Note 1—Organization and basis of presentation
Organization
Laredo Petroleum, Inc. ("Laredo"), together with its wholly-owned subsidiaries, is an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties in the Permian Basin of West Texas. The Company has identified one operating segment: exploration and production. In these notes, the "Company" refers to Laredo, LMS and GCM collectively, unless the context indicates otherwise. All amounts, dollars and percentages presented in these unaudited consolidated financial statements and the related notes are rounded and, therefore, approximate.
Basis of presentation
The unaudited consolidated financial statements were derived from the historical accounting records of the Company and reflect the historical financial position, results of operations and cash flows for the periods described herein. The unaudited consolidated financial statements have been prepared in accordance with GAAP. All material intercompany transactions and account balances have been eliminated in the consolidation of accounts.
The unaudited consolidated financial statements have not been audited by the Company's independent registered public accounting firm, except that the consolidated balance sheet as of December 31, 2021 is derived from the Company's audited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all necessary adjustments to present fairly the Company's financial position as of June 30, 2022, results of operations for the three and six months ended June 30, 2022 and 2021 and cash flows for the six months ended June 30, 2022 and 2021.
Certain disclosures have been condensed or omitted from the unaudited consolidated financial statements. Accordingly, the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2021 Annual Report.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period financial statement presentation. There was no impact on previously reported total assets, total liabilities, net income (loss) or stockholders' equity for the periods presented.
Significant accounting policies
There have been no material changes in the Company's significant accounting policies during the six months ended June 30, 2022. See Note 2 in the 2021 Annual Report for discussion of significant accounting policies.
Use of estimates
The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates are reasonable, actual results could differ.
See Note 2 in the 2021 Annual Report for further information regarding the use of estimates and assumptions.
Note 2—New accounting standards
The Company considered the applicability and impact of all accounting standard updates ("ASU") issued by the Financial Accounting Standards Board to the Accounting Standards Codification ("ASC") and has determined there are no ASUs that are not yet adopted and meaningful to disclose as of June 30, 2022. Additionally, the Company did not adopt any new ASUs during the six months ended June 30, 2022.
Condensed notes to the consolidated financial statements
(Unaudited)
Note 3—Acquisitions and divestitures
2021 Acquisitions and divestiture
Pioneer Acquisition
On September 17, 2021, the Company entered into a purchase and sale agreement (the "Pioneer PSA") with Pioneer Natural Resources USA, Inc ("PXD"), DE Midland III, LLC ("DEM"), Parsley Minerals, LLC ("PM") and Parsley Energy, L.P. ("PE" and collectively with PXD, DEM, and PM, the "Seller") pursuant to which the Company agreed to purchase (the "Pioneer Acquisition"), effective as of July 1, 2021, certain oil and natural gas properties in the Midland Basin, including approximately 20,000 net acres, and approximately 135 gross (121 net) operated locations, located in western Glasscock County, Texas, as well as related assets and contracts (the "Pioneer Assets").
On October 18, 2021 ("Pioneer Closing Date"), the Company closed the Pioneer Acquisition for an aggregate purchase price of $206.3 million, comprised of (i) $131.6 million in cash, (ii) 959,691 shares of the Company's common stock, par value $0.01 per share (the "common stock"), based upon the share price as of the Pioneer Closing Date and (iii) $3.8 million in transaction related expenses, inclusive of customary closing adjustments, subject to post-closing adjustments.
The Company determined that the Pioneer Acquisition was an asset acquisition, as substantially all of the gross assets acquired are concentrated in a group of similar identifiable assets. Accordingly, the consideration paid was allocated to the individual assets acquired and liabilities assumed based on their relative fair values and all transaction costs associated were capitalized.
The following table presents components of the purchase price, inclusive of customary closing adjustments:
| | | | | | | | |
(in thousands, except for share and share price data) | | As of October 18, 2021 |
Shares of Company common stock | | 959,691 |
Company common stock price at the Pioneer Closing Date | | $ | 73.90 | |
Value of Company common stock consideration | | $ | 70,921 | |
| | |
Cash consideration | | $ | 131,633 | |
Transaction costs | | 3,775 | |
| | |
Total purchase price | | $ | 206,329 | |
The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, based on their relative fair values, on the Pioneer Closing Date:
| | | | | | | | |
(in thousands) | | As of October 18, 2021 |
Evaluated properties | | $ | 139,859 | |
Unevaluated properties | | 74,192 | |
Revenue suspense liabilities assumed | | (7,722) | |
Allocated purchase price | | $ | 206,329 | |
The Company funded the cash portion of the aggregate purchase price and related transaction costs with respect to the Pioneer Acquisition with cash on hand and borrowings under its Senior Secured Credit Facility.
During the year ended December 31, 2021, in connection with the Pioneer Acquisition, the Company acquired additional interests in the Pioneer Assets through additional sellers that exercised their "tag-along" sales rights, for total cash consideration of $2.9 million, excluding customary purchase price adjustments. These acquisitions were accounted for as asset acquisitions.
Sabalo/Shad Acquisition
On May 7, 2021, the Company entered into two separate purchase and sale agreements, one (the "Sabalo PSA") with Sabalo Energy, LLC and its subsidiary, Sabalo Operating, LLC (collectively, "Sabalo"), and the other (the "Shad PSA" and together with the Sabalo PSA, the "Sabalo/Shad PSAs") with Shad Permian, LLC ("Shad"), to acquire certain Midland Basin oil and natural gas
Condensed notes to the consolidated financial statements
(Unaudited)
properties, including approximately 21,000 net acres and approximately 120 gross (109 net) operated locations and approximately 150 gross (18 net) non-operated locations, located in Howard and Borden Counties, Texas, (collectively, the "Sabalo/Shad Acquisition"). Sabalo and Shad are unaffiliated, but owned interests in the same assets.
On July 1, 2021 ("Sabalo/Shad Closing Date"), the Company closed the Sabalo/Shad Acquisition, effective April 1, 2021, for an aggregate purchase price of $863.1 million, comprised of (i) $606.1 million in cash (ii) 2,506,964 shares of the Company's common stock, based upon the share price as of the Sabalo/Shad Closing Date, and (iii) $17.0 million in transaction related expenses, inclusive of post-closing adjustments.
The Sabalo/Shad Acquisition was accounted for as a single transaction because the Sabalo PSA and Shad PSA were entered into at the same time and in contemplation of one another to form a single transaction designed to achieve an overall economic effect. The Company determined that the Sabalo/Shad Acquisition was an asset acquisition, as substantially all of the gross assets acquired are concentrated in a group of similar identifiable assets. Accordingly, the consideration paid was allocated to the individual assets acquired and liabilities assumed based on their relative fair values and all transaction costs associated were capitalized.
The following table presents components of the purchase price, inclusive of customary closing adjustments:
| | | | | | | | |
(in thousands, except for share and share price data) | | As of July 1, 2021 |
Shares of Company common stock | | 2,506,964 |
Company common stock price at the Sabalo/Shad Closing Date | | $ | 95.72 | |
Value of Company common stock consideration | | $ | 239,967 | |
| | |
Cash consideration | | $ | 606,126 | |
Transaction costs | | 17,020 | |
Total purchase price | | $ | 863,113 | |
The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, based on their relative fair values, on the Sabalo/Shad Closing Date:
| | | | | | | | |
(in thousands) | | As of July 1, 2021 |
Evaluated properties | | $ | 503,005 | |
Unevaluated properties | | 362,977 | |
Revenue suspense liabilities assumed | | (4,269) | |
Inventory | | 1,400 | |
Allocated purchase price | | $ | 863,113 | |
The Company funded the cash portion of the aggregate purchase price and related transaction costs with respect to the Sabalo/Shad Acquisition with proceeds from borrowings under its Senior Secured Credit Facility and the Working Interest Sale described below.
Working Interest Sale
On May 7, 2021, the Company entered into a purchase and sale agreement (the "Sixth Street PSA") with Piper Investments Holdings, LLC, an affiliate of Sixth Street Partners, LLC ("Sixth Street"), to sell 37.5% of the Company's working interest in certain producing wellbores and the related properties primarily located within Glasscock and Reagan Counties, Texas, subject to certain excluded assets and title diligence procedures (the "Working Interest Sale").
On July 1, 2021 (the "Sixth Street Closing Date"), the Company closed the Working Interest Sale for cash proceeds of $405.0 million. In addition to such proceeds, the Sixth Street PSA also provided the Company with the right to receive up to a maximum of $93.7 million in additional cash consideration if certain cash flow targets related to divested oil and natural gas property operations are met ("Sixth Street Contingent Consideration"). The Sixth Street Contingent Consideration is made up of quarterly payments through June 2027 totaling up to $38.7 million and a potential balloon payment of $55.0 million in June 2027. On the Sixth Street Closing Date, the fair value of the Sixth Street Contingent Consideration was determined to be $33.8 million. The Sixth Street Contingent Consideration is accounted for as a contingent consideration derivative, with all
Condensed notes to the consolidated financial statements
(Unaudited)
gains and losses as a result of changes in the fair value of the contingent consideration derivative recognized in earnings in the period in which the changes occur. See Notes 8 and 9 for further discussion of the Sixth Street Contingent Consideration.
Subsequent to the Sixth Street Closing Date, the Company continues to own and operate its remaining working interest in the properties sold to Sixth Street; however, the results of operations and cash flows related to the 37.5% working interests sold were eliminated from the Company's financial statements. This divestiture did not represent a strategic shift and will not have a major effect on the Company's future operations or financial results.
Pursuant to the rules governing full cost accounting, the Company recorded a gain on the Working Interest Sale of $93.5 million, net of transaction expenses of $11.6 million, on the Company's consolidated statements of operations, inclusive of post-closing adjustments, as this divestment represented more than 25% of the Company's June 30, 2021 proved reserves. For the purposes of calculating the gain, total capitalized costs were allocated between reserves sold and reserves retained as of the Sixth Street Closing Date.
Exchange of unevaluated oil and natural gas properties
From time to time, the Company exchanges undeveloped acreage with third parties. The exchanges are recorded at fair value and the difference is accounted for as an adjustment of capitalized costs with no gain or loss recognized pursuant to the rules governing full cost accounting, unless such adjustment would significantly alter the relationship between capitalized costs and proved reserves of oil, NGL and natural gas.
Note 4—Property and equipment
The following table presents the Company's property and equipment as of the dates presented:
| | | | | | | | | | | | | | |
(in thousands) | | June 30, 2022 | | December 31, 2021 |
Evaluated oil and natural gas properties | | $ | 9,318,212 | | | $ | 8,968,668 | |
Less accumulated depletion and impairment | | (7,164,277) | | | (7,019,670) | |
Evaluated oil and natural gas properties, net | | 2,153,935 | | | 1,948,998 | |
| | | | |
Unevaluated oil and natural gas properties not being depleted | | 124,182 | | | 170,033 | |
| | | | |
Midstream service assets | | 165,352 | | | 165,232 | |
Less accumulated depreciation and impairment | | (72,662) | | | (68,704) | |
Midstream service assets, net | | 92,690 | | | 96,528 | |
| | | | |
Depreciable other fixed assets | | 46,883 | | | 43,381 | |
Less accumulated depreciation and amortization | | (29,537) | | | (27,692) | |
Depreciable other fixed assets, net | | 17,346 | | | 15,689 | |
| | | | |
Land | | 19,415 | | | 18,901 | |
| | | | |
Total property and equipment, net | | $ | 2,407,568 | | | $ | 2,250,149 | |
See Note 9 for discussion of impairments of inventory during the six months ended June 30, 2021. See Notes 2 and 6 in the 2021 Annual Report for additional discussion of the Company's property and equipment.
The unamortized cost of evaluated oil and natural gas properties being depleted did not exceed the full cost ceiling as of June 30, 2022 and June 30, 2021. As such, no full cost ceiling impairments were recorded for the six months ended June 30, 2022 and 2021.
Condensed notes to the consolidated financial statements
(Unaudited)
The following table presents incurred capital expenditures in the acquisition, exploration and development of oil and natural gas properties, with asset retirement obligations included in evaluated property acquisition costs and development costs, for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | | |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Property acquisition costs: | | | | | | | | | | | | |
Evaluated | | $ | — | | | $ | — | | | $ | 4,780 | | | $ | — | | | | | |
Unevaluated | | 17 | | | — | | | 3,291 | | | — | | | | | |
Exploration costs | | 7,604 | | | 15,313 | | | 14,357 | | | 19,270 | | | | | |
Development costs | | 127,892 | | | 87,509 | | | 289,507 | | | 152,001 | | | | | |
Total oil and natural gas properties incurred capital expenditures | | $ | 135,513 | | | $ | 102,822 | | | $ | 311,935 | | | $ | 171,271 | | | | | |
Total oil and natural gas properties incurred capital expenditures includes certain employee-related costs. The following table presents capitalized employee-related incurred capital expenditures in the acquisition, exploration and development of oil and natural gas properties for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | | |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Capitalized employee-related costs | | $ | 4,366 | | | $ | 4,848 | | | $ | 8,709 | | | $ | 9,089 | | | | | |
Note 5—Debt
Long-term debt, net
The following table presents the Company's long-term debt and debt issuance costs, net included in "Long-term debt, net" on the unaudited consolidated balance sheets as of the dates presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
(in thousands) | | Long-term debt | | Debt issuance costs, net | | Long-term debt, net | | Long-term debt | | Debt issuance costs, net | | Long-term debt, net |
January 2025 Notes | | $ | 577,913 | | | $ | (5,288) | | | $ | 572,625 | | | $ | 577,913 | | | $ | (6,345) | | | $ | 571,568 | |
January 2028 Notes | | 354,794 | | | (4,525) | | | 350,269 | | | 361,044 | | | (5,024) | | | 356,020 | |
July 2029 Notes | | 374,224 | | | (5,876) | | | 368,348 | | | 400,000 | | | (6,730) | | | 393,270 | |
Senior Secured Credit Facility(1) | | — | | | — | | | — | | | 105,000 | | | — | | | 105,000 | |
Total | | $ | 1,306,931 | | | $ | (15,689) | | | $ | 1,291,242 | | | $ | 1,443,957 | | | $ | (18,099) | | | $ | 1,425,858 | |
______________________________________________________________________________
(1)Debt issuance costs, net related to the Senior Secured Credit Facility of $8.5 million and $8.1 million as of June 30, 2022 and December 31, 2021, respectively, are included in "Other noncurrent assets, net" on the unaudited consolidated balance sheets.
July 2029 Notes
On July 16, 2021, the Company completed a private offering and sale of $400.0 million in aggregate principal amount of 7.750% senior unsecured notes due 2029 (the "July 2029 Notes"). Interest for the July 2029 Notes is payable semi-annually, in cash in arrears on January 31 and July 31 of each year, commencing January 31, 2022 with interest from closing to that date. The terms of the July 2029 Notes include covenants, which are in addition to but different than similar covenants in the Senior Secured Credit Facility, which limit the Company's ability to incur indebtedness, make restricted payments, grant liens and dispose of assets. The Company was in compliance with these covenants for all periods presented.
The July 2029 Notes are fully and unconditionally guaranteed on a senior unsecured basis by LMS and GCM, and will be fully and unconditionally guaranteed by certain of the Company's future restricted subsidiaries, subject to certain automatic customary releases, including the sale, disposition or transfer of all of the capital stock or of all or substantially all of the assets
Condensed notes to the consolidated financial statements
(Unaudited)
of a subsidiary guarantor to one or more persons that are not the Company or a restricted subsidiary, exercise of legal defeasance or covenant defeasance options or satisfaction and discharge of the applicable indenture, designation of a subsidiary guarantor as a non-guarantor restricted subsidiary or as an unrestricted subsidiary in accordance with the applicable indenture, release from guarantee under the Senior Secured Credit Facility, or liquidation or dissolution (collectively, the "Releases").
The Company received net proceeds of approximately $392.0 million from the July 2029 Notes, after deducting underwriting discounts and commissions and estimated offering expenses. The proceeds from the offering were used for general corporate purposes, including repaying a portion of the borrowings outstanding under the Senior Secured Credit Facility.
Senior unsecured notes repurchases
During the six months ended June 30, 2022, the Company repurchased $25.8 million and $6.2 million in aggregate principal amount of the July 2029 Notes and January 2028 Notes, respectively. In connection with the repurchase of portions of the July 2029 Notes and January 2028 Notes, the Company recognized a loss on extinguishment of debt of $0.8 million, which is included in "Loss on extinguishment of debt, net" on the unaudited consolidated statement of operations. The loss on extinguishment of debt is comprised of (i) $0.5 million for the write off of debt issuance costs and (ii) $0.3 million related to the difference between the consideration paid and the net carrying amounts. See Note 17 for the Company's additional repurchases of its senior unsecured notes subsequent to June 30, 2022.
Senior Secured Credit Facility
On April 13, 2022, the Company entered into the Eighth Amendment to the Senior Secured Credit Facility (the "Eighth Amendment"). The Eighth Amendment, among other things, increased the borrowing base from $1.0 billion to $1.25 billion and the aggregate elected commitment from $725 million to $1.0 billion, increased, from closing through December 31, 2022, the $50 million bond buyback and distributions baskets to $250 million, subject to certain conditions, added an energy transition and technology commercialization investment basket of $25 million, subject to certain conditions, allows for the designation of unrestricted subsidiaries and amended certain other provisions relating to certain commercial agreements and the administration of Loans, in each case, subject to the terms of the Eighth Amendment and the Senior Secured Credit Facility.
As of June 30, 2022, the Senior Secured Credit Facility, which matures on July 16, 2025 (subject to a springing maturity date of July 29, 2024 if any of the January 2025 Notes are outstanding on such date), had a maximum credit amount of $2.0 billion, a borrowing base and an aggregate elected commitment of $1.25 billion and $1.0 billion, respectively, with no balance outstanding. The Senior Secured Credit Facility contains both financial and non-financial covenants, all of which the Company was in compliance with for all periods presented. Additionally, the Senior Secured Credit Facility provides for the issuance of letters of credit, limited to the lesser of total capacity and $80.0 million. As of December 31, 2021, the Company had a $44.1 million letter of credit outstanding under the Senior Secured Credit Facility. No letters of credit were outstanding under the Senior Secured Credit Facility as of June 30, 2022. For additional information see Note 7 in the 2021 Annual Report.
Note 6—Stockholders' equity
Authorized shares increase
On May 26, 2022, upon recommendation of the Company's board of directors, stockholders approved an amendment to the Company's Amended and Restated Certificate of Incorporation to increase the number of authorized shares of its common stock from 22,500,000 shares to 40,000,000 shares.
Share repurchase program
On May 31, 2022, the Company's board of directors authorized a $200.0 million share repurchase program. The repurchase program commenced in May 2022 and expires in May 2024. Share repurchases under the program may be made through a variety of methods, which may include open market purchases, including under plans complying with Rule 10b5-1 of the Exchange Act, and privately negotiated transactions. The timing and actual number of share repurchases will depend upon several factors, including market conditions, business conditions, the trading price of the Company's common stock and the nature of other investment opportunities available to the Company. During the six months ended June 30, 2022, the Company repurchased 85,161 shares of its common stock on the open market at a weighted-average price of $106.50 per common
Condensed notes to the consolidated financial statements
(Unaudited)
share for a total of $9.1 million under this program and, upon repurchase, the shares were retired. See Note 17 for the Company's additional repurchases of its common stock subsequent to June 30, 2022.
ATM Program
On February 23, 2021, the Company entered into an equity distribution agreement (the "Equity Distribution Agreement") with Wells Fargo Securities, LLC acting as sales agent and/or principal (the "Sales Agent"), pursuant to which the Company may offer and sell, from time to time through the Sales Agent, shares of its common stock having an aggregate gross sales price of up to $75.0 million through an "at-the-market" equity program (the "ATM Program").
During the six months ended June 30, 2021, the Company sold 1,438,105 shares of its common stock pursuant to the ATM Program for net proceeds of approximately $72.5 million, after underwriting commissions and other related expenses. The ATM Program was completed during the year ended December 31, 2021. Proceeds from the share sales were utilized to reduce borrowings on the Senior Secured Credit Facility.
Note 7—Equity Incentive Plan
The Laredo Petroleum, Inc. Omnibus Equity Incentive Plan (the "Equity Incentive Plan") provides for the granting of incentive awards in the form of restricted stock awards, stock option awards, performance share awards, performance unit awards, phantom unit awards and other awards. On May 20, 2021, the Company's stockholders approved an amendment to the Equity Incentive Plan to, among other things, increase the maximum number of shares of the Company's common stock issuable under the Equity Incentive Plan from 1,492,500 to 2,432,500 shares.
See Note 9 in the 2021 Annual Report for additional discussion of the Company's equity-based compensation awards.
The following table presents activity for equity-based compensation awards for the six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Equity Awards | | Liability Awards |
(in thousands) | | Restricted Stock Awards | | Stock Option Awards | | Performance Share Awards(1)(2) | | Performance Unit Awards | | Phantom Unit Awards(3) |
Outstanding as of December 31, 2021 | | 350 | | | 7 | | | 72 | | | 209 | | | 33 | |
Granted | | 237 | | | — | | | 62 | | | — | | | — | |
Forfeited | | (7) | | | — | | | (2) | | | — | | | — | |
Vested | | (144) | | | — | | | (70) | | | — | | | (15) | |
| | | | | | | | | | |
Expired or canceled | | — | | | (2) | | | — | | | — | | | — | |
Outstanding as of June 30, 2022 | | 436 | | | 5 | | | 62 | | | 209 | | | 18 | |
_____________________________________________________________________________(1)The performance share awards granted on February 28, 2019 had a performance period of January 1, 2019 to December 31, 2021 and, as their market and performance criteria were satisfied, resulted in a 107% payout. As such, the granted awards vested and were converted into 75,107 shares of the Company's common stock during the six months ended June 30, 2022 based on this 107% payout.
(2)On February 22, 2022, the Company granted performance share awards with a performance period of January 1, 2022 through December 31, 2024. The market criteria consists of: (i) annual relative total shareholder return comparing the Company's shareholder return to the shareholder return of the exploration and production companies listed in the Russell 2000 Index and (ii) annual absolute total shareholder return. The performance criteria for these awards consists of: (i) earnings before interest, taxes, depreciation, amortization and exploration expense and three-year total debt reduction, (ii) growth in inventory and (iii) emissions reduction targets. Any shares earned are expected to be paid in equity during the first quarter following the completion of the requisite service period, based on the achievement of market and performance criteria, and the payout can range from 0% to 225%.
(3)On March 1, 2022 and March 5, 2022, the vested phantom unit awards were settled and paid out in cash at a fair value of $76.60 and $83.00 based on the Company's closing stock price on the respective vesting dates.
Condensed notes to the consolidated financial statements
(Unaudited)
As of June 30, 2022, total unrecognized cost related to equity-based compensation awards was $32.7 million, of which $10.1 million was attributable to liability awards which will be settled in cash rather than shares. Such cost will be recognized on a straight-line basis over an expected weighted-average period of 2.11 years.
Equity-based compensation
The following table reflects equity-based compensation expense for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Equity awards: | | | | | | | | |
Restricted stock awards | | $ | 2,435 | | | $ | 1,857 | | | $ | 4,610 | | | $ | 3,820 | |
Performance share awards | | 500 | | | (85) | | | 961 | | | 683 | |
Stock option awards | | — | | | — | | | — | | | 7 | |
Total share-settled equity-based compensation, gross | | $ | 2,935 | | | $ | 1,772 | | | $ | 5,571 | | | $ | 4,510 | |
Less amounts capitalized | | (331) | | | (42) | | | (914) | | | (712) | |
Total share-settled equity-based compensation, net | | $ | 2,604 | | | $ | 1,730 | | | $ | 4,657 | | | $ | 3,798 | |
Liability awards: | | | | | | | | |
Performance unit awards | | $ | 340 | | | $ | 6,352 | | | $ | 5,906 | | | $ | 7,172 | |
Phantom unit awards | | 270 | | | 427 | | | 879 | | | 933 | |
Total cash-settled equity-based compensation, gross | | $ | 610 | | | $ | 6,779 | | | $ | 6,785 | | | $ | 8,105 | |
Less amounts capitalized | | (155) | | | (95) | | | (202) | | | (293) | |
Total cash-settled equity-based compensation, net | | $ | 455 | | | $ | 6,684 | | | $ | 6,583 | | | $ | 7,812 | |
Total equity-based compensation, net | | $ | 3,059 | | | $ | 8,414 | | | $ | 11,240 | | | $ | 11,610 | |
Note 8—Derivatives
The Company has two types of derivative instruments as of June 30, 2022: (i) commodity derivatives and (ii) a contingent consideration derivative. In previous periods, the Company also engaged in an interest rate swap derivative, which concluded during the quarterly period ended June 30, 2022. See Notes (i) 2 in the 2021 Annual Report for discussion of the Company's significant accounting policies for derivatives and presentation and (ii) 9 for discussion of fair value measurement of derivatives on a recurring basis. The Company's derivatives were not designated as hedges for accounting purposes, and the Company does not enter into such instruments for speculative trading purposes. Accordingly, the changes in fair value are recognized in "Loss on derivatives, net" under "Non-operating income (expense)" on the unaudited consolidated statements of operations.
The following table summarizes components of the Company's loss on derivatives, net by type of derivative instrument for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Commodity | | $ | (66,347) | | | $ | (216,869) | | | $ | (396,071) | | | $ | (370,902) | |
Interest rate | | 1 | | | (30) | | | 14 | | | (26) | |
Contingent consideration | | 419 | | | (43) | | | 4,314 | | | (379) | |
Loss on derivatives, net | | $ | (65,927) | | | $ | (216,942) | | | $ | (391,743) | | | $ | (371,307) | |
Condensed notes to the consolidated financial statements
(Unaudited)
Commodity
Due to the inherent volatility in oil, NGL and natural gas prices and the sometimes wide pricing differentials between where the Company produces and where the Company sells such commodities, the Company engages in commodity derivative transactions, such as puts, swaps, collars and basis swaps, to hedge price risk associated with a portion of the Company's anticipated sales volumes. By removing a portion of the price volatility associated with future sales volumes, the Company expects to mitigate, but not eliminate, the potential effects of variability in cash flows from operations. See Note 10 in the 2021 Annual Report for discussion of transaction types and settlement indexes.
During the six months ended June 30, 2022, the Company’s derivatives were settled based on reported prices on commodity exchanges, with (i) oil derivatives settled based on WTI NYMEX and Brent ICE pricing, (ii) NGL derivatives settled based on Mont Belvieu OPIS pricing and (iii) natural gas derivatives settled based on Henry Hub NYMEX and Waha Inside FERC pricing.
During the six months ended June 30, 2021, the Company completed a hedge restructuring by (i) selling 2,254,500 calendar year 2021 $55.00 per barrel Brent ICE puts, which volumetrically offset existing calendar year 2021 $55.00 per barrel Brent ICE puts, and receiving aggregate premiums of $9.0 million at inception of the contracts and (ii) entering into 2,254,500 calendar year 2021 Brent ICE swaps at a weighted-average price of $55.09 per barrel. Associated with the aforementioned existing calendar year 2021 $55.00 per barrel Brent ICE puts, which were entered into during 2020, were $50.6 million in aggregate premiums paid at the inception of the contracts.
Condensed notes to the consolidated financial statements
(Unaudited)
The following table summarizes open commodity derivative positions as of June 30, 2022, for commodity derivatives that were entered into through June 30, 2022, for the settlement periods presented:
| | | | | | | | | | | | | | | | |
| | Remaining Year 2022 | | Year 2023 | | |
Oil: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
WTI NYMEX - Swaps: | | | | | | |
Volume (Bbl) | | 184,000 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 64.40 | | | $ | — | | | |
WTI NYMEX - Collars: | | | | | | |
Volume (Bbl) | | 2,815,200 | | | 4,362,000 | | | |
Weighted-average floor price ($/Bbl) | | $ | 72.65 | | | $ | 67.93 | | | |
Weighted-average ceiling price ($/Bbl) | | $ | 86.54 | | | $ | 82.89 | | | |
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| | | | | | |
| | | | | | |
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| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Brent ICE - Swaps: | | | | | | |
Volume (Bbl) | | 2,079,200 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 48.34 | | | $ | — | | | |
Brent ICE - Collars: | | | | | | |
Volume (Bbl) | | 782,000 | | | — | | | |
Weighted-average floor price ($/Bbl) | | $ | 56.65 | | | $ | — | | | |
Weighted-average ceiling price ($/Bbl) | | $ | 65.44 | | | $ | — | | | |
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NGL: | | | | | | |
| | | | | | |
Purity Ethane - Swaps: | | | | | | |
Volume (Bbl) | | 772,800 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 11.42 | | | $ | — | | | |
Non-TET Propane - Swaps: | | | | | | |
Volume (Bbl) | | 588,800 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 35.91 | | | $ | — | | | |
Non-TET Normal Butane - Swaps: | | | | | | |
Volume (Bbl) | | 184,000 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 41.58 | | | $ | — | | | |
Non-TET Isobutane - Swaps: | | | | | | |
Volume (Bbl) | | 55,200 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 42.00 | | | $ | — | | | |
Non-TET Natural Gasoline - Swaps: | | | | | | |
Volume (Bbl) | | 184,000 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 60.65 | | | $ | — | | | |
| | | | | | |
Natural gas: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Henry Hub NYMEX - Swaps: | | | | | | |
Volume (MMBtu) | | 1,840,000 | | | — | | | |
Weighted-average price ($/MMBtu) | | $ | 2.73 | | | $ | — | | | |
Henry Hub NYMEX - Collars: | | | | | | |
Volume (MMBtu) | | 14,720,000 | | | 18,250,000 | | | |
Weighted-average floor price ($/MMBtu) | | $ | 3.09 | | | $ | 3.90 | | | |
Weighted-average ceiling price ($/MMBtu) | | $ | 3.84 | | | $ | 8.31 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Waha Inside FERC to Henry Hub NYMEX - Basis Swaps: | | | | | | |
Volume (MMBtu) | | 14,628,000 | | | 18,250,000 | | | |
Weighted-average differential ($/MMBtu) | | $ | (0.36) | | | $ | (1.58) | | | |
Condensed notes to the consolidated financial statements
(Unaudited)
Contingent consideration
The Sixth Street PSA provides for potential contingent payments to be paid to the Company if certain cash flow targets are met related to divested oil and natural gas property operations. The Sixth Street Contingent Consideration provides the Company with the right to receive up to a maximum of $93.7 million in additional cash consideration, comprised of potential quarterly payments through June 2027 totaling up to $38.7 million and a potential balloon payment of $55.0 million in June 2027. The fair value of the Sixth Street Contingent Consideration was $35.9 million as of December 31, 2021 and $38.6 million as of June 30, 2022. See Note 3 for further discussion of the Working Interest Sale associated with the Sixth Street Contingent Consideration.
The Company's asset acquisition of oil and natural gas properties that closed on April 30, 2020 provided for potential contingent payments to be paid by the Company if the arithmetic average of the monthly settlement WTI NYMEX prices exceed certain thresholds for the contingency period beginning on January 1, 2021 and ending on the earlier of December 31, 2022 or the date the counterparty has received the maximum consideration of $1.2 million. As the maximum thresholds were met, the Company paid the maximum amount of the $1.2 million contingent consideration to the counterparty during the year ended December 31, 2021.
At each quarterly reporting period, the Company remeasures contingent consideration with the change in fair value recognized in "Loss on derivatives, net" under "Non-operating income (expense)" on the unaudited consolidated statements of operations.
Note 9—Fair value measurements
See the beginning of Note 11 in the 2021 Annual Report for information about the fair value hierarchy levels.
Fair value measurement on a recurring basis
See Note 8 for further discussion of the Company's derivatives, and see Note 2 in the 2021 Annual Report for the Company's significant accounting policies for derivatives.
Condensed notes to the consolidated financial statements
(Unaudited)
Balance sheet presentation
The following tables present the Company's derivatives by (i) balance sheet classification, (ii) derivative type and (iii) fair value hierarchy level, and provide a total, on a gross basis and a net basis reflected in "Derivatives" on the unaudited consolidated balance sheets as of the dates presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total gross fair value | | Amounts offset | | Net fair value presented on the unaudited consolidated balance sheets |
Assets: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commodity | | $ | — | | | $ | 18,555 | | | $ | — | | | $ | 18,555 | | | $ | (18,555) | | | $ | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Contingent consideration | | — | | | — | | | 5,174 | | | 5,174 | | | — | | | 5,174 | |
Noncurrent: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commodity | | — | | | 6,522 | | | — | | | 6,522 | | | (5,063) | | | 1,459 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Contingent consideration | | — | | | — | | | 33,446 | | | 33,446 | | | — | | | 33,446 | |
Liabilities: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commodity | | — | | | (292,964) | | | — | | | (292,964) | | | 18,555 | | | (274,409) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Noncurrent: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commodity | | — | | | (7,152) | | | — | | | (7,152) | | | 5,063 | | | (2,089) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net derivative liability positions | | $ | — | | | $ | (275,039) | | | $ | 38,620 | | | $ | (236,419) | | | $ | — | | | $ | (236,419) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total gross fair value | | Amounts offset | | Net fair value presented on the consolidated balance sheets |
Assets: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commodity | | $ | — | | | $ | 21,671 | | | $ | — | | | $ | 21,671 | | | $ | (21,671) | | | $ | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Contingent consideration | | — | | | — | | | 4,346 | | | 4,346 | | | — | | | 4,346 | |
Noncurrent: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commodity | | — | | | 1,448 | | | — | | | 1,448 | | | — | | | 1,448 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Contingent consideration | | — | | | — | | | 31,515 | | | 31,515 | | | — | | | 31,515 | |
Liabilities: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commodity | | — | | | (201,428) | | | — | | | (201,428) | | | 21,671 | | | (179,757) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Interest rate | | — | | | (52) | | | — | | | (52) | | | — | | | (52) | |
| | | | | | | | | | | | |
Noncurrent: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
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Commodity | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net derivative liability positions | | $ | — | | | $ | (178,361) | | | $ | 35,861 | | | $ | (142,500) | | | $ | — | | | $ | (142,500) | |
See Note 11 in the 2021 Annual Report for discussion of the significant Level 2 inputs used in the fair value mark-to-market analysis of commodity, interest rate and contingent consideration derivatives. The Company reviewed the third-party specialist's valuations of commodity, interest rate and contingent consideration derivatives, including the related inputs, and analyzed changes in fair values between reporting dates.
Condensed notes to the consolidated financial statements
(Unaudited)
The Working Interest Sale provides for potential contingent payments to be paid to the Company. The Sixth Street Contingent Consideration associated with the Working Interest Sale was categorized as Level 3 of the fair value hierarchy, as the Company utilized its own cash flow projections along with a risk-adjusted discount rate generated by a third-party valuation specialist to determine the valuation. The Company reviewed the third-party specialist's valuation, including the related inputs, and analyzed changes in fair values between the Sixth Street Closing Date and the reporting dates. The fair value of the Sixth Street Contingent Consideration was recorded as part of the basis in the oil and natural gas properties divested and as a contingent consideration asset. At each quarterly reporting period prior to the end of the contingency period, the Company will remeasure the Sixth Street Contingent Consideration with the changes in fair value recognized in the earnings for such quarter. See Note 3 for further discussion of the Working Interest Sale associated with the Sixth Street Contingent Consideration.
The following table summarizes the changes in contingent consideration derivatives classified as Level 3 measurements for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Balance of Level 3 at beginning of period | | $ | 39,756 | | | $ | — | | | $ | 35,861 | | | $ | — | |
| | | | | | | | |
Change in Sixth Street Contingent Consideration fair value | | 419 | | | — | | | 4,314 | | | — | |
Settlements received | | (1,555) | | | — | | | (1,555) | | | — | |
Balance of Level 3 at end of period | | $ | 38,620 | | | $ | — | | | $ | 38,620 | | | $ | — | |
The Company's acquisition of oil and natural gas properties that closed on April 30, 2020 provided for potential contingent payments to be paid by the Company. During the year ended December 31, 2021, the maximum amount of the $1.2 million contingent consideration was distributed to the counterparty.
Fair value measurement on a nonrecurring basis
See Note 2 in the 2021 Annual Report for the Level 2 fair value hierarchy input assumptions used in estimating the net realizable value ("NRV") of inventory to determine the $1.6 million impairment expense of inventory recorded during the six months ended June 30, 2021, pertaining to line-fill and other inventories. There were no impairments of inventory recorded during the six months ended June 30, 2022.
See Note 11 in the 2021 Annual Report for the Level 3 fair value hierarchy input assumptions used in the fair value measurement of long-lived assets. There were no impairments of long-lived assets recorded during the six months ended June 30, 2022 and 2021.
Items not accounted for at fair value
The carrying amounts reported on the unaudited consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued capital expenditures, undistributed revenue and royalties and other accrued assets and liabilities approximate their fair values.
Condensed notes to the consolidated financial statements
(Unaudited)
The Company has not elected to account for its debt instruments at fair value. The following table presents the carrying amounts and fair values of the Company's debt as of the dates presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
(in thousands) | | Carrying amount | | Fair value(1) | | Carrying amount | | Fair value(1) |
January 2025 Notes | | $ | 577,913 | | | $ | 572,995 | | | $ | 577,913 | | | $ | 589,471 | |
January 2028 Notes | | 354,794 | | | 351,246 | | | 361,044 | | | 378,578 | |
July 2029 Notes | | 374,224 | | | 340,424 | | | 400,000 | | | 390,000 | |
Senior Secured Credit Facility | | — | | | — | | | 105,000 | | | 105,040 | |
Total | | $ | 1,306,931 | | | $ | 1,264,665 | | | $ | 1,443,957 | | | $ | 1,463,089 | |
______________________________________________________________________________
(1)The fair values of the outstanding notes were determined using the Level 2 fair value hierarchy quoted market prices for each respective instrument as of June 30, 2022 and December 31, 2021. The fair value of the outstanding debt under the Senior Secured Credit Facility was estimated utilizing the Level 2 fair value hierarchy pricing model for similar instruments as of December 31, 2021.
Note 10—Net income (loss) per common share
Basic and diluted net income (loss) per common share are computed by dividing net income (loss) by the weighted-average common shares outstanding for the period. Diluted net income (loss) per common share reflects the potential dilution of non-vested restricted stock awards, outstanding stock option awards and non-vested performance share awards. See Note 9 in the 2021 Annual Report for additional discussion of these awards. For the three and six months ended June 30, 2021, all of these awards were anti-dilutive due to the Company's net loss and, therefore, were excluded from the calculation of diluted net loss per common share.
The following table reflects the calculations of basic and diluted (i) weighted-average common shares outstanding and (ii) net income (loss) per common share for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in thousands, except for per share data) | | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) (numerator) | | $ | 262,546 | | | $ | (132,661) | | | $ | 175,765 | | | $ | (208,100) | |
Weighted-average common shares outstanding (denominator): | | | | | | | | |
Basic | | 16,834 | | | 12,674 | | | 16,800 | | | 12,298 | |
Dilutive non-vested restricted stock awards | | 205 | | | — | | | 216 | | | — | |
| | | | | | | | |
Dilutive non-vested performance share awards(1) | | — | | | — | | | 24 | | | — | |
| | | | | | | | |
Diluted | | 17,039 | | | 12,674 | | | 17,040 | | | 12,298 | |
Net income (loss) per common share: | | | | | | | | |
Basic | | $ | 15.60 | | | $ | (10.47) | | | $ | 10.46 | | | $ | (16.92) | |
Diluted | | $ | 15.41 | | | $ | (10.47) | | | $ | 10.31 | | | $ | (16.92) | |
_____________________________________________________________________________
(1)The dilutive effect of the non-vested performance shares for the three and six months ended June 30, 2022 was calculated assuming the performance period ended on June 30, 2022.
Note 11—Commitments and contingencies
From time to time, the Company is subject to various legal proceedings arising in the ordinary course of business, including those that arise from interpretation of federal, state and local laws and regulations affecting the oil and natural gas industry, personal injury claims, title disputes, royalty disputes, contract claims, contamination claims relating to oil and natural gas exploration and development and environmental claims, including claims involving assets previously sold to third parties and no longer part of the Company's current operations. The Company may not have insurance coverage for some of these proceedings and failure to comply with applicable laws and regulations can result in substantial penalties. While many of
Condensed notes to the consolidated financial statements
(Unaudited)
these matters involve inherent uncertainty, as of the date hereof, the Company believes that any such legal proceedings, if ultimately decided adversely, will not have a material adverse effect on the Company's business, financial position, results of operations or liquidity. See Note 15 in the 2021 Annual Report for further discussion of litigation and environmental and federal, state and local regulations.
Drilling rig contracts
The Company enters into drilling rig contracts to ensure availability of desired rigs to facilitate drilling plans. The Company has multiple operating leases for terms of multiple months, all of which contain early termination clauses that require the Company to potentially pay penalties to the third party should the Company cease drilling efforts. These penalties would negatively impact the Company's financial statements upon early contract termination. There were no penalties incurred for early contract termination for either of the six months ended June 30, 2022 or 2021. As these drilling rig contracts are operating leases with an initial term greater than 12 months, the present value of the future commitment as of June 30, 2022 is included in current and noncurrent "Other liabilities" on the unaudited consolidated balance sheet as of June 30, 2022. See Note 5 in the 2021 Annual Report for additional discussion of the Company's leases.
Firm sale and transportation commitments
The Company has committed to deliver, for sale or transportation, fixed volumes of product under certain contractual arrangements that specify the delivery of a fixed and determinable quantity. If not fulfilled, the Company is subject to firm transportation payments on excess pipeline capacity and other contractual penalties. These commitments are normal and customary for the Company's business. In certain instances, the Company has used spot market purchases to meet its commitments in certain locations or due to favorable pricing. A portion of the Company's commitments are related to transportation commitments with a certain pipeline pertaining to the gathering of the Company's production from established acreage that extends into 2024. The Company was unable to satisfy a portion of this particular commitment with produced or purchased oil, therefore, the Company expensed firm transportation payments on excess capacity of $3.5 million and $1.1 million during the six months ended June 30, 2022 and 2021, respectively, which are recorded in "Transportation and marketing expenses" on the unaudited consolidated statement of operations. The Company's estimated aggregate liability of firm transportation payments on excess capacity is $5.6 million as of June 30, 2022, and is included in "Accounts payable and accrued liabilities" on the unaudited consolidated balance sheet. As of June 30, 2022, future firm sale and transportation commitments of $189.6 million are expected to be satisfied and, as such, are not recorded as a liability on the unaudited consolidated balance sheet.
Sand purchase commitment
During the year ended December 31, 2021, the Company renegotiated an agreement to take delivery of processed sand at a fixed price for one year, which is utilized in the Company's completions activities, from its sand mine that is operated by a third-party contractor. As of June 30, 2022, under the terms of this agreement, the Company is required to purchase a certain volume remaining under its commitment or it will incur a shortfall payment of $2.2 million at the end of the contract period.
Condensed notes to the consolidated financial statements
(Unaudited)
Note 12—Supplemental cash flow and non-cash information
The following table presents supplemental cash flow and non-cash information for the periods presented:
| | | | | | | | | | | | | | |
| | Six months ended June 30, |
(in thousands) | | 2022 | | 2021 |
Supplemental cash flow information: | | | | |
Cash paid for interest, net of $2,606 and $890 of capitalized interest, respectively | | $ | 67,995 | | | $ | 49,966 | |
Restricted cash | | $ | — | | | $ | 71,441 | |
| | | | |
Supplemental non-cash investing information: | | | | |
| | | | |
Change in accrued capital expenditures | | $ | 14,173 | | | $ | 4,366 | |
| | | | |
Capitalized share-settled equity-based compensation | | $ | 914 | | | $ | 712 | |
Capitalized asset retirement cost | | $ | 217 | | | $ | 730 | |
| | | | |
| | | | |
| | | | |
| | | | |
The following table presents supplemental non-cash adjustments information related to operating leases for the periods presented:
| | | | | | | | | | | | | | |
| | Six months ended June 30, |
(in thousands) | | 2022 | | 2021 |
Right-of-use assets obtained in exchange for operating lease liabilities(1) | | $ | 33,985 | | | $ | 7,532 | |
| | | | |
| | | | |
| | | | |
| | | | |
_____________________________________________________________________________(1)See Note 5 in the 2021 Annual Report for additional discussion of the Company's leases.
Note 13—Asset retirement obligations
See Note 2 in the 2021 Annual Report for discussion of the Company's significant accounting policies for asset retirement obligations. The following table reconciles the Company's asset retirement obligation liability associated with tangible long-lived assets for the periods presented:
| | | | | | | | | | | | | | |
| | Six months ended June 30, |
(in thousands) | | 2022 | | 2021 |
Liability at beginning of period | | $ | 72,003 | | | $ | 68,326 | |
Liabilities added due to acquisitions, drilling, midstream service asset construction and other | | 217 | | | 730 | |
Accretion expense(1) | | 1,992 | | | 2,301 | |
Liabilities settled due to plugging and abandonment or removed due to sale | | (986) | | | (151) | |
| | | | |
| | | | |
Liability at end of period | | $ | 73,226 | | | $ | 71,206 | |
_____________________________________________________________________________(1)Accretion expense is included in "Other operating income (expense), net" on the unaudited consolidated statements of operations.
Note 14—Income taxes
The Company is subject to federal and state income taxes and the Texas franchise tax. As of June 30, 2022, the Company had federal net operating loss ("NOL") carryforwards totaling $1.9 billion, $1.5 billion of which will begin to expire in 2028 and $376.2 million of which will not expire but may be limited in future periods, and state of Oklahoma net operating loss carryforwards totaling $34.4 million that will begin to expire in 2032. If the Company were to experience an "ownership change" as determined under Section 382 of the Internal Revenue Code, the Company's ability to offset taxable income arising after the ownership change with net operating losses arising prior to the ownership change would be limited. For the three and six months ended June 30, 2022, the Company recorded current tax expense of $4.5 million and $5.7 million for Texas franchise taxes, respectively.
As of June 30, 2022, the Company believes it is more likely than not that a portion of the net operating loss carryforwards are not fully realizable. The Company continues to consider new evidence, both positive and negative, in determining whether,
Condensed notes to the consolidated financial statements
(Unaudited)
based on the weight of that evidence, a valuation allowance is needed. Such consideration includes projected future cash flows from its oil, NGL and natural gas reserves (including the timing of those cash flows), the reversal of deferred tax liabilities recorded as of June 30, 2022 and the Company's ability to capitalize intangible drilling costs, rather than expensing these costs and future projections of taxable income. As of June 30, 2022, a total valuation allowance of $398.2 million has been recorded to offset the Company's federal and Oklahoma net deferred tax assets, resulting in a $1.3 million Texas net deferred liability, which is included in "Other noncurrent liabilities" on the unaudited consolidated balance sheets.
Since September 30, 2015, the Company has recorded a full valuation allowance against its federal and Oklahoma net deferred tax position. As such, the Company's effective tax rate is 2%, due to the Texas franchise tax. The Company's effective tax rate is affected by changes in valuation allowances, recurring permanent differences and discrete items that may occur in any given year, but are not consistent from year to year.
Note 15—Related parties
Halliburton
The Chairman of the Company's board of directors is on the board of directors of Halliburton Company ("Halliburton"). Halliburton provides drilling and completions services to the Company.
The following table presents the capital expenditures for oil and natural gas properties paid to Halliburton included in the unaudited consolidated statements of cash flows for the periods presented: | | | | | | | | | | | | | | |
| | Six months ended June 30, |
(in thousands) | | 2022 | | 2021 |
| | | | |
Capital expenditures for oil and natural gas properties | | $ | 56,620 | | | $ | 25,657 | |
Note 16—Organizational restructurings
On June 29, 2021 (the "Effective Date"), the Company committed to a company-wide reorganization effort (the “Reorganization Plan”) that included a workforce reduction of 14 individuals, or approximately 5% of the workforce. The reduction in workforce was communicated to employees on the Effective Date and implemented immediately, subject to certain administrative procedures. The Company put the Reorganization Plan in place in order to better position the Company for the future. In connection with the Reorganization Plan, the Company incurred an aggregate of $9.8 million of one-time charges during the three months ended June 30, 2021 comprising of compensation, tax, professional, outplacement and insurance related expenses. All equity-based compensation awards held by the affected employees were forfeited and the corresponding equity-based compensation totaling $1.1 million was reversed during the three months ended June 30, 2021.
Note 17—Subsequent events
Senior unsecured notes repurchases
Subsequent to June 30, 2022, the Company repurchased $11.0 million, $22.5 million and $25.9 million in aggregate principal amount of the January 2025 Notes, January 2028 Notes and July 2029 Notes, respectively, through August 2, 2022. See Note 5 for additional discussion of the Company's senior unsecured notes repurchases.
Share repurchase program
Subsequent to June 30, 2022, the Company repurchased 99,012 shares of its common stock on the open market at a weighted-average price of $71.38 per common share for a total of $7.0 million under the share repurchase program through August 2, 2022. See Note 6 for additional discussion of the Company's share repurchases under this program.