The Company received net proceeds of

$392.8 million after deducting paid and accrued fees of $7.2 million, which are being amortized as deferred financing costs over the life of the 2028 Senior Notes. The net proceeds were used to repurchase $193.1 million and $172.3 million of outstanding principal amount of the Company’s 2022 Senior Notes and 2024 Senior Notes, respectively, through a cash tender offer (“Tender Offer”), and to redeem the remaining $19.3 million of 2022 Senior Notes not repurchased as part of the Tender Offer (“2022 Senior Notes Redemption”). The Company paid total consideration, excluding accrued interest, of $385.3 million, and recorded a net loss on extinguishment of debt of $2.1 million for the three months ended June 30, 2021, which included $1.5 million of accelerated unamortized deferred financing costs and $600,000 of net premiums. The Company canceled all repurchased and redeemed 2022 Senior Notes and 2024 Senior Notes upon settlement.

Q2 2020 Senior Notes Transactions. During the second quarter of 2020, the Company initiated an offer to exchange certain of its outstanding Senior Unsecured Notes, as defined and presented in the Senior Unsecured Notes section below, other than its 1.50% Senior Convertible Notes due 2021 (“2021 Senior Convertible Notes,” and together with the Senior Unsecured Notes, “Old Notes”), and entered into a private exchange of certain of its outstanding 2021 Senior Convertible Notes and portions of its outstanding Senior Unsecured Notes (“Private Exchange”), in each case, for newly issued 10.0% Senior Secured Second Lien Notes due January 15, 2025 (“2025 Senior Secured Notes”), referred to together as “Exchange Offers.”

On June 17, 2020, the Company exchanged $611.9 million in aggregate principal amount of Senior Unsecured Notes and $107.0 million in aggregate principal amount of 2021 Senior Convertible Notes for $446.7 million in aggregate principal amount of 2025 Senior Secured Notes. Further, in connection with the Private Exchange, the Company tendered $53.5 million in cash to certain holders of the 2021 Senior Convertible Notes and issued the Warrants. Please refer to Note 3 - Equity for more information regarding the Warrants issued by the Company. Upon the closing of the Exchange Offers, the Company recorded a net gain on extinguishment of debt of $227.3 million which included the recognition of $6.1 million and $5.6 million of previously unamortized debt discount and deferred financing costs, respectively. The Company canceled all retired Senior Unsecured Notes and 2021 Senior Convertible Notes upon closing of the Exchange Offers. Pursuant to the indenture governing its 2021 Senior Convertible Notes, the Company’s remaining outstanding 2021 Senior Convertible Notes became secured and are subsequently referred to as the “2021 Senior Secured Convertible Notes,” and together with the 2025 Senior Secured Notes, the “Senior Secured Notes.” Please refer to Note 5 - Long-Term Debt in the 2020 Form 10-K for additional information regarding the debt transactions that occurred during the second quarter of 2020.

Q1 2020 Senior Notes Transactions. During the first quarter of 2020, the Company repurchased a total of $40.7 million in aggregate principal amount of its 2022 Senior Notes in open market transactions for a total settlement amount, excluding accrued interest, of $28.3 million. In connection with the repurchases, the Company recorded a net gain on extinguishment of debt of $12.2 million for the three months ended March 31, 2020. This amount included discounts realized upon repurchase of $12.4 million partially offset by $235,000 of accelerated unamortized deferred financing costs. The Company canceled all repurchased 2022 Senior Notes upon settlement.

Senior Secured Notes. Senior Secured Notes, net of unamortized discount and deferred financing costs, included within the Senior Notes, net line item on the accompanying balance sheets as of June 30, 2021, and December 31, 2020, consisted of the following:


	As of June 30, 2021
	Principal Amount		Unamortized Debt Discount		Unamortized Deferred Financing Costs		Net

	(in thousands)
1.50% Senior Secured Convertible Notes due 2021	$	65,485	$	—	$	—	$	65,485
10.0% Senior Secured Notes due 2025	446,675		34,208		10,145		402,322
Total	$	512,160	$	34,208	$	10,145	$	467,807

	As of December 31, 2020
	Principal Amount		Unamortized Debt Discount		Unamortized Deferred Financing Costs		Net

	(in thousands)
1.50% Senior Secured Convertible Notes due 2021	$	65,485	$	1,828	$	175	$	63,482
10.0% Senior Secured Notes due 2025	446,675		37,943		11,558		397,174
Total	$	512,160	$	39,771	$	11,733	$	460,656

The Senior Secured Notes are senior obligations of the Company, secured on a second-priority basis, ranking junior to the Company’s obligations under the Credit Agreement and equal in priority to one another. The Senior Secured Notes rank senior in right of payment with all of the Company’s existing and any future unsecured senior or subordinated debt.

The 2021 Senior Secured Convertible Notes matured on July 1, 2021, and on that day, the Company used borrowings under its revolving credit facility to retire at par the outstanding principal amount of $65.5 million. Interest expense recognized on the 2021 Senior Secured Convertible Notes related to the stated interest rate and amortization of the debt discount totaled $1.1 million and $2.6 million for the three months ended June 30, 2021, and 2020, respectively, and totaled $2.3 million and $5.4 million for the six months ended June 30, 2021, and 2020, respectively.

The Company may redeem some or all of its 2025 Senior Secured Notes prior to their maturity at redemption prices based on a premium, plus accrued and unpaid interest, as described in the indenture governing the 2025 Senior Secured Notes.

Senior Unsecured Notes. Senior Unsecured Notes, net of unamortized deferred financing costs, included within the Senior Notes, net line item on the accompanying balance sheets as of June 30, 2021, and December 31, 2020, consisted of the following:


	As of June 30, 2021						As of December 31, 2020
	Principal Amount		Unamortized Deferred Financing Costs		Principal Amount, Net		Principal Amount		Unamortized Deferred Financing Costs		Principal Amount, Net

	(in thousands)
6.125% Senior Notes due 2022	$	—	$	—	$	—	$	212,403	$	855	$	211,548
5.0% Senior Notes due 2024	104,769		499		104,270		277,034		1,576		275,458
5.625% Senior Notes due 2025	349,118		2,476		346,642		349,118		2,792		346,326
6.75% Senior Notes due 2026	419,235		3,620		415,615		419,235		3,970		415,265
6.625% Senior Notes due 2027	416,791		4,337		412,454		416,791		4,725		412,066
6.5% Senior Notes due 2028	400,000		7,163		392,837		—		—		—
Total	$	1,689,913	$	18,095	$	1,671,818	$	1,674,581	$	13,918	$	1,660,663

The senior unsecured notes listed above (collectively referred to as “Senior Unsecured Notes,” and together with the Senior Secured Notes, “Senior Notes”) are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and any future unsecured senior debt and are senior in right of payment to any future subordinated debt. The Company may redeem some or all of its Senior Unsecured Notes prior to their maturity at redemption prices based on a premium, plus accrued and unpaid interest as described in the indentures governing the Senior Unsecured Notes.

Please refer to Note 5 - Long-Term Debt in the 2020 Form 10-K for additional detail on the Company’s Senior Notes.

Covenants

The Company is subject to certain financial and non-financial covenants under the Credit Agreement and the indentures governing the Senior Notes that, among other terms, limit the Company’s ability to incur additional indebtedness, make restricted payments including dividends, sell assets, create liens that secure debt, enter into transactions with affiliates, merge or consolidate with another company, and with respect to the Company’s restricted subsidiaries, permit the consensual restriction on the ability of such restricted subsidiaries to pay dividends or indebtedness owing to the Company or to any other restricted subsidiaries. The Company was in compliance with all covenants under the Credit Agreement and the indentures governing the Senior Notes as of June 30, 2021, and through the filing of this report.

Please refer to Note 5 - Long-Term Debt in the 2020 Form 10-K for additional detail on the Company’s covenants under the Credit Agreement and indentures governing the Senior Notes.

Capitalized Interest

Capitalized interest costs for the three months ended June 30, 2021, and 2020, totaled $4.7 million and $4.1 million, respectively, and totaled $9.0 million and $6.8 million for the six months ended June 30, 2021, and 2020, respectively. The amount of interest the Company capitalizes generally fluctuates based on the amount borrowed, the Company’s capital program, and the timing and amount of costs associated with capital projects that are considered in progress. Capitalized interest costs are included in total costs incurred.

Note 6 - Commitments and Contingencies

Commitments

Other than those items discussed below, there have been no changes in commitments through the filing of this report that differ materially from those disclosed in the 2020 Form 10-K. Please refer to Note 6 - Commitments and Contingencies in the 2020 Form 10-K for additional discussion of the Company’s commitments.

Drilling Rig Service Contracts. During the first half of 2021, the Company amended certain of its drilling rig contracts resulting in the extension of contract terms. As of June 30, 2021, the Company’s drilling rig commitments totaled $16.1 million under contract terms extending through the second quarter of 2022. If all of these contracts were terminated as of June 30, 2021, the Company would avoid a portion of the contractual service commitments; however, the Company would be required to pay $9.7 million in early termination fees. No material expenses related to early termination or standby fees were incurred by the Company during the six months ended June 30, 2021, and the Company does not expect to incur material penalties with regard to its drilling rig contracts during the remainder of 2021.

Drilling and Completion Commitments. During the first half of 2021, the Company amended an agreement that includes minimum drilling and completion footage requirements on certain existing leases. If these minimum requirements are not satisfied by March 31, 2022, the Company will be required to pay liquidated damages based on the difference between the actual footage drilled and completed and the minimum requirements. As of June 30, 2021, the liquidated damages could range from zero to a maximum of $45.1 million, with the maximum exposure assuming no additional development activity occurred prior to March 31, 2022. As of the filing of this report, the Company expects to meet its obligations under this agreement.

Other Contracts. During the second quarter of 2021, the Company entered into an operating lease agreement with a total estimated obligation of $26.1 million and an initial term extending through the second quarter of 2033. As of the filing of this report, the Company expects to meet this commitment.

Contingencies

The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation and claims are not expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company.

Note 7 - Compensation Plans

As of June 30, 2021, 3.8 million shares of common stock were available for grant under the Company’s Equity Incentive Compensation Plan (“Equity Plan”). The Company may also grant other types of long-term incentive-based awards, such as cash awards and performance-based cash awards to eligible employees under its compensation plan.

Performance Share Units

The Company has granted performance share units (“PSUs”) to eligible employees as part of its Equity Plan. The number of shares of the Company’s common stock issued to settle PSUs ranges from zero to two times the number of PSUs awarded and is determined based on certain criteria over a three-year performance period. PSUs generally vest on the third anniversary of the date of the grant or upon other triggering events as set forth in the Equity Plan.

For PSUs granted in 2018 and 2019, the settlement criteria include a combination of the Company’s Total Shareholder Return (“TSR”) relative to the TSR of certain peer companies and the Company’s cash return on total capital invested (“CRTCI”) relative to the CRTCI of certain peer companies over the associated three-year performance period. In addition to these performance criteria, the award agreements for these grants also stipulate that if the Company’s absolute TSR is negative over the three-year performance period, the maximum number of shares of common stock that can be issued to settle outstanding PSUs is capped at one times the number of PSUs granted on the award date, regardless of the Company’s TSR and CRTCI performance relative to its peer group. The fair values of the PSUs granted in 2018 and 2019 were measured on the applicable grant dates using the GBM Model, with the assumption that the associated CRTCI performance condition will be met at the target amount at the end of the respective performance periods. Compensation expense for PSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards. As these awards depend on a combination of performance-based settlement criteria and market-based settlement criteria, compensation expense may be adjusted in future periods as the number of units expected to vest increases or decreases based on the Company’s expected CRTCI performance relative to the applicable peer companies.

The Company records compensation expense associated with the issuance of PSUs based on the fair value of the awards as of the date of grant. Total compensation expense recorded for PSUs was $1.3 million and $2.8 million for the three months ended June 30, 2021, and 2020, respectively, and $4.5 million and $5.4 million for the six months ended June 30, 2021, and 2020,

respectively. As of June 30, 2021, there was $3.0 million of total unrecognized compensation expense related to non-vested PSU awards, which is being amortized through 2022. There were no material changes to the outstanding and non-vested PSUs during the six months ended June 30, 2021.

Employee Restricted Stock Units

The Company grants restricted stock units (“RSUs”) to eligible persons as part of its Equity Plan. Each RSU represents a right to receive one share of the Company’s common stock upon settlement of the award at the end of the specified vesting period. RSUs generally vest one-third of the total grant on each anniversary date of the grant over the applicable vesting period or upon other triggering events as set forth in the Equity Plan.

The Company records compensation expense associated with the issuance of RSUs based on the fair value of the awards as of the date of grant. The fair value of an RSU is equal to the closing price of the Company’s common stock on the date of the grant. Compensation expense for RSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards. Total compensation expense recorded for employee RSUs was $2.1 million and $2.7 million for the three months ended June 30, 2021, and 2020, respectively, and $4.3 million and $5.3 million for the six months ended June 30, 2021, and 2020, respectively. As of June 30, 2021, there was $10.1 million of total unrecognized compensation expense related to non-vested RSU awards, which is being amortized through 2023. There were no material changes to the outstanding and non-vested RSUs during the six months ended June 30, 2021.

Subsequent to June 30, 2021, the Company settled 349,328 RSUs upon the vesting of awards granted in previous years. The Company and all grant participants mutually agreed to net share settle a portion of the awards to cover income and payroll tax withholdings, as provided for in the Equity Plan and applicable award agreements. As a result, the Company issued 250,009 net shares of common stock upon settlement of the awards. The remaining 99,319 shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those RSUs.

Director Shares

During the second quarters of 2021, and 2020, the Company issued 57,795 and 267,576 shares, respectively, of its common stock to its non-employee directors under the Equity Plan. Shares issued during the second quarter of 2021 will fully vest on December 31, 2021. Shares issued during the second quarter of 2020 fully vested on December 31, 2020.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation, ensuring that the accrual is no more than 2,500 shares per offering period and not in excess of $25,000 in value related to purchases for each calendar year. The purchase price of the stock is 85 percent of the lower of the fair market value of the stock on either the first or last day of the purchase period. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. There were 252,665 and 297,013 shares issued under the ESPP during the second quarters of 2021, and 2020, respectively. Total proceeds to the Company for the issuance of these shares was $1.3 million and $947,000 for the six months ended June 30, 2021, and 2020, respectively. The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model.

Please refer to Note 7 - Compensation Plans in the 2020 Form 10-K for additional detail on the Company’s Equity Plan.

Note 8 - Fair Value Measurements

The Company follows fair value measurement accounting guidance for all assets and liabilities measured at fair value. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The fair value hierarchy for grouping these assets and liabilities is based on the significance level of the following inputs:

•Level 1 – quoted prices in active markets for identical assets or liabilities

•Level 2 – quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable

•Level 3 – significant inputs to the valuation model are unobservable.

The following table is a listing of the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they are classified within the fair value hierarchy as of June 30, 2021:


	Level 1		Level 2		Level 3

	(in thousands)
Assets:
Derivatives (1)	$	—	$	44,837	$	—

Liabilities:
Derivatives (1)	$	—	$	661,335	$	—

__________________________________________

(1) This represents a financial asset or liability that is measured at fair value on a recurring basis.


	Level 1		Level 2		Level 3

	(in thousands)
Assets:
Derivatives (1)	$	—	$	54,353	$	—
Liabilities:
Derivatives (1)	$	—	$	222,520	$	—

____________________________________________