sm-20230331

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, 2023

☐ 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.)

1700 Lincoln Street, Suite 3200, 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 21, 2023, the registrant had 120,517,918 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, 2023, and December 31, 2022	4

	Condensed Consolidated Statements of Operations Three Months Ended March 31, 2023, and 2022	5

	Condensed Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2023, and 2022	6

	Condensed Consolidated Statements of Stockholders’ Equity Three Months Ended March 31, 2023, and 2022	7

	Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2023, and 2022	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

	Part II	33

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33



Item 6.	Exhibits	34

	Signatures	35

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 (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements included in this report, other than statements of historical fact, 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,” “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:

•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;

•the amount and nature of future capital expenditures, the resilience of our assets to declining commodity prices, and the availability of liquidity and capital resources to fund capital expenditures;

•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, and the impacts of inflation on each of these;

•armed conflict, political instability, or civil unrest in oil and 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;

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

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

•our drilling and completion activities and other exploration and development activities, each of which could be impacted by supply chain disruptions and inflation, 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 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; 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, 2022 (“2022 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, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	477,869	$	444,998
Accounts receivable	187,810		233,297
Derivative assets	81,062		48,677
Prepaid expenses and other	9,535		10,231
Total current assets	756,276		737,203
Property and equipment (successful efforts method):
Proved oil and gas properties	10,483,159		10,258,368
Accumulated depletion, depreciation, and amortization	(6,339,303)		(6,188,147)
Unproved oil and gas properties, net of valuation allowance of $37,904 and $38,008, respectively	497,127		487,192
Wells in progress	342,875		287,267

Other property and equipment, net of accumulated depreciation of $57,338 and $56,512, respectively	45,694		38,099
Total property and equipment, net	5,029,552		4,882,779
Noncurrent assets:
Derivative assets	15,373		24,465
Other noncurrent assets	68,957		71,592
Total noncurrent assets	84,330		96,057
Total assets	$	5,870,158	$	5,716,039
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	522,279	$	532,289

Derivative liabilities	30,723		56,181
Other current liabilities	10,144		10,114
Total current liabilities	563,146		598,584
Noncurrent liabilities:
Revolving credit facility	—		—
Senior Notes, net	1,572,991		1,572,210


Asset retirement obligations	110,163		108,233

Deferred income taxes	330,782		280,811
Derivative liabilities	3,639		1,142
Other noncurrent liabilities	59,642		69,601
Total noncurrent liabilities	2,077,217		2,031,997

Commitments and contingencies (note 6)

Stockholders’ equity:
Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 120,517,918 and 121,931,676 shares, respectively	1,205		1,219
Additional paid-in capital	1,743,567		1,779,703
Retained earnings	1,489,032		1,308,558
Accumulated other comprehensive loss	(4,009)		(4,022)
Total stockholders’ equity	3,229,795		3,085,458
Total liabilities and stockholders’ equity	$	5,870,158	$	5,716,039

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,
		2023		2022
Operating revenues and other income:
Oil, gas, and NGL production revenue		$	570,778	$	858,721

Other operating income		2,727		1,055
Total operating revenues and other income		573,505		859,776
Operating expenses:
Oil, gas, and NGL production expense		142,348		144,691
Depletion, depreciation, amortization, and asset retirement obligation liability accretion		154,189		159,481
Exploration		18,428		9,046


General and administrative		27,669		24,996
Net derivative (gain) loss		(51,329)		418,521
Other operating expense, net		10,153		1,305
Total operating expenses		301,458		758,040
Income from operations		272,047		101,736
Interest expense		(22,459)		(39,387)

Other non-operating income (expense), net		4,470		(724)
Income before income taxes		254,058		61,625
Income tax expense		(55,506)		(12,861)
Net income		$	198,552	$	48,764

Basic weighted-average common shares outstanding		121,671		121,907
Diluted weighted-average common shares outstanding		122,294		124,179
Basic net income per common share		$	1.63	$	0.40
Diluted net income per common share		$	1.62	$	0.39
Dividends per common share		$	0.15	$	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 (UNAUDITED)

(in thousands)


	For the Three Months Ended March 31,
		2023		2022
Net income		$	198,552	$	48,764
Other comprehensive income, net of tax:
Pension liability adjustment		13		182
Total other comprehensive income, net of tax		13		182
Total comprehensive income		$	198,565	$	48,946

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, 2022	121,931,676	$	1,219	$	1,779,703	$	1,308,558	$	(4,022)	$	3,085,458
Net income	—	—		—		198,552		—		198,552
Other comprehensive income	—	—		—		—		13		13
Cash dividends declared, $0.15 per share	—	—		—		(18,078)		—		(18,078)


Stock-based compensation expense	—	—		4,318		—		—		4,318

Purchase of shares under Stock Repurchase Program	(1,413,758)	(14)		(40,454)		—		—		(40,468)
Balances, March 31, 2023	120,517,918	$	1,205	$	1,743,567	$	1,489,032	$	(4,009)	$	3,229,795


				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

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,
	2023		2022
Cash flows from operating activities:
Net income	$	198,552	$	48,764
Adjustments to reconcile net income to net cash provided by operating activities:

Depletion, depreciation, amortization, and asset retirement obligation liability accretion	154,189		159,481


Stock-based compensation expense	4,318		4,274
Net derivative (gain) loss	(51,329)		418,521
Derivative settlement gain (loss)	5,076		(168,183)
Amortization of debt discount and deferred financing costs	1,371		4,010

Deferred income taxes	49,968		11,948
Other, net	(4,295)		1,239
Net change in working capital	(26,216)		(137,962)





Net cash provided by operating activities	331,634		342,092

Cash flows from investing activities:

Capital expenditures	(240,712)		(150,127)
Other, net	307		—
Net cash used in investing activities	(240,405)		(150,127)

Cash flows from financing activities:



Cash paid to repurchase Senior Notes	—		(104,770)
Repurchase of common stock	(40,068)		—

Dividends paid	(18,290)		—
Other, net	—		(24)
Net cash used in financing activities	(58,358)		(104,794)

Net change in cash, cash equivalents, and restricted cash	32,871		87,171
Cash, cash equivalents, and restricted cash at beginning of period	444,998		332,716
Cash, cash equivalents, and restricted cash at end of period	$	477,869	$	419,887

Supplemental schedule of additional cash flow information:
Operating activities:
Cash paid for interest, net of capitalized interest	$	(33,882)	$	(64,204)

Investing activities:
Increase in capital expenditure accruals and other	$	66,873	$	15,627

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 2022 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, 2023, 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 2022 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 2022 Form 10-K.

Recently Issued Accounting Standards

As of March 31, 2023, 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, 2023, and 2022:


	Midland Basin						South Texas						Total
	Three Months Ended March 31,						Three Months Ended March 31,						Three Months Ended March 31,
	2023			2022			2023			2022			2023			2022

	(in thousands)
Oil production revenue	$	320,135		$	493,895		$	100,703		$	113,407		$	420,838		$	607,302
Gas production revenue	49,789			102,273			43,942			67,776			93,731			170,049
NGL production revenue	177			152			56,032			81,218			56,209			81,370
Total	$	370,101		$	596,320		$	200,677		$	262,401		$	570,778		$	858,721
Relative percentage	65		%	69		%	35		%	31		%	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.

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, 2023, and December 31, 2022, were $146.2 million and $184.5 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. 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.

Please refer to Note 1 - Summary of Significant Accounting Policies and Note 2 - Revenue from Contracts with Customers in the 2022 Form 10-K for more information regarding the Company’s revenue recognition policy and the application of the guidance in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, and for more information regarding the types of contracts under which oil, gas, and NGL production revenue is generated.

Note 3 - Equity

Stock Repurchase Program

During 2022, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to $500.0 million in aggregate value of its common stock through December 31, 2024 (“Stock Repurchase Program”). The Stock Repurchase Program permits the Company to repurchase shares of its common stock from time to time in open market transactions, through privately negotiated transactions or by other means in accordance with federal securities laws and subject to certain provisions of the Credit Agreement and the indentures governing the Senior Notes, as defined in Note 5 - Long-Term Debt. Please refer to Note 3 - Equity in the 2022 Form 10-K for additional information regarding the Company’s Stock Repurchase Program.

During the three months ended March 31, 2023, the Company utilized net cash provided by operating activities to repurchase and subsequently retire 1,413,758 shares of its common stock at a weighted-average share price of $28.32 for a total cost of $40.0 million, excluding taxes, commissions, and fees. As of March 31, 2023, $402.8 million remained available for repurchases of the Company’s outstanding common stock under the Stock Repurchase Program.

Note 4 - Income Taxes

The provision for income taxes for the three months ended March 31, 2023, and 2022, consists of the following:


	For the Three Months Ended March 31,
		2023			2022

		(in thousands)
Current portion of income tax expense:
Federal		$	(4,998)		$	(609)
State		(540)			(304)
Deferred portion of income tax expense		(49,968)			(11,948)
Income tax expense		$	(55,506)		$	(12,861)

Effective tax rate		21.8		%	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 deduction 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 balances. The Company commissioned a multi-year research and development (“R&D”) credit study in 2022, which is expected to be completed in late 2023, and is expected to favorably impact the Company’s effective tax rate and future tax obligations when the results are recorded. The Company’s policy is to not record an R&D credit until it is claimed on a filed tax return, which had not occurred as of the filing of this report.

For all years before 2019, the Company is generally no longer subject to United States federal or state income tax examinations by tax authorities.

Note 5 - Long-Term Debt

Credit Agreement

The Company’s Credit Agreement provides for a senior secured revolving credit facility with a maximum loan amount of $3.0 billion. As of March 31, 2023, the borrowing base and aggregate lender commitments under the Credit Agreement were $2.5 billion and $1.25 billion, respectively. Subsequent to March 31, 2023, the semi-annual borrowing base redetermination was completed, which reaffirmed both the Company’s borrowing base and aggregate lender commitments at existing amounts. The next scheduled borrowing base redetermination date is October 1, 2023. The Credit Agreement is scheduled to mature on the earlier of (a) August 2, 2027 (“Stated Maturity Date”), or (b) 91 days prior to the maturity date of any of the Company’s outstanding Senior Notes, as defined below, to the extent that, on or before such date, the respective Senior Notes have not been repaid, exchanged, repurchased, refinanced, or otherwise redeemed in full, and, if refinanced or exchanged, with a scheduled maturity date that is not earlier than at least 180 days after the Stated Maturity Date.

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 2022 Form 10-K. At the Company’s election, borrowings under the Credit Agreement may be in the form of Secured Overnight Financing Rate (“SOFR”), Alternate Base Rate (“ABR”), or Swingline loans. SOFR loans accrue interest at SOFR 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.

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 21, 2023, March 31, 2023, and December 31, 2022:


	As of April 21, 2023		As of March 31, 2023		As of December 31, 2022

	(in thousands)
Revolving credit facility (1)	$	—	$	—	$	—
Letters of credit (2)	6,000		6,000		6,000
Available borrowing capacity	1,244,000		1,244,000		1,244,000
Total aggregate lender commitment amount	$	1,250,000	$	1,250,000	$	1,250,000

____________________________________________

(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 $10.2 million and $10.8 million as of March 31, 2023, and December 31, 2022, 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

The Company’s Senior Notes, net line item on the accompanying balance sheets as of March 31, 2023, and December 31, 2022, consists of the following (collectively referred to as “Senior Notes”):


	As of March 31, 2023						As of December 31, 2022
	Principal Amount		Unamortized Deferred Financing Costs		Principal Amount, Net		Principal Amount		Unamortized Deferred Financing Costs		Principal Amount, Net

	(in thousands)
5.625% Senior Notes due 2025	$	349,118	$	1,369	$	347,749	$	349,118	$	1,528	$	347,590
6.75% Senior Notes due 2026	419,235		2,394		416,841		419,235		2,569		416,666
6.625% Senior Notes due 2027	416,791		2,978		413,813		416,791		3,172		413,619
6.5% Senior Notes due 2028	400,000		5,412		394,588		400,000		5,665		394,335
Total	$	1,585,144	$	12,153	$	1,572,991	$	1,585,144	$	12,934	$	1,572,210

The 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 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 Notes.

On February 14, 2022, the Company redeemed the remaining $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. The Company canceled all redeemed 2024 Senior Notes upon settlement.

Please refer to Note 5 - Long-Term Debt in the 2022 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, and merge or consolidate with other entities. The Company was in compliance with all financial and non-financial covenants as of March 31, 2023, and through the filing of this report. Please refer to Note 5 - Long-Term Debt in the 2022 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, 2023, and 2022, totaled $5.5 million and $3.0 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 2022 Form 10-K. Please refer to Note 6 - Commitments and Contingencies in the 2022 Form 10-K for additional discussion of the Company’s commitments.

Drilling Rig Service Contracts. During the three months ended March 31, 2023, and through the filing of this report, the Company amended certain of its drilling rig contracts resulting in the increase of day rates and potential early termination fees, and the extension of contract terms. As of the filing of this report, the Company’s drilling rig commitments totaled $30.3 million under contract terms extending through the second quarter of 2024. If all of these contracts were terminated as of the filing of this report, the Company would avoid a portion of the contractual service commitments; however, the Company would be required to pay $18.8 million in early termination fees. No early termination penalties or standby fees were incurred by the Company during the three months ended

March 31, 2023, and the Company does not expect to incur material penalties with regard to its drilling rig contracts during the remainder of 2023.

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 - 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, 2023, and through the filing of this report, all contracts were entered into for other-than-trading purposes. The Company’s commodity derivative contracts consist of price swap and collar arrangements for oil and gas production, and price swap arrangements for NGL production. In a typical commodity swap agreement, if the agreed upon published third-party index price (“index price”) is lower than the swap price, the Company receives the difference between the index price and the agreed upon swap price. If the index price is higher than the swap 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 March 31, 2023, the Company had basis swap contracts with fixed price differentials between:

•NYMEX WTI and Argus WTI Midland for a portion of its Midland Basin oil production with sales contracts that settle at Argus WTI Midland 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 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 Midland Basin gas production with sales contracts that settle at IF Waha prices.

The Company has also entered into 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, 2023, the Company had commodity derivative contracts outstanding through the fourth quarter of 2025 as summarized in the table below:


	Contract Period
	Second Quarter 2023		Third Quarter 2023		Fourth Quarter 2023		2024		2025
Oil Derivatives (volumes in MBbl and prices in $ per Bbl):
Swaps
NYMEX WTI Volumes	333		607		546		—		—
Weighted-Average Contract Price	$	45.18	$	59.77	$	60.00	$	—	$	—
ICE Brent Volumes	910		920		920		910		—
Weighted-Average Contract Price	$	86.50	$	86.50	$	86.50	$	85.50	$	—
Collars
NYMEX WTI Volumes	464		291		—		919		—
Weighted-Average Floor Price	$	67.85	$	75.00	$	—	$	75.00	$	—
Weighted-Average Ceiling Price	$	81.53	$	93.05	$	—	$	81.47	$	—
Basis Swaps
WTI Midland-NYMEX WTI Volumes	1,357		1,414		1,294		2,961		—
Weighted-Average Contract Price	$	0.99	$	0.88	$	0.88	$	1.17	$	—


WTI Houston MEH-NYMEX WTI Volumes	431		361		296		877		—
Weighted-Average Contract Price	$	1.68	$	1.59	$	1.53	$	1.85	$	—
Roll Differential Swaps
NYMEX WTI Volumes	1,243		1,304		1,201		2,188		—
Weighted-Average Contract Price	$	0.62	$	0.64	$	0.62	$	0.42	$	—

Gas Derivatives (volumes in BBtu and prices in $ per MMBtu):
Swaps
NYMEX HH Volumes	1,420		1,470		—		—		—
Weighted-Average Contract Price	$	5.05	$	5.11	$	—	$	—	$	—






Collars
NYMEX HH Volumes	5,181		6,194		8,362		19,457		—
Weighted-Average Floor Price	$	3.83	$	3.75	$	3.90	$	3.71	$	—
Weighted-Average Ceiling Price	$	4.68	$	4.62	$	5.70	$	5.89	$	—
IF HSC Volumes	1,345		1,389		1,451		—		—
Weighted-Average Floor Price	$	4.25	$	4.25	$	4.25	$	—	$	—
Weighted-Average Ceiling Price	$	5.00	$	4.95	$	5.55	$	—	$	—






Basis Swaps




IF Waha-NYMEX HH Volumes	2,462		2,442		2,337		20,958		20,501
Weighted-Average Contract Price	$	(1.93)	$	(1.05)	$	(1.01)	$	(0.86)	$	(0.66)
IF HSC-NYMEX HH Volumes	1,774		1,813		2,008		10,208		—
Weighted-Average Contract Price	$	(0.25)	$	(0.25)	$	(0.25)	$	(0.33)	$	—

NGL Derivatives (volumes in MBbl and prices in $ per Bbl):
Swaps
OPIS Propane Mont Belvieu Non-TET Volumes	182		181		187		—		—
Weighted-Average Contract Price	$	36.66	$	36.67	$	36.66	$	—	$	—

Commodity Derivative Contracts Entered Into Subsequent to March 31, 2023

Subsequent to March 31, 2023, the Company entered into NYMEX WTI price swap contracts for the fourth quarter of 2023 for a total of 0.3 MMBbl of oil production at a contract price of $77.00 per Bbl and NYMEX HH price swap contracts for 2025 for a total of 5,891 BBtu of gas production at a weighted-average contract price of $4.20 per MMBtu.

Derivative Assets and Liabilities Fair Value

The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities, with the exception of derivative instruments that meet the “normal purchase normal sale” exclusion. The Company does not designate its commodity derivative contracts as hedging instruments. The fair value of the commodity derivative contracts was a net asset of $62.1 million and $15.8 million as of March 31, 2023, and December 31, 2022, respectively.

The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets, by category:


	As of March 31, 2023		As of December 31, 2022

	(in thousands)
Derivative assets:
Current assets	$	81,062	$	48,677
Noncurrent assets	15,373		24,465
Total derivative assets	$	96,435	$	73,142
Derivative liabilities:
Current liabilities	$	30,723	$	56,181
Noncurrent liabilities	3,639		1,142
Total derivative liabilities	$	34,362	$	57,323

Offsetting of Derivative Assets and Liabilities

As of March 31, 2023, and December 31, 2022, all derivative instruments held by the Company were subject to master netting arrangements with various financial institutions. In general, the terms of the Company’s agreements provide for offsetting of amounts payable or receivable between it and the counterparty, at the election of both parties, for transactions that settle on the same date and in the same currency. The Company’s agreements also provide that in the event of an early termination, the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. The Company’s accounting policy is to not offset these positions in its accompanying balance sheets.

The following table provides a reconciliation between the gross assets and liabilities reflected on the accompanying balance sheets and the potential effects of master netting arrangements on the fair value of the Company’s commodity derivative contracts:


	Derivative Assets as of				Derivative Liabilities as of
	March 31, 2023		December 31, 2022		March 31, 2023		December 31, 2022

	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	96,435	$	73,142	$	(34,362)	$	(57,323)
Amounts not offset in the accompanying balance sheets	(25,293)		(26,136)		25,293		26,136
Net amounts	$	71,142	$	47,006	$	(9,069)	$	(31,187)

The following table summarizes the commodity components of the derivative settlement (gain) loss, and the net derivative (gain) loss line items presented within the accompanying unaudited condensed consolidated statements of cash flows (“accompanying statements of cash flows”) and the accompanying statements of operations, respectively:


	For the Three Months Ended March 31,
		2023		2022

		(in thousands)
Derivative settlement (gain) loss:
Oil contracts		$	6,226	$	129,168
Gas contracts		(11,302)		27,051
NGL contracts		—		11,964
Total derivative settlement (gain) loss		$	(5,076)	$	168,183

Net derivative (gain) loss:
Oil contracts		$	(29,167)	$	315,050
Gas contracts		(20,778)		86,175
NGL contracts		(1,384)		17,296
Total net derivative (gain) loss		$	(51,329)	$	418,521

Credit Related Contingent Features

As of March 31, 2023, all of the Company’s derivative counterparties were members of the Credit Agreement lender group. The Company does not enter into derivative contracts with counterparties that are not part of the lender group. Under the Credit Agreement, the Company is required to provide mortgage liens on assets having a value equal to at least 85 percent of the total PV-9, as defined in the Credit Agreement, of the Company’s proved oil and gas properties evaluated in the most recent reserve report. Collateral securing indebtedness under the Credit Agreement also secures the Company’s derivative agreement obligations.

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, 2023						As of December 31, 2022
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3

	(in thousands)
Assets:
Derivatives (1)	$	—	$	96,435	$	—	$	—	$	73,142	$	—

Liabilities:
Derivatives (1)	$	—	$	34,362	$	—	$	—	$	57,323	$	—

__________________________________________

(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 7 - Derivative Financial Instruments in this report, and to Note 8 - Fair Value Measurements and Note 10 - Derivative Financial Instruments in the 2022 Form 10-K for more information regarding the Company’s derivative instruments.

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, 2023, or December 31, 2022, as they were recorded at carrying value, net of any unamortized deferred financing costs. Please refer to Note 5 - Long-Term Debt above for additional information.


	As of March 31, 2023				As of December 31, 2022
	Principal Amount		Fair Value		Principal Amount		Fair Value

	(in thousands)
5.625% Senior Notes due 2025	$	349,118	$	339,207	$	349,118	$	337,821
6.75% Senior Notes due 2026	$	419,235	$	411,898	$	419,235	$	409,484
6.625% Senior Notes due 2027	$	416,791	$	404,466	$	416,791	$	402,120
6.5% Senior Notes due 2028	$	400,000	$	386,660	$	400,000	$	384,520

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 restricted stock units (“RSUs”) and contingent performance share units (“PSUs”), which were measured using the treasury stock method. Please refer to Note 7 - Compensation Plans and Note 9 - Earnings Per Share in the 2022 Form 10-K for additional detail on these potentially dilutive securities.

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


	For the Three Months Ended March 31,
		2023		2022

		(in thousands, except per share data)
Net income		$	198,552	$	48,764

Basic weighted-average common shares outstanding		121,671		121,907
Dilutive effect of non-vested RSUs, contingent PSUs, and other		623		2,272

Diluted weighted-average common shares outstanding		122,294		124,179

Basic net income per common share		$	1.63	$	0.40
Diluted net income per common share		$	1.62	$	0.39

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion includes forward-looking statements. Please refer to the Cautionary Information about Forward-Looking Statements section of this report for important information about these types of statements. Throughout the following discussion, we explain changes between the three months ended March 31, 2023, and the three months ended December 31, 2022 (“sequential quarterly” or “sequentially”), as well as the year-to-date (“YTD”) change between the three months ended March 31, 2023, and the three months ended March 31, 2022 (“YTD 2023-over-YTD 2022”).

Overview of the Company

General Overview

Our strategy is to be a premier operator of top-tier oil and gas assets. Our team executes this strategy by prioritizing safety, technological innovation, and stewardship of natural resources, all of which are integral to our corporate culture. Our purpose is to make people’s lives better by responsibly producing energy supplies, contributing to domestic energy security and prosperity, and having a positive impact in the communities where we live and work. Our long-term vision is to sustainably grow value for all of our stakeholders by maintaining and optimizing our high-quality asset portfolio, generating cash flows, and maintaining a strong balance sheet. Our near-term goals include returning value to stockholders through our Stock Repurchase Program and fixed dividend payments, and focusing on continued operational excellence.

Our asset portfolio is comprised of high-quality assets in the Midland Basin of West Texas and in the Maverick Basin of South Texas that are capable of generating strong returns in the current macroeconomic environment, and present resilience to commodity price risk and volatility. We remain focused on maximizing returns and increasing the value of our top-tier assets through continued development and optimization of our Midland Basin assets and through continued development and delineation of the Austin Chalk formation in South Texas. We believe that our high-quality asset base provides for a sustainable approach to prioritizing operational execution, maintaining a strong balance sheet, generating cash flows, returning capital to stockholders, and maintaining strong financial flexibility.

We are committed to exceptional safety, health, and environmental stewardship; supporting the professional development of a diverse and thriving team of employees; building and maintaining partnerships with our stakeholders by investing in and connecting with the communities where we live and work; and transparency in reporting on our progress in these areas. The Environmental, Social and Governance Committee of our Board of Directors oversees, among other things, the development and implementation of the Company’s ESG policies, programs and initiatives, and, together with management, reports to our Board of Directors regarding such matters. Further demonstrating our commitment to sustainable operations and environmental stewardship, compensation for our executives and eligible employees under our long-term incentive plan, and compensation for all employees under our short-term incentive plan is calculated based on, in part, certain Company-wide, performance-based metrics that include key financial, operational, environmental, health, and safety measures.

Global commodity and financial markets remain subject to heightened levels of uncertainty and volatility as a result of inflation, disruptions resulting from recent bank failures, and the ongoing conflict between Russia and Ukraine and associated economic and trade sanctions on Russia. These circumstances have driven commodity price volatility and have contributed to increased service provider and other costs, instances of supply chain disruptions, and a rise in interest rates, and could have further industry-specific impacts that may require us to adjust our business plan. For additional detail, please refer to the Risk Factors section