sm-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 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 July 21, 2023, the registrant had 118,665,529 shares of common stock outstanding.

TABLE OF CONTENTS


Item		Page
	Cautionary Information about Forward-Looking Statements	3

	Part I	4

Item 1.	Financial Statements (unaudited)	4

	Condensed Consolidated Balance Sheets June 30, 2023, and December 31, 2022	4

	Condensed Consolidated Statements of Operations Three and Six Months Ended June 3 0 , 2023, and 2022	5

	Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended Ju ne 3 0 , 2023, and 2022	6

	Condensed Consolidated Statements of Stockholders’ Equity Continuous Quarterly Presentation Ended June 30, 2023, and 2022	7

	Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 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	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

	Part II	37

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37



Item 6.	Exhibits	38

	Signatures	39

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 effects 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 affected 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)


	June 30, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	378,238	$	444,998
Accounts receivable	217,794		233,297
Derivative assets	74,138		48,677
Prepaid expenses and other	8,815		10,231
Total current assets	678,985		737,203
Property and equipment (successful efforts method):
Proved oil and gas properties	10,824,717		10,258,368
Accumulated depletion, depreciation, and amortization	(6,494,068)		(6,188,147)
Unproved oil and gas properties, net of valuation allowance of $37,904 and $38,008, respectively	524,693		487,192
Wells in progress	332,609		287,267

Other property and equipment, net of accumulated depreciation of $58,203 and $56,512, respectively	43,276		38,099
Total property and equipment, net	5,231,227		4,882,779
Noncurrent assets:
Derivative assets	12,077		24,465
Other noncurrent assets	70,337		71,592
Total noncurrent assets	82,414		96,057
Total assets	$	5,992,626	$	5,716,039
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	530,459	$	532,289

Derivative liabilities	22,210		56,181
Other current liabilities	11,319		10,114
Total current liabilities	563,988		598,584
Noncurrent liabilities:
Revolving credit facility	—		—
Senior Notes, net	1,573,772		1,572,210


Asset retirement obligations	113,999		108,233

Deferred income taxes	375,063		280,811
Derivative liabilities	5,894		1,142
Other noncurrent liabilities	61,443		69,601
Total noncurrent liabilities	2,130,171		2,031,997

Commitments and contingencies (note 6)

Stockholders’ equity:
Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 118,112,105 and 121,931,676 shares, respectively	1,181		1,219
Additional paid-in capital	1,680,080		1,779,703
Retained earnings	1,621,202		1,308,558
Accumulated other comprehensive loss	(3,996)		(4,022)
Total stockholders’ equity	3,298,467		3,085,458
Total liabilities and stockholders’ equity	$	5,992,626	$	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 June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Operating revenues and other income:
Oil, gas, and NGL production revenue	$	546,555	$	990,377	$	1,117,333	$	1,849,098

Other operating income	4,199		1,725		6,926		2,780
Total operating revenues and other income	550,754		992,102		1,124,259		1,851,878
Operating expenses:
Oil, gas, and NGL production expense	145,588		165,593		287,936		310,284
Depletion, depreciation, amortization, and asset retirement obligation liability accretion	157,832		154,823		312,021		314,304
Exploration	14,960		20,868		33,388		29,914

General and administrative	27,500		28,291		55,169		53,287
Net derivative (gain) loss	(11,674)		104,236		(63,003)		522,757
Other operating expense, net	7,197		5,485		17,350		6,790
Total operating expenses	341,403		479,296		642,861		1,237,336
Income from operations	209,351		512,806		481,398		614,542
Interest expense	(22,148)		(35,496)		(44,607)		(74,883)
Loss on extinguishment of debt	—		(67,226)		—		(67,605)
Other non-operating income (expense), net	4,763		112		9,233		(233)
Income before income taxes	191,966		410,196		446,024		471,821
Income tax expense	(42,092)		(86,711)		(97,598)		(99,572)
Net income	$	149,874	$	323,485	$	348,426	$	372,249

Basic weighted-average common shares outstanding	119,408		121,910		120,533		121,909
Diluted weighted-average common shares outstanding	120,074		124,343		121,175		124,267
Basic net income per common share	$	1.26	$	2.65	$	2.89	$	3.05
Diluted net income per common share	$	1.25	$	2.60	$	2.88	$	3.00
Dividends per common share	$	0.15	$	—	$	0.30	$	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 June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Net income	$	149,874	$	323,485	$	348,426	$	372,249
Other comprehensive income, net of tax:
Pension liability adjustment	13		182		26		364
Total other comprehensive income, net of tax	13		182		26		364
Total comprehensive income	$	149,887	$	323,667	$	348,452	$	372,613

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
Net income	—	—		—		149,874		—		149,874
Other comprehensive income	—	—		—		—		13		13
Cash dividends declared, $0.15 per share	—	—		—		(17,704)		—		(17,704)
Issuance of common stock under Employee Stock Purchase Plan	68,210	1		1,815		—		—		1,816
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings	774	—		(7)		—		—		(7)
Stock-based compensation expense	56,872	1		4,162		—		—		4,163

Purchase of shares under Stock Repurchase Program	(2,550,706)	(26)		(69,457)		—		—		(69,483)
Other	19,037	—		—		—		—		—
Balances, June 30, 2023	118,112,105	$	1,181	$	1,680,080	$	1,621,202	$	(3,996)	$	3,298,467


				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
Net income	—	—		—		323,485		—		323,485
Other comprehensive income	—	—		—		—		182		182

Issuance of common stock under Employee Stock Purchase Plan	65,634	1		1,644		—		—		1,645

Stock-based compensation expense	29,471	—		4,479		—		—		4,479


Balances, June 30, 2022	121,959,282	$	1,220	$	1,850,601	$	605,564	$	(12,485)	$	2,444,900

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

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	For the Six Months Ended June 30,
	2023		2022
Cash flows from operating activities:
Net income	$	348,426	$	372,249
Adjustments to reconcile net income to net cash provided by operating activities:

Depletion, depreciation, amortization, and asset retirement obligation liability accretion	312,021		314,304


Stock-based compensation expense	8,481		8,753
Net derivative (gain) loss	(63,003)		522,757
Derivative settlement gain (loss)	20,712		(408,781)
Amortization of debt discount and deferred financing costs	2,743		7,607
Loss on extinguishment of debt	—		67,605
Deferred income taxes	94,246		92,948
Other, net	(4,305)		16,967
Net change in working capital	(4,436)		(109,748)





Net cash provided by operating activities	714,885		884,661

Cash flows from investing activities:

Capital expenditures	(550,046)		(365,745)
Acquisition of proved and unproved oil and gas properties	(88,834)		—
Other, net	657		—
Net cash used in investing activities	(638,223)		(365,745)

Cash flows from financing activities:



Cash paid to repurchase Senior Notes	—		(584,946)
Repurchase of common stock	(108,863)		—
Net proceeds from sale of common stock	1,815		1,645
Dividends paid	(36,367)		(1,218)
Other, net	(7)		(24)
Net cash used in financing activities	(143,422)		(584,543)

Net change in cash, cash equivalents, and restricted cash	(66,760)		(65,627)
Cash, cash equivalents, and restricted cash at beginning of period	444,998		332,716
Cash, cash equivalents, and restricted cash at end of period	$	378,238	$	267,089

Supplemental schedule of additional cash flow information and non-cash activities:
Operating activities:
Cash paid for interest, net of capitalized interest	$	(42,680)	$	(90,875)
Net cash paid for income taxes	$	(6,137)	$	(10,502)
Investing activities:
Increase in capital expenditure accruals and other	$	24,220	$	37,780
Non-cash financing activities (1)

_______________________________________

(1) Please refer to Note 5 - Long-Term Debt for discussion of the debt transactions executed during the six months ended June 30, 2022.

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 June 30, 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 June 30, 2023, and through the filing of this report, no new accounting standards 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”) reflects revenue generated from contracts with customers.

The tables below present oil, gas, and NGL production revenue by product type for each of the Company’s operating areas for the three and six months ended June 30, 2023, and 2022:


	Midland Basin						South Texas						Total
	Three Months Ended June 30,						Three Months Ended June 30,						Three Months Ended June 30,
	2023			2022			2023			2022			2023			2022

	(in thousands)
Oil production revenue	$	302,874		$	534,927		$	120,519		$	132,092		$	423,393		$	667,019
Gas production revenue	36,800			137,543			32,927			103,784			69,727			241,327
NGL production revenue	211			130			53,224			81,901			53,435			82,031
Total	$	339,885		$	672,600		$	206,670		$	317,777		$	546,555		$	990,377
Relative percentage	62		%	68		%	38		%	32		%	100		%	100		%


	Midland Basin						South Texas						Total
	Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022			2023			2022

	(in thousands)
Oil production revenue	$	623,009		$	1,028,822		$	221,222		$	245,499		$	844,231		$	1,274,321
Gas production revenue	86,589			239,816			76,869			171,560			163,458			411,376
NGL production revenue	388			282			109,256			163,119			109,644			163,401
Total	$	709,986		$	1,268,920		$	407,347		$	580,178		$	1,117,333		$	1,849,098
Relative percentage	64		%	69		%	36		%	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 transfer of control 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 affected 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 June 30, 2023, and December 31, 2022, were $162.5 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 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 and six months ended June 30, 2023, the Company repurchased and subsequently retired 2,550,706 and 3,964,464 shares, respectively, of its common stock at a weighted-average share price of $26.95 and $27.44, respectively, for a total cost of $68.7 million and $108.8 million, respectively, excluding excise taxes, commissions, and fees. As of June 30, 2023, $334.0 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 and six months ended June 30, 2023, and 2022, consists of the following:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2023			2022			2023			2022

	(in thousands)
Current portion of income tax (expense) benefit:
Federal	$	2,189		$	(3,664)		$	(2,809)		$	(4,273)
State	(3)			(2,047)			(543)			(2,351)
Deferred portion of income tax expense	(44,278)			(81,000)			(94,246)			(92,948)
Income tax expense	$	(42,092)		$	(86,711)		$	(97,598)		$	(99,572)

Effective tax rate	21.9		%	21.1		%	21.9		%	21.1		%

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 quarterly effective tax rate and the resulting income tax expense or benefit can also be affected by the proportional effects of forecast net income or loss and the correlative effect on the valuation allowance for each of the periods presented in the table above.

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 has not occurred as of the filing of this report.

The Company made $6.1 million of cash tax payments during the second quarter of 2023, primarily related to Texas franchise taxes.

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 June 30, 2023, the borrowing base and aggregate lender commitments under the Credit Agreement were $2.5 billion and $1.25 billion, respectively. 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 July 21, 2023, June 30, 2023, and December 31, 2022:


	As of July 21, 2023		As of June 30, 2023		As of December 31, 2022

	(in thousands)
Revolving credit facility (1)	$	—	$	—	$	—
Letters of credit (2)	2,500		2,500		6,000
Available borrowing capacity	1,247,500		1,247,500		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 $9.6 million and $10.8 million as of June 30, 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 June 30, 2023, and December 31, 2022, consists of the following (collectively referred to as “Senior Notes”):


	As of June 30, 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	$	1,211	$	347,907	$	349,118	$	1,528	$	347,590
6.75% Senior Notes due 2026	419,235		2,219		417,016		419,235		2,569		416,666
6.625% Senior Notes due 2027	416,791		2,784		414,007		416,791		3,172		413,619
6.5% Senior Notes due 2028	400,000		5,158		394,842		400,000		5,665		394,335
Total	$	1,585,144	$	11,372	$	1,573,772	$	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.

Senior Secured Notes

On June 17, 2022, the Company redeemed all of the $446.7 million of aggregate principal amount outstanding of its 10.0% Senior Secured Notes due 2025 (“2025 Senior Secured Notes”), with cash on hand, at a redemption price equal to 107.5 percent of the principal amount outstanding on the date of the redemption, plus accrued and unpaid interest. Upon redemption, the Company recorded a net loss on extinguishment of debt of $67.2 million which included $33.5 million of premium paid, $26.3 million of accelerated expense recognition of the remaining unamortized debt discount, and $7.4 million of accelerated expense recognition of the remaining unamortized deferred financing costs. The Company canceled all redeemed 2025 Senior Secured Notes upon settlement.

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 June 30, 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 June 30, 2023, and 2022, totaled $5.9 million and $4.2 million, respectively, and totaled $11.4 million and $7.2 million for the six months ended June 30, 2023, and 2022, 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 six months ended June 30, 2023, and through the filing of this report, the Company amended certain of its drilling rig contracts to extend contract terms, which resulted in changes to day rates and potential early termination fees. As of the filing of this report, the Company’s drilling rig commitments totaled $27.0 million under contract terms extending through the third 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 $18.7 million in early termination fees. No early termination penalties or standby fees were incurred by the Company during the six months ended June 30, 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 effect on cash flows. All commodity derivative contracts that the Company enters into are 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 June 30, 2023, the Company had basis swap contracts with fixed price differentials between:

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

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

•NYMEX Henry Hub (“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 June 30, 2023, the Company had commodity derivative contracts outstanding through the fourth quarter of 2025 as summarized in the table below:


	Contract Period
	Third Quarter 2023		Fourth Quarter 2023		2024		2025
Oil Derivatives (volumes in MBbl and prices in $ per Bbl):
Swaps
NYMEX WTI Volumes	607		837		—		—
Weighted-Average Contract Price	$	59.77	$	65.91	$	—	$	—
ICE Brent Volumes	920		920		910		—
Weighted-Average Contract Price	$	86.50	$	86.50	$	85.50	$	—
Collars
NYMEX WTI Volumes	291		—		919		—
Weighted-Average Floor Price	$	75.00	$	—	$	75.00	$	—
Weighted-Average Ceiling Price	$	93.05	$	—	$	81.47	$	—
Basis Swaps
WTI Midland-NYMEX WTI Volumes	1,414		1,294		2,961		—
Weighted-Average Contract Price	$	0.88	$	0.88	$	1.17	$	—


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

Gas Derivatives (volumes in BBtu and prices in $ per MMBtu):
Swaps
NYMEX HH Volumes	1,470		—		2,759		5,891
Weighted-Average Contract Price	$	5.11	$	—	$	3.27	$	4.20






Collars
NYMEX HH Volumes	6,194		8,362		22,342		5,891
Weighted-Average Floor Price	$	3.75	$	3.90	$	3.61	$	3.50
Weighted-Average Ceiling Price	$	4.62	$	5.70	$	5.76	$	5.32
IF HSC Volumes	1,389		1,451		—		—
Weighted-Average Floor Price	$	4.25	$	4.25	$	—	$	—
Weighted-Average Ceiling Price	$	4.95	$	5.55	$	—	$	—






Basis Swaps




IF Waha-NYMEX HH Volumes	3,505		2,337		20,958		20,501
Weighted-Average Contract Price	$	(0.95)	$	(1.01)	$	(0.86)	$	(0.66)
IF HSC-NYMEX HH Volumes	1,813		2,008		10,208		—
Weighted-Average Contract Price	$	(0.25)	$	(0.25)	$	(0.33)	$	—

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

Commodity Derivative Contracts Entered Into Subsequent to June 30, 2023

Subsequent to June 30, 2023, and through July 21, 2023, the Company entered into the following commodity derivative contracts:

•NYMEX WTI oil collar contracts for the first and second quarters of 2024 for a total of 0.6 MMBbl of oil production at a weighted-average floor price of $62.38 per Bbl and a weighted-average ceiling price of $76.51 per Bbl;

•WTI Midland-NYMEX WTI basis swap contracts for 2024 for a total of 0.9 MMBbl of oil production at a contract price of $1.35 per Bbl;

•WTI Houston MEH-NYMEX WTI basis swap contract for 2024 for a total of 0.3 MMBbl of oil production at a contract price of $1.75 per Bbl; and

•IF HSC-NYMEX HH basis swap contracts for 2024 for a total of 4,780 BBtu of gas production at a weighted-average contract price of $(0.15) 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 $58.1 million and $15.8 million as of June 30, 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 June 30, 2023		As of December 31, 2022

	(in thousands)
Derivative assets:
Current assets	$	74,138	$	48,677
Noncurrent assets	12,077		24,465
Total derivative assets	$	86,215	$	73,142
Derivative liabilities:
Current liabilities	$	22,210	$	56,181
Noncurrent liabilities	5,894		1,142
Total derivative liabilities	$	28,104	$	57,323

Offsetting of Derivative Assets and Liabilities

As of June 30, 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
	June 30, 2023		December 31, 2022		June 30, 2023		December 31, 2022

	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	86,215	$	73,142	$	(28,104)	$	(57,323)
Amounts not offset in the accompanying balance sheets	(24,835)		(26,136)		24,835		26,136
Net amounts	$	61,380	$	47,006	$	(3,269)	$	(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 June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022

	(in thousands)
Derivative settlement (gain) loss:
Oil contracts	$	472	$	179,213	$	6,698	$	308,381
Gas contracts	(14,550)		53,337		(25,852)		80,388
NGL contracts	(1,558)		8,048		(1,558)		20,012
Total derivative settlement (gain) loss	$	(15,636)	$	240,598	$	(20,712)	$	408,781

Net derivative (gain) loss:
Oil contracts	$	(17,518)	$	100,273	$	(46,685)	$	415,323
Gas contracts	10,560		8,548		(10,218)		94,723
NGL contracts	(4,716)		(4,585)		(6,100)		12,711
Total net derivative (gain) loss	$	(11,674)	$	104,236	$	(63,003)	$	522,757

Credit Related Contingent Features

As of June 30, 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 June 30, 2023						As of December 31, 2022
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3

	(in thousands)
Assets:
Derivatives (1)	$	—	$	86,215	$	—	$	—	$	73,142	$	—

Liabilities:
Derivatives (1)	$	—	$	28,104	$	—	$	—	$	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 June 30, 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 June 30, 2023				As of December 31, 2022
	Principal Amount		Fair Value		Principal Amount		Fair Value

	(in thousands)
5.625% Senior Notes due 2025	$	349,118	$	341,560	$	349,118	$	337,821
6.75% Senior Notes due 2026	$	419,235	$	411,332	$	419,235	$	409,484
6.625% Senior Notes due 2027	$	416,791	$	408,259	$	416,791	$	402,120
6.5% Senior Notes due 2028	$	400,000	$	384,584	$	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 (“RSU” or “RSUs”) and contingent performance share units (“PSU” or “PSUs”), which were measured using the treasury stock method. Please refer to Note 10 - Compensation Plans in this report 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 June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022

	(in thousands, except per share data)
Net income	$	149,874	$	323,485	$	348,426	$	372,249

Basic weighted-average common shares outstanding	119,408		121,910		120,533		121,909
Dilutive effect of non-vested RSUs, contingent PSUs, and other	666		2,433		642		2,358
Diluted weighted-average common shares outstanding	120,074		124,343		121,175		124,267

Basic net income per common share	$	1.26	$	2.65	$	2.89	$	3.05
Diluted net income per common share	$	1.25	$	2.60	$	2.88	$	3.00

Note 10 - Compensation Plans

The Company may grant various types of both short-term and long-term incentive-based awards under its compensation plans, such as cash awards, performance-based cash awards, and equity awards to eligible employees. Additionally, the Company grants stock-based compensation to its Board of Directors and provides an employee stock purchase plan. As of June 30, 2023, approximately 3.7 million shares of common stock were available for grant under the Company’s Equity Incentive Compensation Plan (“Equity Plan”).

Performance Share Units

The Company has granted 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 2022 and 2023, which the Company determined to be equity awards, settlement will be determined based on a combination of the following criteria measured over the three-year performance period: the Company’s Total Shareholder Return (“TSR”) relative to the TSR of certain peer companies, the Company’s absolute TSR, free cash flow (“FCF”) generation, and the achievement of certain ESG targets, in each case as defined by the award agreement. The Company initially records compensation expense associated with the issuance of PSUs based on the fair value of the awards as of the grant date. As a portion of these awards depends on performance-based settlement criteria, compensation expense may be adjusted in future periods as the expected number of shares of the Company’s common stock issued to settle the units increases or decreases based on the Company’s expected FCF generation and achievement of certain ESG targets.

Compensation expense for PSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards. Total compensation expense recorded for PSUs was $0.2 million and $0.7 million for the three months ended June 30, 2023, and 2022, respectively, and $0.8 million and $1.4 million for the six months ended June 30, 2023, and 2022, respectively. As of June 30, 2023, there was $4.1 million of total unrecognized compensation expense related to non-vested PSUs, which is being amortized through mid-2025. There were no material changes to the outstanding and non-vested PSUs during the six months ended June 30, 2023.

Subsequent to June 30, 2023, the Company granted a total of 256,633 PSUs with a grant date fair value of $7.7 million.

Restricted Stock Units

The Company has granted RSUs to eligible employees as part of its Equity Plan. Each RSU represents a right to receive one share of the Company’s common stock upon settlement of the award at the end of the specified vesting period. RSUs generally vest in one-third increments 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 RSUs was $3.4 million and $3.2 million for the three months ended June 30, 2023, and 2022, respectively, and $6.7 million and $6.5 million for the six months ended June 30, 2023, and 2022, respectively. As of June 30, 2023, there was $17.4 million of total unrecognized compensation expense related to non-vested RSUs, which is being amortized through January 2026. There were no material changes to the outstanding and non-vested RSUs during the six months ended June 30, 2023.

Subsequent to June 30, 2023, the Company settled RSUs upon the vesting of awards granted in previous years. The Company and a majority of eligible recipients mutually agreed to net share settle a portion of the awards to cover income and payroll tax withholdings, as provided for in the Equity Plan and applicable award agreements. After withholding 248,963 shares to satisfy income and payroll tax withholding obligations, the Company issued 553,442 shares of common stock in accordance with the terms of the applicable award agreements. Additionally, the Company granted to employees a total of 591,361 RSUs with a grant date fair value of $18.7 million.

Director Shares

During the second quarters of 2023, and 2022, the Company issued a total of 56,872 and 29,471 shares, respectively, of its common stock as compensation to its non-employee directors under the Equity Plan. Shares issued during 2023 will fully vest on December 31, 2023, and shares issued during 2022 fully vested on December 31, 2022.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation, subject to a maximum of 2,500 shares per offering period and a maximum of $25,000 in value related to purchases for each calendar year. The purchase price of the common stock is 85 percent of the lower of the trading price of the common stock on either the first or last day of the six-month offering period. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. There were a total of 68,210 and 65,634 shares issued under the ESPP during the second quarters of 2023, and 2022, respectively. Total proceeds to the Company for the issuance of these shares was $1.8 million and $1.6 million for the six months ended June 30, 2023, and 2022, respectively. The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model.

Please refer to Note 7 - Compensation Plans in the 2022 Form 10-K for additional detail on the Company’s compensation plans.

Note 11 - Acquisitions

Acquisitions

On June 30, 2023, the Company acquired approximately 20,000 net acres of oil and gas properties located in Dawson and northern Martin Counties, Texas. Total consideration paid after purchase price adjustments was $88.8 million. Under authoritative accounting guidance, this transaction was considered to be an asset acquisition. Therefore, the properties were recorded based on the total consideration paid after purchase price adjustments and the transaction costs were capitalized as a component of the cost of the assets acquired.

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. Additionally, the following discussion includes sequential quarterly comparison to the financial information presented in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, filed with the Securities and Exchange Commission (“SEC”) on April 28, 2023. Throughout the following discussion, we explain changes between the three months ended June 30, 2023, and the three months ended March 31, 2023 (“sequential quarterly” or “sequentially”), as well as the year-to-date (“YTD”) change between the six months ended June 30, 2023, and the six months ended June 30, 2022 (“YTD 2023-over-YTD 2022”).

Overview of the Company

General Overview

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 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 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 disciplined capital spending, strategic acreage acquisitions, and continued development and optimization of our existing assets. 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.

While the United States inflation rate has decreased since the beginning of the year and the average rate of inflation in 2023 is lower than it was in 2022, global commodity and financial markets remain subject to heightened levels of uncertainty and volatility. Tightening of monetary policy by the United States Federal Reserve, recent oil production curtailment agreements among the Organization of the Petroleum Exporting Countries (“OPEC”) plus other non-OPEC oil producing countries (collectively referred to as “OPEC+”), and the ongoing conflict between Russia and Ukraine and associated economic and trade sanctions have driven commodity price volatility, contributed to 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 in Part I, Item 1A of our 2022 Form 10-K. Despite continuing uncertainty, we expect to maximize the value of our high-quality asset base and sustain strong operational performance and financial stability. We remain focused on returning capital to stockholders through cash flow generation.

Areas of Operations

Our Midland Basin assets are comprised of approximately 110,000 net acres located in the Permian Basin in West Texas (“Midland Basin”). In the second quarter of 2023, drilling and completion activities within our RockStar and Sweetie Peck positions continued to focus primarily on development optimization of our Midland Basin position. Our Midland Basin position provides substantial future development opportunities within multiple oil-rich intervals, including the Spraberry and Wolfcamp formations.

Our South Texas assets are comprised of approximately 155,000 net acres located in the Maverick Basin in Dimmit and Webb Counties, Texas (“South Texas”). In the second quarter of 2023, we focused our operations in South Texas on production from both the Austin Chalk formation and Eagle Ford shale formation, development of the Eagle Ford shale formation, and development and further delineation of the Austin Chalk formation. Our overlapping acreage position in the Maverick Basin covers a significant portion of the western Eagle Ford shale and Austin Chalk formations, and includes acreage across the oil, gas-condensate, and dry gas windows with gas composition amenable to processing for NGL extraction.

Second Quarter 2023 Overview and Outlook for the Remainder of 2023

During the second quarter of 2023, we continued to execute on our goal of sustainably returning capital to our stockholders through our Stock Repurchase Program and fixed quarterly dividend by repurchasing and subsequently retiring approximately 2.6 million shares of our outstanding common stock at a cost of $68.7 million, excluding excise taxes, commissions, and fees, and declaring quarterly dividends of $0.15 per share totaling $17.7 million. Please refer to Note 3 - Equity in Part I, Item 1 of this report for additional discussion of our Stock Repurchase Program.

Additionally, during the second quarter of 2023, we acquired approximately 20,000 net acres of oil and gas properties in the Midland Basin, and an additional 2,800 net acres through our continued leasing efforts, demonstrating our repeated success in extending inventory life and maintaining a strong balance sheet. Please refer to Note 11 - Acquisitions in Part I, Item 1 of this report for additional discussion.

Our total 2023 capital program, excluding acquisitions and leasing efforts, is expected to be approximately $1.05 billion. This reflects a decrease of $50.0 million, as compared to our original expectation, primarily as a result of lower-than-expected costs. Our capital program remains focused on our highly economic oil development projects in both our Midland Basin and South Texas assets. During 2023, we expect to repeat our track record of inventory replacement and growth, and to continue applying our strength in geosciences and development optimization. Please refer to Overview of Liquidity and Capital Resources below for discussion of how we expect to fund the remainder of our 2023 capital program.

Financial and Operational Results. Average net daily equivalent production for the three months ended June 30, 2023, increased five percent sequentially to 154.4 MBOE, consisting of a 12 percent increase from our South Texas assets driven by higher oil, gas, and NGL production volumes from both new and existing wells. This increase was slightly offset by a one percent decrease from our Midland Basin assets resulting from the timing of well completions.

Oil, gas, and NGL realized prices, before the effect of derivative settlements (“realized price” or “realized prices”), decreased sequentially by three percent, 29 percent, and 21 percent, respectively, as a result of decreases in benchmark commodity prices during the second quarter of 2023. Total realized price per BOE decreased 10 percent sequentially, resulting in a four percent decrease in oil, gas, and NGL production revenue, which was $546.6 million for the three months ended June 30, 2023, compared with $570.8 million for the three months ended March 31, 2023. Oil, gas, and NGL production expense of $10.36 per BOE for the three months ended June 30, 2023, decreased four percent sequentially, primarily as a result of decreases in production tax expense per BOE and lease operating expense (“LOE”) per BOE.

We recorded net derivative gains of $11.7 million and $51.3 million for the three months ended June 30, 2023, and March 31, 2023, respectively. Included within these amounts are derivative settlement gains of $15.6 million and $5.1 million for the three months ended June 30, 2023, and March 31, 2023, respectively.

Operational and financial activities during the three months ended June 30, 2023, resulted in the following:

•Net cash provided by operating activities of $383.3 million, compared with $331.6 million for the three months ended March 31, 2023.

•Net income of $149.9 million, or $1.25 per diluted share, compared with net income of $198.6 million, or $1.62 per diluted share, for the three months ended March 31, 2023.

•Adjusted EBITDAX, a non-GAAP financial measure, of $390.2 million, compared with $401.4 million for the three months ended March 31, 2023. Please refer to the caption Non-GAAP Financial Measures below for additional discussion and our definition of adjusted EBITDAX and reconciliations to net income and net cash provided by operating activities.

Please refer to Overview of Selected Production and Financial Information, Including Trends and Comparison of Financial Results and Trends Between the Three Months Ended June 30, 2023, and March 31, 2023, and Between the Six Months Ended June 30, 2023, and 2022 below for additional discussion.

Operational Activities. In our Midland Basin program, we operated three drilling rigs and one completion crew, drilled 11 gross (five net) wells, and completed 20 gross (16 net) wells during the second quarter of 2023. Average net daily equivalent production volumes decreased sequentially by one percent to 73.0 MBOE. Costs incurred in our Midland Basin program during the three months ended June 30, 2023, totaled $261.0 million, or 70 percent of our total costs incurred for the period. During the remainder of 2023, we anticipate operating one completion crew, and we plan to add an additional drilling rig in the fourth quarter to begin drilling on recently acquired acreage. We expect our activity to focus primarily on developing formations within our RockStar and Sweetie Peck positions.

In our South Texas program, we operated two drilling rigs and one completion crew, drilled 12 gross (12 net) wells, and completed eight gross (eight net) wells during the second quarter of 2023. Average net daily equivalent production volumes increased sequentially by 12 percent to 81.4 MBOE. Costs incurred in our South Texas program during the three months ended June 30, 2023,

totaled $102.6 million, or 27 percent of our total costs incurred for the period. We anticipate operating two drilling rigs for the remainder of 2023 and one completion crew for a majority of the remainder of 2023, focused primarily on developing the Austin Chalk formation.

The table below provides a quarterly summary of changes in our drilled but not completed well count and current year drilling and completion activity in our operated programs for the three and six months ended June 30, 2023:


	Midland Basin		South Texas (1)		Total
	Gross	Net	Gross	Net	Gross	Net
Wells drilled but not completed at December 31, 2022 (2)	49	40	29	28	78	69
Wells drilled	8	7	7	7	15	14
Wells completed	(12)	(10)	(17)	(16)	(29)	(26)

Wells drilled but not completed at March 31, 2023 (2)	45	37	19	19	64	56
Wells drilled	11	5	12	12	23	17
Wells completed	(20)	(16)	(8)	(8)	(28)	(24)

Wells drilled but not completed at June 30, 2023 (2)	36	27	23	23	59	50

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(1) The South Texas drilled but not completed well count as of December 31, 2022, included nine gross (nine net) wells that were not included in our five-year development plan as of December 31, 2022, eight of which were in the Eagle Ford shale formation.

(2) Amounts may not calculate due to rounding.

Costs Incurred. Costs incurred in oil and gas property acquisition, exploration, and development activities, whether capitalized or expensed, totaled $373.9 million and $682.6 million for the three and six months ended June 30, 2023, respectively, and were primarily incurred in our Midland Basin and South Texas programs as discussed in Operational Activities above.

Production Results. The table below presents our production by product type for each of our assets for the periods presented:


	For the Three Months Ended				For the Six Months Ended
	June 30, 2023		March 31, 2023		June 30, 2023		June 30, 2022
Midland Basin Production:
Oil (MMBbl)	4.2		4.2		8.4		10.2
Gas (Bcf)	14.8		14.5		29.2		31.4
NGLs (MMBbl)	—		—		—		—
Equivalent (MMBOE)	6.6		6.7		13.3		15.4
Average net daily equivalent (MBOE per day)	73.0		74.0		73.5		85.3
Relative percentage	47	%	51	%	49	%	57	%

South Texas Production:
Oil (MMBbl)	1.7		1.4		3.1		2.4
Gas (Bcf)	18.9		17.8		36.7		31.4
NGLs (MMBbl)	2.6		2.1		4.7		4.0
Equivalent (MMBOE)	7.4		6.5		13.9		11.7
Average net daily equivalent (MBOE per day)	81.4		72.5