sm-20220331

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 March 31, 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 001-31539

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 April 20, 2022, the registrant had 121,864,177 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 March 31, 2022, and December 31, 2021	4

	Condensed Consolidated Statements of Operations Three Months Ended March 31, 2022, and 2021	5

	Condensed Consolidated Statements of Comprehensive Income (Loss) Three Months Ended March 31, 2022, and 2021	6

	Condensed Consolidated Statements of Stockholders’ Equity Three Months Ended March 31, 2022, and 2021	7

	Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2022, and 2021	8

	Notes to Condensed Consolidated Financial Statements	9

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

	Part II	38

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 6.	Exhibits	39

	Signatures	40

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,” “goal,” “intend,” “pending,” “plan,” “potential,” “projected,” “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:

•armed conflict, political instability, or civil unrest in crude oil and natural gas producing regions, including the ongoing conflict between Russia and Ukraine, and related potential effects on laws and regulations, or the imposition of economic or trade sanctions;

•the effects 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 prices for future crude oil, natural gas, and natural gas liquids (also referred to throughout this report as “oil,” “gas,” and “NGLs,” respectively), 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 acquisitions and divestitures, including the possible divestiture or farm-out of, or farm-in 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, as well as the conversion of proved undeveloped reserves to proved developed reserves;

•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, debt redemptions or equity repurchases, capital markets activities, environmental, social, and governance (“ESG”) goals and initiatives, 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. We caution you that forward-looking statements are not guarantees of future performance and these statements are subject to known and unknown risks and uncertainties, which may cause our actual results or 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, 2021 (“2021 Form 10-K”).

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)


	March 31, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	419,887	$	332,716
Accounts receivable	321,076		247,201
Derivative assets	9,649		24,095
Prepaid expenses and other	8,223		9,175
Total current assets	758,835		613,187
Property and equipment (successful efforts method):
Proved oil and gas properties	9,518,883		9,397,407
Accumulated depletion, depreciation, and amortization	(5,792,648)		(5,634,961)
Unproved oil and gas properties	628,250		629,098
Wells in progress	192,821		148,394

Other property and equipment, net of accumulated depreciation of $62,845 and $62,359, respectively	35,667		36,060
Total property and equipment, net	4,582,973		4,575,998
Noncurrent assets:
Derivative assets	8,903		239
Other noncurrent assets	45,070		44,553
Total noncurrent assets	53,973		44,792
Total assets	$	5,395,781	$	5,233,977
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	514,558	$	563,306

Derivative liabilities	538,127		319,506
Other current liabilities	6,036		6,515
Total current liabilities	1,058,721		889,327
Noncurrent liabilities:
Revolving credit facility	—		—
Senior Notes, net	1,980,392		2,081,164


Asset retirement obligations	98,908		97,324

Deferred income taxes	21,768		9,769
Derivative liabilities	51,631		25,696
Other noncurrent liabilities	69,252		67,566
Total noncurrent liabilities	2,221,951		2,281,519

Commitments and contingencies (note 6)

Stockholders’ equity:
Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 121,864,177 and 121,862,248 shares, respectively	1,219		1,219
Additional paid-in capital	1,844,478		1,840,228
Retained earnings	282,079		234,533
Accumulated other comprehensive loss	(12,667)		(12,849)
Total stockholders’ equity	2,115,109		2,063,131
Total liabilities and stockholders’ equity	$	5,395,781	$	5,233,977

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 March 31,
		2022		2021
Operating revenues and other income:
Oil, gas, and NGL production revenue		$	858,721	$	423,165

Other operating income		1,055		20,681
Total operating revenues and other income		859,776		443,846
Operating expenses:
Oil, gas, and NGL production expense		144,691		100,930
Depletion, depreciation, amortization, and asset retirement obligation liability accretion		159,481		166,960
Exploration		9,046		9,323

Impairment		1,000		8,750
General and administrative		24,996		24,714
Net derivative loss		418,521		344,689
Other operating expense, net		305		(599)
Total operating expenses		758,040		654,767
Income (loss) from operations		101,736		(210,921)
Interest expense		(39,387)		(39,871)

Other non-operating expense, net		(724)		(371)
Income (loss) before income taxes		61,625		(251,163)
Income tax expense		(12,861)		(106)
Net income (loss)		$	48,764	$	(251,269)

Basic weighted-average common shares outstanding		121,907		114,759
Diluted weighted-average common shares outstanding		124,179		114,759
Basic net income (loss) per common share		$	0.40	$	(2.19)
Diluted net income (loss) per common share		$	0.39	$	(2.19)
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 INCOME (LOSS) (UNAUDITED)

(in thousands)


	For the Three Months Ended March 31,
		2022		2021
Net income (loss)		$	48,764	$	(251,269)
Other comprehensive income, net of tax:
Pension liability adjustment		182		191
Total other comprehensive income, net of tax		182		191
Total comprehensive income (loss)		$	48,946	$	(251,078)

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
	Shares	Amount
Balances, December 31, 2021	121,862,248	$	1,219	$	1,840,228	$	234,533	$	(12,849)	$	2,063,131
Net income	—	—		—		48,764		—		48,764
Other comprehensive income	—	—		—		—		182		182
Cash dividends declared, $0.01 per share	—	—		—		(1,218)		—		(1,218)

Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings	1,929	—		(24)		—		—		(24)
Stock-based compensation expense	—	—		4,274		—		—		4,274


Balances, March 31, 2022	121,864,177	$	1,219	$	1,844,478	$	282,079	$	(12,667)	$	2,115,109


				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

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 Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net income (loss)	$	48,764	$	(251,269)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depletion, depreciation, amortization, and asset retirement obligation liability accretion	159,481		166,960
Impairment	1,000		8,750
Stock-based compensation expense	4,274		5,737
Net derivative loss	418,521		344,689
Derivative settlement loss	(168,183)		(107,885)
Amortization of debt discount and deferred financing costs	4,010		4,723

Deferred income taxes	11,948		(52)
Other, net	239		(14,592)
Net change in working capital	(137,962)		(51,437)





Net cash provided by operating activities	342,092		105,624

Cash flows from investing activities:

Capital expenditures	(150,127)		(147,563)
Other, net	—		(71)
Net cash used in investing activities	(150,127)		(147,634)

Cash flows from financing activities:
Proceeds from revolving credit facility	—		440,000
Repayment of revolving credit facility	—		(398,000)

Cash paid to repurchase Senior Notes	(104,770)		—


Other, net	(24)		—
Net cash provided by (used in) financing activities	(104,794)		42,000

Net change in cash, cash equivalents, and restricted cash	87,171		(10)
Cash, cash equivalents, and restricted cash at beginning of period	332,716		10
Cash, cash equivalents, and restricted cash at end of period	$	419,887	$	—

Supplemental schedule of additional cash flow information:
Operating activities:
Cash paid for interest, net of capitalized interest	$	(64,204)	$	(53,449)

Investing activities:
Increase in capital expenditure accruals and other	$	15,627	$	37,409

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 2021 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 March 31, 2022, 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 2021 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 2021 Form 10-K.

Recently Issued Accounting Standards

As of March 31, 2022, and through the filing of this report, no Accounting Standards Updates have been issued and not yet adopted that are applicable to the Company and that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures.

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 table below presents oil, gas, and NGL production revenue by product type for each of the Company’s operating areas for the three months ended March 31, 2022, and 2021:


	Midland Basin						South Texas						Total
	Three Months Ended March 31,						Three Months Ended March 31,						Three Months Ended March 31,
	2022			2021			2022			2021			2022			2021

	(in thousands)
Oil production revenue	$	493,895		$	286,105		$	113,407		$	19,672		$	607,302		$	305,777
Gas production revenue	102,273			57,806			67,776			31,852			170,049			89,658
NGL production revenue	152			100			81,218			27,630			81,370			27,730
Total	$	596,320		$	344,011		$	262,401		$	79,154		$	858,721		$	423,165
Relative percentage	69		%	81		%	31		%	19		%	100		%	100		%

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 2021 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 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 March 31, 2022, and December 31, 2021, were $291.7 million and $215.6 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”). The Warrants became exercisable at the election of the holders on January 15, 2021, pursuant to the terms of the Warrant Agreement, dated as of June 17, 2020. 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.

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.

No Warrants were exercised during the first quarter of 2022. As of March 31, 2022, 19,044 Warrants remain unexercised and such Warrants will remain exercisable in full or from time to time in part at the election of the holders until their expiration on June 30, 2023.

Note 4 - Income Taxes

The provision for income taxes for the three months ended March 31, 2022, and 2021, consists of the following:


	For the Three Months Ended March 31,
		2022			2021

		(in thousands)
Current portion of income tax expense:
Federal		$	(609)		$	—
State		(304)			(158)
Deferred portion of income tax (expense) benefit		(11,948)			52
Income tax expense		$	(12,861)		$	(106)

Effective tax rate		20.9		%	—		%

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 effect 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 (expense) benefit can also be affected by the proportional effects of forecasted net income or loss and the correlative effect on the valuation allowance for each period presented, as reflected in the table above. Forecasted net income had a larger impact on the effective tax rate for the three months ended March 31, 2022, compared with the same period in 2021, and valuation allowance adjustments had a larger impact on the effective tax rate for the three months ended March 31, 2021, compared with the same period in 2022.

For all years before 2018, 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 Senior Secured Notes net of unamortized discount and deferred financing costs, and Senior Unsecured Notes net of unamortized deferred financing costs, as of March 31, 2022, and December 31, 2021:


	As of March 31, 2022		As of December 31, 2021

	(in thousands)

Senior Secured Notes (1)	$	410,525	$	407,712
Senior Unsecured Notes (1)	1,569,867		1,673,452
Total	$	1,980,392	$	2,081,164

____________________________________________

(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 March 31, 2022, the borrowing base and aggregate lender commitments under the Credit Agreement were $1.1 billion. Subsequent to March 31, 2022, the semi-annual borrowing base redetermination was completed, which reaffirmed both the Company’s borrowing base and aggregate lender commitments at $1.1 billion. The next borrowing base redetermination date is scheduled for October 1, 2022.

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 2021 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 the London Interbank Offered Rate (“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.

LIBOR was discontinued as a global reference rate for new loans and contracts after December 31, 2021. 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. In advance of the maturity date of the Company’s existing Credit Agreement, the Company expects to enter into a new credit agreement in 2022 that will, in addition to other negotiated terms, conditions, agreements, and other provisions, specify a new interest rate for Eurodollar loans. The Company does not expect to incur borrowings in the form of Eurodollar loans prior to that time.

The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Agreement as of April 20, 2022, March 31, 2022, and December 31, 2021:


	As of April 20, 2022		As of March 31, 2022		As of December 31, 2021

	(in thousands)
Revolving credit facility (1)	$	—	$	—	$	—
Letters of credit (2)	6,000		6,000		2,500
Available borrowing capacity	1,094,000		1,094,000		1,097,500
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 $2.3 million and $2.7 million as of March 31, 2022, and December 31, 2021, 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 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 March 31, 2022, and December 31, 2021, consist of the 10.0% Senior Secured Notes due 2025 (“2025 Senior Secured Notes” or “Senior Secured Notes”):


	As of March 31, 2022		As of December 31, 2021
	(in thousands)

Principal amount of 10.0% Senior Secured Notes due 2025	$	446,675	$	446,675
Unamortized debt discount	28,135		30,236
Unamortized deferred financing costs	8,015		8,727
10.0% Senior Secured Notes due 2025, net of unamortized debt discount and deferred financing costs	$	410,525	$	407,712

The 2025 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. The 2025 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 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.

On April 28, 2022, the Company issued a notice of redemption to the holders of the 2025 Senior Secured Notes notifying such holders that the Company intends to redeem the $446.7 million aggregate principal amount outstanding of its 2025 Senior Secured Notes on June 17, 2022 (“Redemption Date”). In accordance with the terms of the indenture governing the 2025 Senior Secured Notes, the redemption price will be equal to 107.5 percent of the principal amount of the 2025 Senior Secured Notes on the Redemption Date ($1,075 per $1,000 principal amount outstanding), plus accrued and unpaid interest.

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 March 31, 2022, and December 31, 2021, consist of the following (collectively referred to as “Senior Unsecured Notes,” and together with the 2025 Senior Secured Notes, “Senior Notes”):


	As of March 31, 2022						As of December 31, 2021
	Principal Amount		Unamortized Deferred Financing Costs		Principal Amount, Net		Principal Amount		Unamortized Deferred Financing Costs		Principal Amount, Net

	(in thousands)
5.0% Senior Notes due 2024	$	—	$	—	$	—	$	104,769	$	403	$	104,366
5.625% Senior Notes due 2025	349,118		2,001		347,117		349,118		2,160		346,958
6.75% Senior Notes due 2026	419,235		3,095		416,140		419,235		3,270		415,965
6.625% Senior Notes due 2027	416,791		3,755		413,036		416,791		3,949		412,842
6.5% Senior Notes due 2028	400,000		6,426		393,574		400,000		6,679		393,321
Total	$	1,585,144	$	15,277	$	1,569,867	$	1,689,913	$	16,461	$	1,673,452

The Senior Unsecured 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.

On February 14, 2022, the Company redeemed all of the $104.8 million of aggregate principal amount outstanding of its 5.0% Senior Notes due 2024 (“2024 Senior Notes”), with cash on hand, pursuant to the terms of the indenture governing the 2024 Senior Notes which provided for a redemption price equal to 100 percent of the principal amount of the 2024 Senior Notes on the date of redemption, plus accrued and unpaid interest. Upon redemption, the Company accelerated the amortization of all remaining previously unamortized deferred financing costs. The Company canceled all redeemed 2024 Senior Notes upon settlement.

Please refer to Note 5 - Long-Term Debt in the 2021 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 other entities, 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 March 31, 2022, and through the filing of this report. Please refer to Note 5 - Long-Term Debt in the 2021 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 March 31, 2022, and 2021, totaled $3.0 million and $4.3 million, 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 2021 Form 10-K. Please refer to Note 6 - Commitments and Contingencies in the 2021 Form 10-K for additional discussion of the Company’s commitments.

Drilling Rig Service Contracts. During the three months ended March 31, 2022, the Company amended certain of its drilling rig contracts resulting in the extension of contract terms. As of March 31, 2022, the Company’s drilling rig commitments totaled

$27.1 million under contract terms extending through the second quarter of 2023. If all of these contracts were terminated as of March 31, 2022, the Company would avoid a portion of the contractual service commitments; however, the Company would be required to pay $17.3 million in early termination fees. No early termination penalties or standby fees were incurred by the Company during the three months ended March 31, 2022, and the Company does not expect to incur material penalties with regard to its drilling rig contracts during the remainder of 2022.

Drilling and Completion Commitments. During the three months ended March 31, 2022, the Company entered into an agreement that includes minimum drilling and completion footage requirements on certain existing leases. If these minimum requirements are not satisfied by March 31, 2024, 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 March 31, 2022, the liquidated damages could range from zero to a maximum of $96.0 million, with the maximum exposure assuming no additional development activity occurred prior to March 31, 2024. As of the filing of this report, the Company expects to meet its obligations under this agreement.

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 March 31, 2022, 4.9 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.

Performance Share Units

The Company has granted performance share units (“PSU” or “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 2019, which the Company determined to be equity awards, 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 value of the PSUs granted in 2019 was measured on the applicable grant date 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 period. 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 $0.7 million and $3.2 million for the three months ended March 31, 2022, and 2021, respectively. As of March 31, 2022, there was $0.7 million of total unrecognized compensation expense related to non-vested PSUs, which is being amortized through mid-2022. There were no material changes to the outstanding and non-vested PSUs during the three months ended March 31, 2022.

Employee Restricted Stock Units

The Company has granted restricted stock units (“RSU” or “RSUs”) to eligible persons as part of its Equity Plan. Each RSU granted 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 $3.3 million and $2.2 million for the three months ended March 31, 2022, and 2021, respectively. As of March 31, 2022, there was $17.2 million of total unrecognized compensation expense related to non-vested RSUs, which is being amortized through mid-2024. There were no material changes to the outstanding and non-vested RSUs during the three months ended March 31, 2022.

Please refer to Note 7 - Compensation Plans in the 2021 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 March 31, 2022:


	Level 1		Level 2		Level 3

	(in thousands)
Assets:
Derivatives (1)	$	—	$	18,552	$	—

Liabilities:
Derivatives (1)	$	—	$	589,758	$	—

__________________________________________

(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)	$	—	$	24,334	$	—
Liabilities:
Derivatives (1)	$	—	$	345,202	$	—

____________________________________________

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

Both financial and non-financial assets and liabilities are categorized within the above fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used by the Company as well as the general classification of such instruments pursuant to the above fair value hierarchy.

Derivatives

The Company uses Level 2 inputs to measure the fair value of oil, gas, and NGL commodity derivatives. Fair values are based upon interpolated data. The Company derives internal valuation estimates taking into consideration forward commodity price curves, counterparties’ credit ratings, the Company’s credit rating, and the time value of money. These valuations are then compared to the respective counterparties’ mark-to-market statements. The considered factors result in an estimated exit price that management believes provides a reasonable and consistent methodology for valuing derivative instruments. The commodity derivative instruments utilized by the Company are not considered by management to be complex, structured, or illiquid. The oil, gas, and NGL commodity

derivative markets are highly active. Please refer to Note 10 - Derivative Financial Instruments in this report, and to Note 10 - Derivative Financial Instruments and Note 8 - Fair Value Measurements in the 2021 Form 10-K for more information regarding the Company’s derivative instruments.

Oil and Gas Properties and Other Property and Equipment

The Company had no assets included in total property and equipment, net, measured at fair value as of March 31, 2022, or December 31, 2021.

No proved property impairment expense was recorded during the three months ended March 31, 2022, or 2021. For the three months ended March 31, 2022, and 2021, the Company recorded impairment expense related to the abandonment and impairment of unproved properties of $1.0 million, and $8.8 million, respectively. These impairments related to actual and anticipated lease expirations, as well as actual and anticipated losses on acreage due to title defects, changes in development plans, and other inherent acreage risks. The balances in the unproved oil and gas properties line item on the accompanying balance sheets as of March 31, 2022, and December 31, 2021, are recorded at carrying value.

Please refer to Note 1 - Summary of Significant Accounting Policies and Note 8 - Fair Value Measurements in the 2021 Form 10-K for more information about the Company’s policies for determining the fair value of its oil and gas producing properties and related impairment expense.

Long-Term Debt

The following table reflects the fair value of the Company’s Senior Notes obligations measured using Level 1 inputs based on quoted secondary market trading prices. These notes were not presented at fair value on the accompanying balance sheets as of March 31, 2022, or December 31, 2021, as they were recorded at carrying value, net of any unamortized discounts and deferred financing costs. Please refer to Note 5 - Long-Term Debt above for additional information.


	As of March 31, 2022				As of December 31, 2021
	Principal Amount		Fair Value		Principal Amount		Fair Value

	(in thousands)
10.0% Senior Secured Notes due 2025	$	446,675	$	486,760	$	446,675	$	491,628
5.0% Senior Notes due 2024	$	—	$	—	$	104,769	$	104,583
5.625% Senior Notes due 2025	$	349,118	$	349,715	$	349,118	$	353,091
6.75% Senior Notes due 2026	$	419,235	$	431,158	$	419,235	$	431,787
6.625% Senior Notes due 2027	$	416,791	$	428,253	$	416,791	$	432,783
6.5% Senior Notes due 2028	$	400,000	$	413,660	$	400,000	$	417,284

Note 9 - Earnings Per Share

Basic net income or loss per common share is calculated by dividing net income or loss available to common stockholders by the basic weighted-average number of common shares outstanding for the respective period. Diluted net income or loss per common share is calculated by dividing net income or loss available to common stockholders by the diluted weighted-average number of common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for this calculation consist primarily of non-vested RSUs, contingent PSUs, and Warrants, all of which were measured using the treasury stock method. The Warrants became exercisable at the election of the holders on January 15, 2021, and as a result, they were included as potentially dilutive securities on an adjusted weighted-average basis for the portion of the three months ended March 31, 2021, for which they were outstanding. Please refer to Note 3 - Equity and Note 7 - Compensation Plans in this report, and Note 9 - Earnings Per Share in the 2021 Form 10-K for additional detail on these potentially dilutive securities.

When the Company recognizes a net loss from continuing operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per common share. The following table details the weighted-average number of anti-dilutive securities for the periods presented:


	For the Three Months Ended March 31,
		2022	2021

		(in thousands)
Anti-dilutive		—	8,106

The following table sets forth the calculations of basic and diluted net income (loss) per common share:


	For the Three Months Ended March 31,
		2022		2021

		(in thousands, except per share data)
Net income (loss)		$	48,764	$	(251,269)

Basic weighted-average common shares outstanding		121,907		114,759
Dilutive effect of non-vested RSUs and contingent PSUs		2,253		—
Dilutive effect of Warrants		19		—
Diluted weighted-average common shares outstanding		124,179		114,759

Basic net income (loss) per common share		$	0.40	$	(2.19)
Diluted net income (loss) per common share		$	0.39	$	(2.19)

Note 10 - Derivative Financial Instruments

Summary of Oil, Gas, and NGL Derivative Contracts in Place

The Company regularly enters into commodity derivative contracts to mitigate a portion of its exposure to oil, gas, and NGL price volatility and location differentials, and the associated impact on cash flows. As of March 31, 2022, all contracts were entered into for other-than-trading purposes. The Company’s commodity derivative contracts consist of swap and collar arrangements for oil, gas, and NGL production. In a typical commodity swap agreement, if the agreed upon published third-party index price (“index price”) is lower than the swap fixed price, the Company receives the difference between the index price and the agreed upon swap fixed price. If the index price is higher than the swap fixed price, the Company pays the difference. For collar arrangements, the Company receives the difference between an agreed upon index price and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices.

The Company has entered into fixed price oil and gas basis swaps in order to mitigate exposure to adverse pricing differentials between certain industry benchmark prices and the actual physical pricing points where the Company’s production is sold. As of the filing of this report, the Company has basis swap contracts with fixed price differentials between:

•NYMEX WTI and WTI Midland for a portion of its Midland Basin oil production with sales contracts that settle at WTI Midland prices;

•NYMEX WTI and Intercontinental Exchange Brent Crude (“ICE Brent”) for a portion of its Midland Basin oil production with sales contracts that settle at ICE Brent prices;

•NYMEX WTI and Argus WTI Houston Magellan East Houston Terminal (“MEH”) for a portion of its South Texas oil production with sales contracts that settle at Argus WTI Houston MEH (“WTI Houston MEH”) prices;

•NYMEX Henry Hub (“HH”) and Inside FERC Tennessee Texas, Zone 0 (“IF Tenn TX Z0”) for a portion of its South Texas gas production with sales contracts that settle at IF Tenn TX Z0 prices;

•NYMEX HH and Inside FERC Houston Ship Channel (“IF HSC”) for a portion of its South Texas gas production with sales contracts that settle at IF HSC prices; and

•NYMEX HH and Inside FERC West Texas (“IF WAHA”) for a portion of its South Texas gas production with sales contracts that settle at IF WAHA prices.

The Company has also entered into crude oil swap contracts to fix the differential in pricing between the NYMEX calendar month average and the physical crude oil delivery month (“Roll Differential”) in which the Company pays the periodic variable Roll Differential and receives a weighted-average fixed price differential. The weighted-average fixed price differential represents the amount of net addition (reduction) to delivery month prices for the notional volumes covered by the swap contracts.

As of March 31, 2022, the Company had commodity derivative contracts outstanding through the fourth quarter of 2025 as summarized in the table below:


			Contract Period
	Second Quarter 2022		Third Quarter 2022		Fourth Quarter 2022		2023		2024		2025
Oil Derivatives (volumes in MBbl and prices in $ per Bbl):
Swaps
NYMEX WTI Volumes	2,451		1,938		1,923		1,190		—		—
Weighted-Average Contract Price	$	52.71	$	44.63	$	44.58	$	45.20	$	—	$	—
ICE Brent Volumes	—		—		—		3,650		614		—
Weighted-Average Contract Price	$	—	$	—	$	—	$	86.50	$	85.26	$	—
Collars
NYMEX WTI Volumes	894		1,114		1,128		858		—		—
Weighted-Average Floor Price	$	56.94	$	64.77	$	63.74	$	60.00	$	—	$	—
Weighted-Average Ceiling Price	$	64.93	$	71.89	$	75.48	$	73.09	$	—	$	—
Basis Swaps
WTI Midland-NYMEX WTI Volumes	2,374		2,442		2,462		885		—		—
Weighted-Average Contract Price	$	1.15	$	1.15	$	1.15	$	0.60	$	—	$	—
NYMEX WTI-ICE Brent Volumes	910		920		920		—		—		—
Weighted-Average Contract Price	$	(7.78)	$	(7.78)	$	(7.78)	$	—	$	—	$	—
WTI Houston MEH-NYMEX WTI Volumes	349		335		374		646		—		—
Weighted-Average Contract Price	$	1.25	$	1.25	$	1.25	$	1.24	$	—	$	—
Roll Differential Swaps
NYMEX WTI Volumes	3,359		3,288		3,248		4,968		—		—
Weighted-Average Contract Price	$	0.21	$	0.22	$	0.21	$	0.62	$	—	$	—

Gas Derivatives (volumes in BBtu and prices in $ per MMBtu):
Swaps
NYMEX HH volumes	1,977		1,677		1,903		—		—		—
Weighted-Average Contract Price	$	3.95	$	4.02	$	4.25	$	—	$	—	$	—
IF HSC Volumes	6,808		6,934		6,982		—		—		—
Weighted-Average Contract Price	$	2.34	$	2.37	$