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Item 2. Management’s Discussion and Analysis

2022-05-09 compared with 2021-11-08 · 130 added, 292 removed, 107 unchanged (80% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding our results of operations for the three and nine months ended September 30, 2021 and 2020 and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and with the consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

The following discussion is intended to assist in understanding our results of operations for the three months ended March 31, 2022 and 2021 and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and with the consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Statements in this discussion may be forward-looking.

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As a result, our properties and drilling activities are currently focused in the Delaware Basin, where we have an extensive drilling inventory that we believe offers attractive long-term economics.

Our total operating revenues for the first nine months of 2021 and 2020 were $200.7 million and $105.7 million, respectively.

Our total operating revenues for the first three months of 2022 and 2021 were $81.6 million and $55.5 million, respectively.

The increase in revenues is primarily attributable to an approximate $18.42 per Boe increase in average realized prices (excluding the effects of hedging arrangements).

During the first nine months of 2021, production averaged 15,890 Boe/d compared to average production of 16,712 Boe/d during the first nine months of 2020.

Average daily oil and natural gas production was impacted by the temporary shut-in of production amounting to approximately 400 Boe/d and 1,800 Boe/d in the first nine months of 2021 and 2020, respectively.

During the first three months of 2022, production averaged 14,767 Boe/d compared to average production of 14,333 Boe/d during the first three months of 2021.

In February 2021, we temporarily shut-in production due to inclement weather.

In May and June 2020, we temporarily shut-in production in response to historically low commodity prices.

Current year production was also impacted by third-party processing curtailments and downtime resulting from facility upgrades and repairs.

For the nine months ended September 30, 2021, we drilled and cased 2.0 gross (2.0 net) operated wells, completed 6.0 gross (6.0 net) operated wells, and put online 6.0 gross (6.0 net) operated wells.

The estimated decrease in average daily oil and natural gas production associated with this temporary shut-in was approximately 1,300 Boe/d in the first three months of 2021.

Current year production was impacted by natural production declines on our existing producing wells.

We last brought new producing wells online in June 2021.

For the three months ended March 31, 2022, we drilled and cased 3.0 gross (3.0 net) operated wells, completed zero gross and net operated wells, and put online zero gross and net operated wells.

Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production.

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The ceiling test calculation dictates that we use the unweighted arithmetic average price of crude oil and natural gas as of the first day of each month for the 12-month period ending at the balance sheet date.

Using the crude oil price for October 2021 of $75.95 per barrel, and holding it constant for two months to create a trailing 12-month period of average prices that is more reflective of recent price trends, our ceiling test calculation would not have generated an impairment, holding all other inputs and factors constant.

Using the crude oil price for April 2022 of $99.33 per barrel, and holding it constant for two months to create a trailing 12-month period of average prices that is more reflective of recent price trends, our ceiling test calculation would not have generated an impairment, holding all other inputs and factors constant.

In addition to commodity prices, our production rates, levels of proved reserves, future development costs, transfers of unevaluated properties to our full cost pool, capital spending and other factors will determine our actual ceiling test calculation and impairment analyses in future periods.

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As a consequence, beginning in March 2020, we realized lower revenue as a result of commodity price declines, resulting in us temporarily shutting in producing wells in May and June 2020, which further contributed to lower revenues that year.

Additionally, we incurred ceiling test impairments, which were primarily driven by a decline in the average pricing required to be used in the valuation of our reserves for ceiling test purposes.

Additionally in 2020, we incurred ceiling test impairments, which were primarily driven by a decline in the average pricing required to be used in the valuation of our reserves for ceiling test purposes.

During 2021, widespread availability of COVID-19 vaccines in the United States and elsewhere combined with accommodative governmental monetary and fiscal policies and other factors, led to a rebound in demand for oil and natural gas and increases in oil and natural gas prices.

Further, at present, OPEC and Russia have been coordinating production increases to maintain supply and demand balance, stabilize prices and avoid market disruptions.

However, there remains the potential for such cooperation to fail and for demand for oil and natural gas to be adversely impacted by the economic effects of the ongoing COVID-19 pandemic, including as a consequence of the circulation of more infectious “variants” of the disease, vaccine hesitancy, waning vaccine effectiveness or other factors.

As a consequence, we are unable to predict whether oil and natural gas prices will remain at current levels or will be adversely impacted by the same sorts of factors that negatively impacted prices during 2020.

Furthermore, the health of our employees, contractors and vendors, and our ability to meet staffing needs in our operations and critical functions remain concerns and cannot be predicted, nor can the impact on our customers, vendors and contractors.

Any material effect on these parties could adversely impact us.

These and other factors could affect our operations, earnings and cash flows and could cause our results to not be comparable to those of the same period in previous years.

Further, in 2022, the effects of Russian sanctions amidst the conflict with Ukraine have pushed oil and gas prices higher.

However, there remains the potential for demand for oil and natural gas to be adversely impacted by the economic effects of rising interest rates and tightening monetary policies, as well as the ongoing COVID-19 pandemic, including as a consequence of the circulation of more infectious “variants” of the disease, vaccine hesitancy, waning vaccine effectiveness or other factors.

As a consequence, the Company is unable to predict whether oil and natural gas prices will remain at current levels or will be adversely impacted by these or other factors.

The results presented in this Form 10-Q are not necessarily indicative of future operating results.

For further information regarding the actual and potential impacts of COVID-19 on us, see “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.

Paycheck Protection Program Loan

Effective August 13, 2021, the principal amount of our promissory note (the PPP Loan) under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was reduced from $2.2 million to $0.2 million by the U.S.

Small Business Administration (SBA).

We applied for forgiveness of the amount due on the PPP Loan based on the use of the loan proceeds on eligible expenses in accordance with the terms of the CARES Act.

We recorded a gain on the extinguishment of the forgiven portion of the PPP Loan and related accrued interest of debt of $2.1 million.

The gain is presented in “Gain (loss) on extinguishment of debt” in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2021.

Employee Retention Credit

The CARES Act included, among other things, provisions relating to refundable payroll tax credits (the Employee Retention Credit or ERC).

As provided for in the CARES Act and subsequent legislation which modified and extended the provisions included therein, the ERC allows for a refundable tax credit against certain employment taxes equal to 50% of the first $10,000 in qualified wages paid to each employee after March 12, 2020 and through December 31, 2020 and 70% of the first $10,000 in qualified wages paid to each employee, per calendar quarter, after December 31, 2020 through September 30, 2021.

During the three months ended September 30, 2021, we determined that the qualifications for the Employee Retention Credit were met and filed the corresponding applications for the applicable 2020 and 2021

We recognized an approximate $0.7 million Employee Retention Credit during the three and nine months ended September 30, 2021, with approximately $0.5 million recorded to “General and administrative” and approximately $0.2 million recorded to “Lease operating” in the unaudited condensed consolidated statements of operations.

Senior Revolving Credit Facility

On September 24, 2021, we entered into the Fifth Amendment to Senior Secured Revolving Credit Agreement (the Fifth Amendment) which, among other things, modifies the limits on swap agreements so as not to exceed, (i) from the period of the Fifth Amendment effective date through December 31, 2021, the percentage of the reasonably anticipated hydrocarbon production from proved developed producing reserves during such period hedged pursuant to secured swap agreements in place as of the Fifth Amendment effective date;

(ii) for the fiscal year ending December 31, 2022, the greater of (a) the proved developed producing reserves during such fiscal year hedged pursuant to secured swap agreements in place as of the Fifth Amendment effective date and (b) 85% of the proved developed producing reserves during such fiscal year;

and (iii) for the fiscal years ending December 31, 2023, December 31, 2024 and December 31, 2025, swap agreements not to exceed 85%, 70% and 60% of the proved developed producing reserves, respectively, during each fiscal year.

On May 10, 2021, we entered into the Fourth Amendment to Senior Secured Revolving Credit Agreement (the Fourth Amendment) which reduced the borrowing base to $185.0 million effective June 1, 2021 and further reduced the borrowing base to $175.0 million effective September 1, 2021.

The Fourth Amendment also, among other things, (i) increased interest margins to 2.00% to 3.00% for ABR-based loans and 3.00% to 4.00% for Eurodollar-based loans, (ii) amended the covenant relating to the minimum mortgaged total value of proved borrowing base properties to increase the value from 90% to 95%, (iii) provides for direct reductions in the borrowing base in the event of asset dispositions in excess of $1.0 million per fiscal year or swap terminations and (iv) revised certain covenants and covenant-related baskets including, but not limited to, adding covenants prohibiting the designation of unrestricted subsidiaries and requiring prior consent from the lenders regarding asset dispositions or swap terminations in excess of the greater of $7.5 million or 3.5% of the then effective borrowing base.

For further information regarding the actual and potential impacts of COVID-19 on the Company, see “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Capital Resources and Liquidity

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic.

In 2020, the COVID - 19 outbreak and associated government restrictions significantly impacted economic activity and markets and dramatically reduced demand for oil and natural gas at the same time that supply was maintained at high levels due to a price and market share war involving the OPEC/Saudi Arabia and Russia, all of which adversely impacted the prices we received for our production.

In 2020, the COVID - 19 outbreak and associated government restrictions significantly impacted economic activity and markets and reduced demand for oil and natural gas at the same time that supply was maintained at high levels due to a price and market share war involving the OPEC/Saudi Arabia and Russia, all of which adversely impacted the prices we received for our production.

As a consequence, beginning in March 2020, we realized lower revenue as a result of these commodity price declines, resulting in us temporarily shutting in producing wells in May and June 2020, which further contributed to lower revenues that year.

Additionally, we incurred ceiling test impairments, which were primarily driven by a decline in the average pricing required to be used in the valuation of our reserves for ceiling test purposes.

During 2021, widespread availability of COVID-19 vaccines in the United States and elsewhere combined with accommodative governmental monetary and fiscal policies and other factors, led to a rebound in demand of oil and natural gas and increases in oil and natural gas prices.

Further, at present, OPEC and Russia have been coordinating production increases to maintain supply and demand balance, stabilize prices and avoid market disruptions.

As a consequence, the Company is unable to predict whether oil and natural gas prices will remain at current levels or will be adversely impacted by the same sorts of factors that negatively impacted prices during 2020.

Further, in 2022, the effects of Russian sanctions amidst the conflict with Ukraine have pushed oil and gas prices higher.

As a consequence, we are unable to predict whether oil and natural gas prices will remain at current levels or will be adversely impacted by these or other factors.

Actual or anticipated declines in domestic or foreign economic activity or growth rates, regional or worldwide increases in tariffs or other trade restrictions, turmoil affecting the U.S.

or global financial system and markets and an economic contraction either regionally or worldwide, resulting from current efforts to contain the COVID-19 coronavirus or other factors, could materially affect our business and financial condition and impact our ability to finance operations by worsening the actual or anticipated future drop in worldwide oil demand, negatively impacting the price received for oil and natural gas production, adversely impacting our ability to comply with covenants in our Senior Credit Agreement or causing our

lenders to further reduce the borrowing base under our Senior Credit Agreement.

or global financial system and markets and a severe economic contraction either regionally or worldwide, resulting from current efforts to contain the COVID-19

coronavirus or other factors, could materially affect our business and financial condition and impact our ability to finance operations by worsening the actual or anticipated future drop in worldwide oil demand, negatively impacting the price received for oil and natural gas production or adversely impacting our ability to comply with covenants in our Term Loan Agreement.

Negative economic conditions could also adversely affect the collectability of our trade receivables or performance by our vendors and suppliers or cause our commodity hedging arrangements to be ineffective if our counterparties are unable to perform their obligations.

All of the foregoing may adversely affect our business, financial condition, results of operations, cash flows and, potentially, compliance with the covenants contained in, and borrowing capacity under, our Senior Credit Agreement.

We expect to spend approximately $45.0 million to $55.0 million on drilling, completion, support infrastructure and other capital costs during 2021.

These near-term capital spending requirements are expected to be funded with cash and cash equivalents on hand, cash flows from operations and, if needed, borrowings under our Senior Credit Agreement, which has a current borrowing base of $175.0 million.

Amounts borrowed under our Senior Credit Agreement will mature on October 8, 2024.

At September 30, 2021, we had $155.0 million of indebtedness outstanding and approximately $2.0 million letters of credit outstanding under our Senior Credit Agreement, resulting in $18.0 million of borrowing capacity under the current $175.0 million borrowing base.

The lenders agreed to postpone the fall redetermination until December 2021.

If our borrowing base is further reduced upon a redetermination, our resulting liquidity could be insufficient to fund our business, operations and planned capital expenditures and the reduction could result in a borrowing base deficiency, which would require us to repay any amount outstanding in excess of the borrowing base.

As part of our ongoing efforts to manage our business and liquidity, we are in regular contact with our lenders regarding matters relating to the Senior Credit Agreement, and we closely monitor our compliance with the various covenants under our Senior Credit Agreement, which include certain financial covenants, such as maintenance of (i) a Total Net Indebtedness Leverage Ratio (as defined in the Senior Credit Agreement) of not greater than 3.50 to 1.00 and (ii) a Current Ratio (as defined in the Senior Credit Agreement) of not less than 1.00 to 1.00.

As of September 30, 2021, afte r giving effect to the Third Amendment to Senior Secured Revolving Credit Agreement and Limited Waiver (the Third Amendment) which provides a consent to a waiver of the Current Ratio (as defined in the Senior Credit Agreement) for the fiscal quarter ended September 30, 2020 and suspended testing of the Current Ratio until the fiscal quarter ending December 31, 2021 , we were in compliance with the financial covenants under the Senior Credit Agreement.

All of the foregoing may adversely affect our business, financial condition, results of operations, cash flows and, potentially, compliance with the covenants contained in Term Loan Agreement.

We expect to spend approximately $130.0 million to $150.0 million in capital expenditures, including drilling, completion, support infrastructure and other capital costs, during 2022.

Additionally, from time to time, we enter into commitments that may require us to incur material expenditures in the future.

Included in our 2022 capital expenditures budget is $2.6 million associated with an active drilling rig commitment.

We have a minimum volume commitment with a third party for the purchase of chemicals to treat sour gas production through December 31, 2022.

The future payments associated with the minimum volume commitment are approximately $4.9 million.

Our capital spending requirements and commitments are expected to be funded with cash and cash equivalents on hand from the funding of our Term Loan Agreement and cash flows from operations.

Amounts borrowed under our Term Loan Agreement bear interest at LIBOR plus an applicable margin of 7.00% and will mature on November 24, 2025.

At March 31, 2022, we had $43.5 million of cash and cash equivalents, $200.0 million of indebtedness outstanding, approximately $1.6 million letters of credit outstanding and $35.0 million in delayed draw term loans available to be drawn under our Term Loan Agreement, subject to the satisfaction of certain conditions defined in the agreement.

On April 29, 2022, we borrowed the $20.0 million available under the first delayed draw of the Term Loan Agreement.

We are required to make scheduled amortization payments in the aggregate amount of $120.0 million from the fiscal quarter ending March 31, 2023 through the fiscal quarter ending September 30, 2025.

In addition, we may be required to make mandatory prepayments of the loans under the Term Loan Agreement in connection with the incurrence of non-permitted debt, certain asset sales, and with cash on hand in excess of certain maximum levels.

For each fiscal quarter after January 1, 2023, we are required to make mandatory prepayments when our Consolidated Cash Balance, as defined in the Term Loan Agreement, exceeds $20.0 million.

Until December 31, 2024, the forecasted APOD capital expenditures for the succeeding fiscal quarter are excluded for purposes of determining the Consolidated Cash Balance.

The Term Loan Agreement contains certain financial covenants, including maintenance of (i) an Asset Coverage Ratio (as defined in the Term Loan Agreement) of not less than (A) 1.50 to 1.00 as of December 31, 2021 and March 31, 2022, (B) 1.60 to 1.00 as of June 30, 2022, (C) 1.70 to 1.00 as of September 30, 2022, and (D) 1.80 to 1.00 as of December 31, 2022 and each fiscal quarter thereafter, (ii) a Total Net Leverage Ratio (as defined in the Term Loan Agreement) of not greater than (A) 3.25 to 1.00 as of December 31, 2021 through and including June 30, 2022, (B) 3.00 to 1.00 as of September 30, 2022 and December 31, 2022, (C) 2.75 to 1.00 as of March 31, 2023, and (D) 2.50 to 1.00 as of each fiscal quarter thereafter, and (iii) a Current Ratio (as defined in the Term Loan Agreement) of not less than 1.00:1.00, each determined as of the last day of any fiscal quarter period.

Changes in the level and timing of our production, drilling and completion costs, the cost and availability of transportation for our production and other factors varying from our expectations can affect our ability to comply with the covenants under our Term Loan Agreement.

As a consequence, we endeavor to anticipate potential covenant compliance issues and work with our lenders under our Term Loan Agreement to address any such issues ahead of time.

We have periodically, including as recently as October 2020, obtained waivers or amendments to the financial covenants under our revolving credit agreements in circumstances where we anticipated that it might be challenging for us to comply with them for a particular period of time.

As a consequence, we endeavor to anticipate potential covenant compliance issues and work with the lenders under our Senior Credit Agreement to address any such issues ahead of time.

For instance, depressed oil and natural gas prices during 2020 and our decision to temporarily shut-in a portion of our production in response to market conditions adversely impacted our cash flows, which, combined with cash requirements associated with capital-intensive oil and gas development projects undertaken in late 2019 and early 2020, led to challenges in our compliance with the Current Ratio under the Senior Credit Agreement for the fiscal quarter ended June 30, 2020.

Thus, o n July 31, 2020, we secured a waiver in which the lenders consented to waive maintenance of the Current Ratio (as defined in the Senior Credit Agreement) of not less than 1.00 to 1.00 for the fiscal quarter ended June 30, 2020.

In conjunction with the fall 2020 borrowing base redetermination process, and due to a decline in the value associated with our derivative contracts, we pursued additional relief from our lenders in regards to the Current Ratio.

On October 29, 2020, in the Third Amendment, the lenders waived maintenance with the Current Ratio for the fiscal quarter ending September 30, 2020 and suspended testing of the Current Ratio until the fiscal quarter ending December 31, 2021.

Similarly, in prior years, we have also obtained waivers and amendments for other financial covenant violations.

For instance, our strategic decision to transform into a pure-play, single basin company focused on the Delaware Basin in West Texas resulted in us divesting our producing properties located in other areas and acquiring primarily undeveloped acreage in the Delaware Basin.

Our drilling activities once we acquired these assets required significant capital expenditure outlays to replenish production and related EBITDA from the divested producing properties.

These and other factors adversely impacted our ability to comply with our debt covenants under the predecessor credit agreement by reducing our production, reserves and EBITDA on a current and a pro forma historical basis, while making us more

susceptible to fluctuations in performance and compliance more challenging.

In addition, we encountered certain operational difficulties that impacted our ability to comply at the time, including elevated levels of hydrogen sulfide in the natural gas produced from our Monument Draw wells and limited and expensive treatment and transportation options.

Severance payments to executives in 2019 also impacted our ability to comply with our financial covenants.

In short, historically, our lenders have provided us with the covenant relief we have sought to the extent it was necessary to manage through near-term business and operational challenges as we pursued our longer-term business objectives;

however, there is no assurance that they will be amenable to providing any such relief in the future, should it become necessary.

Further, there is some evidence that credit is becoming more challenging for oil and gas companies generally, and for us in particular, to secure.

As noted previously, late last year, Bank of Montreal, the primary lender under our Senior Credit Agreement, announced that it was exiting its U.S.

energy investment banking business, a service line that is generally complementary to commercial banking service offerings.

Bank of Montreal’s election to exit that line of business may be an indication of sentiment overall with regards to the business and investment banking environment affecting the U.S.

oil and gas industry in the near term.

More specifically as it regards us in our spring redetermination, the lenders under our Senior Credit Agreement reduced our borrowing base to $185.0 million effective on June 1, 2021 and $175.0 million effective on September 1, 2021, and we agreed to some other modifications of the terms and covenants contained in our Senior Credit Agreement at the request of our lenders in the Fourth Amendment, as discussed in greater detail above.

While we anticipate that we will be able to operate our business and maintain adequate liquidity within the limitations imposed by our Senior Credit Agreement, as amended, the loss of additional liquidity may prevent us from accelerating our drilling plans in an effort to manage our liquidity more closely.

Additionally, reduced access to bank borrowings limits our flexibility in responding to unforeseen adverse events as well as our ability to pursue opportunities that might prove beneficial in the future.

As noted elsewhere herein and our other filings with the Securities and Exchange Commission, many factors, including many that are beyond our control, affect our business and operations and may adversely impact our cash flows, liquidity and our ability to comply with the covenants under our Senior Credit Agreement.

Consequently, there is no assurance that our expectations with regard to our capital needs or compliance with the covenants in the Senior Credit Agreement will prove accurate.

In the event we are unable to maintain compliance, the lenders under our Senior Credit Agreement may be unwilling to provide us with the covenant relief we need.

In the event we are not successful in obtaining covenant modifications, if needed, there is no assurance that we will be successful in securing alternative means of financing our business upon favorable terms or at all.

We are exploring financing options intended to provide us additional flexibility to pursue our long-term business objectives;

however, there can be no assurance that alternative options will be available or if we are able to secure alternative financing, it may be more costly, provide less liquidity, or impose more restrictive covenants than our Senior Credit Agreement.

When commodity prices decline significantly, as they did in 2020, our ability to finance our capital budget and operations may be adversely impacted.

We employ derivative instruments to provide partial protection against declines in oil, natural gas and natural gas liquids prices, however, the total volumes we typically hedge are less than our expected production, vary from period to period based on our view of current and future market conditions and generally extend up to only approximately 30 months.

These limitations result in our liquidity being susceptible to commodity price declines in the near term and, in particular, if such prices decline for a sustained period of time.

Additionally, while intended to reduce the effects of volatile commodity prices, derivative transactions may limit our potential gains and increase our potential losses if commodity prices were to rise substantially over the price established under our hedges.

Our Senior Credit Agreement contains certain hedging requirements.

Pursuant to the Third Amendment, we are required to hedge at least 65% of anticipated production from proved developed producing reserves through December 31, 2022 and the Fifth Amendment, as discussed above, modified the limits on hedge agreements.

For instance, depressed oil and natural gas prices during 2020 and our decision to temporarily shut-in a portion of our production in response to market conditions adversely impacted our cash flows, which, combined with cash requirements associated with capital-intensive oil and gas development projects undertaken in late 2019 and early 2020, led to challenges in our compliance with the current ratio under our previous revolving credit agreement for the fiscal quarter ended June 30, 2020.

Thus, o n July 31, 2020, we secured a waiver in which the lenders consented to waive maintenance of the current ratio under the agreement for the fiscal quarter ended June 30, 2020.

In conjunction with the fall 2020 borrowing base redetermination process under the revolving credit facility, and due to a decline in the value associated with our derivative contracts, we pursued additional relief from our

lenders in regards to the current ratio.

On October 29, 2020, in an amendment to the agreement, the lenders waived maintenance with the current ratio for the fiscal quarter ending September 30, 2020 and suspended testing of the current ratio until the fiscal quarter ended December 31, 2021.

The revolving credit agreement was amended and restated by the Term Loan Agreement in November 2021.

While we have largely been successful in obtaining modifications of our covenants as needed, there can be no assurance that we will be successful in the future.

In the event we are not successful in obtaining covenant modifications, if needed, there is no assurance that we will be successful in implementing alternatives that allow us to maintain compliance with our covenants or that we will be successful in obtaining alternative financing that provides us with the liquidity that we need to operate our business.

Even if successful, alternative sources of financing could prove more expensive than borrowings under our Term Loan Agreement.

When commodity prices decline significantly our ability to finance our capital budget and operations may be adversely impacted.

While we use derivative instruments to provide partial protection against declines in oil and natural gas prices, the total volumes we hedge are less than our expected production, vary from period to period based on our view of current and future market conditions, remain consistent with the requirements in effect under our Term Loan Agreement and extend, on a rolling basis, for the next four years.

These limitations result in our liquidity being susceptible to commodity price declines.

Our hedge policies and objectives may change significantly as our operational profile changes and/or commodities prices change.

We do not enter into derivative contracts for speculative trading purposes.

Our future capital resources and liquidity depend on our success in developing our leasehold interests, growing our reserves and production and finding additional reserves.

Our future capital resources and liquidity depend, in part, on our success in developing our leasehold interests, growing our reserves and production and finding additional reserves.

Cash is required to fund capital expenditures necessary to offset inherent declines in our production and proven reserves, which is typical in the capital-intensive oil and natural gas industry.

borrowing capacity, facilitate drilling on our undeveloped acreage position and permit us to selectively expand our acreage.

Our ability to complete such transactions and maintain or increase our borrowing base is subject to a number of variables, including our level of oil and natural gas production, proved reserves and commodity prices, the amount and cost of our indebtedness, as well as various economic and market conditions that have historically affected the oil and natural gas industry.

We strive to maintain financial flexibility while pursuing our drilling plans and may access capital markets, pursue joint ventures, sell assets and engage in other transactions as necessary to, among other things, maintain sufficient liquidity, facilitate drilling on our undeveloped acreage position and permit us to selectively expand our acreage.

Our ability to complete such transactions and maintain or increase our liquidity is subject to a number of variables, including our level of oil and natural gas production, proved reserves and commodity prices, the amount and cost of our indebtedness, as well as various economic and market conditions that have historically affected the oil and natural gas industry.

Even if we are otherwise successful in growing our proved reserves and production, if oil and natural gas prices decline for a sustained period of time, our ability to fund our capital expenditures, complete acquisitions, reduce debt, meet our financial obligations and become profitable may be materially impacted.

During the nine months ended September 30, 2021, operating cash flows funded our capital expenditures program and net repayments of borrowings under our Senior Credit Agreement.

During the three months ended March 31, 2022, operating cash flows funded our capital expenditures program.

See “ Results of Operations ” for a review of the impact of prices and volumes on operating revenues.

Net increase (decrease) in cash and cash equivalents is summarized as follows (in thousands):

Nine Months Ended

September 30,

Three Months Ended

Cash flows provided by (used in) operating activities

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Cash flows provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Net increase (decrease) in cash, cash equivalents and restricted cash

Operating Activities.

Net cash flows provided by operating activities for the nine months ended September 30, 2021 and 2020 were $47.1 million and $47.9 million, respectively.

Operating cash flows for the nine months ended September 30, 2021 decreased from the nine months ended September 30, 2020 due to realized losses from derivative contracts incurred in the nine months ended September 30, 2021 as a result of increased commodity prices.

In addition, realized gains from derivative contracts were higher in the nine months ended September 30, 2020, as that period included the early termination of certain derivative contracts.

During the nine months ended September 30, 2020, we terminated certain derivative contracts in advance of their natural expiration dates and received net proceeds of approximately $22.9 million during the period.

The decrease to current period operating cash flows was partially offset by our average realized price increase of approximately $23.25 per Boe which contributed to higher oil and natural gas revenues in 2021.

Operating cash flows for the nine months ended September 30, 2020 increased from the nine months ended September 30, 2019 due to decreases in our operating expenses associated with our focus on efficiencies and cost savings and a decrease in interest expense associated with lower outstanding debt due to our chapter 11 bankruptcy.

In addition, realized gains from derivative contracts were higher in the nine months ended September 30, 2020, which included the early termination of certain derivative contracts.

These increases to operating cash flows in 2020 were partially offset by decreased oil and natural gas revenues as a result of lower realized commodity prices and lower production volumes.

Net cash flows provided by operating activities for the three months ended March 31, 2022 and 2021 were $12.0 million and $13.4 million, respectively.

Operating cash flows for the three months ended March 31, 2022 decreased from the three months ended March 31, 2021 due to realized losses from derivative contracts incurred in the three months ended March 31, 2022 as a result of increased commodity prices partially offset by higher total operating revenues due to an approximate $18.42 per Boe increase in average realized prices in the three months ended March 31, 2022.

Operating cash flows for the three months ended March 31, 2021 increased slightly between the first three months of 2021 and 2020.

Our average realized price increase of approximately $15.34 per Boe contributed to higher total operating revenues in 2021 which were partially offset by payments on derivative settlements in 2021.

Investing Activities.

Net cash flows used in investing activities for the nine months ended September 30, 2021 and 2020 were approximately $46.2 million and $92.5 million, respectively.

During the nine months ended September 30, 2021, we spent $47.2 million on oil and natural gas capital expenditures, of which $39.4 million related to drilling and completion costs and $5.7 million related to the development of our treating equipment and gathering support infrastructure.

We received $0.9 million in proceeds from the sale of oil and natural gas properties.

During the nine months ended September 30, 2020, we spent $96.5 million on oil and natural gas capital expenditures, of which $62.9 million related to drilling and completion costs and $32.1 million related to the development of our treating equipment and our gathering support infrastructure.

Net cash flows used in investing activities for the three months ended March 31, 2022 and 2021 were approximately $15.8 million and $12.7 million, respectively.

During the three months ended March 31, 2022, we spent $15.7 million on oil and natural gas capital expenditures, of which $12.9 million related to drilling and completion costs and $1.7 million related to the development of our treating equipment and gathering support infrastructure.

During the three months ended March 31, 2021, we spent $13.8 million on oil and natural gas capital expenditures, of which $10.8 million related to drilling and completion costs and $2.2 million related to the development of our treating equipment and gathering support infrastructure.

We received $1.1 million in proceeds from the sale of oil and natural gas properties.

In addition, we received $0.5 million in insurance proceeds associated with a casualty loss on our support infrastructure.

Financing Activities.

Net cash flows used in financing activities for the nine months ended September 30, 2021 were approximately $3.3 million.

Net cash flow provided by financing activities for the nine months ended September 30, 2020 were approximately $36.2 million.

During the nine months ended September 30, 2021, net repayments of borrowings of $3.0 million under our Senior Credit Agreement were funded with cash flows from operations.

During the nine months ended September 30, 2020, net borrowings of $34.0 million under our Senior Credit Agreement were used to fund our drilling and completions program and the development of our treating equipment and gathering support facilities.

We also borrowed $2.2 million under the PPP Loan to fund payroll costs, rent and utilities.

Senior Revolving Credit Facility

On October 8, 2019, we entered into the Senior Credit Agreement with Bank of Montreal, as administrative agent, and certain other financial institutions party thereto, as lenders.

The Senior Credit Agreement, as amended, provides for a $750.0 million senior secured reserve-based revolving credit facility with a current borrowing base of $175.0 million.

A portion of the Senior Credit Agreement, in the amount of $25.0 million, is available for the issuance of letters of credit.

The maturity date of the Senior Credit Agreement is October 8, 2024.

Redeterminations of the borrowing base occur semi-annually on May 1 and November 1, with the lenders and us each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations.

The lenders agreed to postpone the fall redetermination until December 2021.

The borrowing base takes into account the estimated value of our oil and natural gas properties, proved reserves, total indebtedness, and other relevant factors consistent with customary oil and natural gas lending criteria.

Amounts outstanding under the Senior Credit Agreement bear interest at specified margins over the base rate of 2.00% to 3.00% for ABR-based loans or at specified margins over LIBOR of 3.00% to 4.00% for Eurodollar-based loans, which margins may be increased one-time by not more than 50 basis points per annum if necessary in order to successfully syndicate the Senior Credit Agreement.

These margins fluctuate based on our utilization of the facility.

We may elect, at our option, to prepay any borrowings outstanding under the Senior Credit Agreement without premium or penalty, except with respect to any break funding payments that may be payable pursuant to the terms of the Senior Credit Agreement.

We may be required to make mandatory prepayments of the outstanding borrowings under the Senior Credit Agreement in connection with certain borrowing base deficiencies, including deficiencies which may arise in connection with a borrowing base redetermination, an asset disposition or swap terminations.

Amounts outstanding under the Senior Credit Agreement are guaranteed by our direct and indirect subsidiaries and secured by a security interest in substantially all of the assets of us and our subsidiaries.

The Senior Credit Agreement contains certain events of default, including non-payment;

breaches of representation and warranties;

non-compliance with covenants;

cross-defaults to material indebtedness;

voluntary or involuntary bankruptcy;

judgments and change in control.

The Senior Credit Agreement also contains certain financial covenants, including maintenance of (i) a Total Net Indebtedness Leverage Ratio (as defined in the Senior Credit Agreement) of not greater than 3.50 to 1.00 and (ii) a Current Ratio (as defined in the Senior Credit Agreement) of not less than 1.00 to 1.00.

On October 29, 2020, we entered into the Third Amendment.

The Third Amendment, among other things, set the borrowing base to $190.0 million as of November 1, 2020.

The Third Amendment also reduced the amount available for the issuance of letters of credit to $25.0 million and amended certain covenants including, but not limited to, covenants relating to increasing the minimum mortgaged total value of proved borrowing base properties from 85% to 90%.

Additionally, the Third Amendment provided for new covenants that, among other things, require us to enter into swap

agreements representing not less than 65% of our reasonably anticipated projected production from proved reserves classified as developed producing reserves for a period from the Third Amendment effective date through at least December 31, 2022 and prohibit no more than $3.0 million of our uncontested accounts payable or accrued expenses, liabilities or other obligations from remaining outstanding for longer than 90 days.

Pursuant to the Third Amendment, the administrative agent and the lenders consented to a waiver of the Current Ratio (as defined in the Senior Credit Agreement) for the fiscal quarter ended September 30, 2020 and suspended testing of the Current Ratio until the fiscal quarter ending December 31, 2021.

On May 10, 2021, we entered into the Fourth Amendment which reduced the borrowing base to $185.0 million effective June 1, 2021 and further reduced the borrowing base to $175.0 million effective September 1, 2021.

On September 24, 2021, we entered into the Fifth Amendment which, among other things, modifies the limits on swap agreements so as not to exceed, (i) from the period of the Fifth Amendment effective date through December 31, 2021, the percentage of the reasonably anticipated hydrocarbon production from proved developed producing reserves during such period hedged pursuant to secured swap agreements in place as of the Fifth Amendment effective date;

As of September 30, 2021, after giving effect to the Third Amendment which provides a consent to a waiver of the Current Ratio (as defined in the Senior Credit Agreement) for the fiscal quarter ended September 30, 2020 and suspended testing of the Current Ratio until the fiscal quarter ending December 31, 2021, we were in compliance with the financial covenants under the Senior Credit Agreement.

Net cash flows used in financing activities for the three months ended March 31, 2022 and 2021 were approximately $0.9 million and $3.3 million.

During the three months ended March 31, 2021, we used cash flows from operations to make net repayments of $3.0 million on our revolving credit agreement.

Term Loan Credit Facility

On November 24, 2021, we and our wholly owned subsidiary, Halcón Holdings, LLC (Borrower) entered into the Term Loan Agreement with Macquarie Bank Limited, as administrative agent, and certain other financial institutions party thereto, as lenders.

The Term Loan Agreement amends and restates in its entirety our previous revolving credit agreement.

Pursuant to the Term Loan Agreement, the lenders have agreed to loan us (i) $200.0 million, which funded on November 24, 2021 and was partially used to refinance all amounts owed under the Senior Credit Agreement;

(ii) up to $20.0 million, available to be drawn up to 18 months from November 24, 2021, subject to the satisfaction of certain conditions;

and (iii) up to $15.0 million, which amount will be available to be drawn from the date certain wells included in the approved plan of development (APOD) are deemed producing APOD wells until up to 18 months after November 24, 2021, subject to the satisfaction of certain conditions.

On April 29, 2022, we borrowed the $20.0 million available under the first delayed draw of the Term Loan Agreement.

An additional $5.0 million is available for the issuance of letters of credit.

The maturity date of the Term Loan Agreement is November 24, 2025.

Until such maturity date, borrowings under the Term Loan Agreement shall bear interest at a rate per annum equal to LIBOR (or another applicable reference rate, as determined pursuant to the provisions of the Term Loan Agreement) plus an applicable margin of 7.00%.

We may be required to make mandatory prepayments of the loans under the Term Loan Agreement in connection with the incurrence of non-permitted debt, certain asset sales, and with cash on hand in excess of certain maximum levels.

For each fiscal quarter after January 1, 2023, we are required to make mandatory prepayments when our Consolidated Cash Balance, as defined in the Term Loan Agreement, exceeds $20.0 million.

Until December 31, 2024, the forecasted APOD capital expenditures for the succeeding fiscal quarter are excluded for purposes of determining the Consolidated Cash Balance.

We are required to make scheduled amortization payments in the aggregate amount of $120.0 million from the fiscal quarter ending March 31, 2023 through the fiscal quarter ending September 30, 2025.

Amounts outstanding under the Term Loan Agreement are guaranteed by certain of the Borrower’s direct and indirect subsidiaries and secured by a security interest in substantially all of the assets of the Borrower and such direct and

indirect subsidiaries, and all of the equity interests of the Borrower held by us.

As part of the Term Loan Agreement there are certain restrictions on the transfer of assets, including cash, to Battalion from the guarantor subsidiaries.

The Term Loan Agreement also contains certain financial covenants, including the maintenance of (i) an Asset Coverage Ratio (as defined in the Term Loan Agreement) of not less than (A) 1.50 to 1.00 as of December 31, 2021 and March 31, 2022, (B) 1.60 to 1.00 as of June 30, 2022, (C) 1.70 to 1.00 as of September 30, 2022, and (D) 1.80 to 1.00 as of December 31, 2022 and each fiscal quarter thereafter, (ii) a Total Net Leverage Ratio (as defined in the Term Loan Agreement) of not greater than (A) 3.25 to 1.00 as of December 31, 2021 through and including June 30, 2022, (B) 3.00 to 1.00 as of September 30, 2022 and December 31, 2022, (C) 2.75 to 1.00 as of March 31, 2023, and (D) 2.50 to 1.00 as of each fiscal quarter thereafter, and (iii) a Current Ratio (as defined in the Term Loan Agreement) of not less than 1.00 to 1.00, each determined as of the last day of any fiscal quarter period.

As of March 31, 2022, we were in compliance with the financial covenants under the Term Loan Agreement.

The Term Loan Agreement also contains an APOD for our Monument Draw acreage through the drilling and completion of certain wells.

The Term Loan Agreement contains a proved developed producing production test and an APOD economic test which we must maintain compliance with otherwise, subject to any available remedies or waivers, we are required to immediately cease making expenditures in respect of the approved plan of development other than any expenditures deemed necessary by us in respect of no more than six additional approved plan of development wells.

The Term Loan Agreement also contains certain events of default, including non-payment;

breaches of representations and warranties;

non-compliance with covenants or other agreements;

cross-default to material indebtedness;

change of control;

and voluntary and involuntary bankruptcy.

Notes to the Unaudited Condensed Consolidated Financial Statements– Note 5, “Debt” for additional information on the Term Loan Agreement.

Paycheck Protection Program Loan

On April 16, 2020, we entered into the PPP Loan for a principal amount of approximately $2.2 million from Bank of Montreal under the Paycheck Protection Program of the CARES Act, which is administered by the SBA.

On April 16, 2020, we entered into a promissory note (the PPP Loan) for a principal amount of approximately $2.2 million from Bank of Montreal under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which is administered by the U.S.

Small Business Administration (the SBA).

Pursuant to the terms of the CARES Act, the proceeds of the PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs.

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Effective August 13, 2021, the principal amount of our PPP Loan was reduced to $0.2 million by the SBA and we recorded a gain on the extinguishment of the forgiven portion of the PPP Loan and related accrued interest of $2.1 million.

The gain is presented in “Gain (loss) on extinguishment of debt” in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2021.

The PPP Loan contains certain events of default including non-payment, breach of representations and warranties, cross-defaults to other loans with the lender or to material indebtedness, voluntary or involuntary bankruptcy, judgments and change in control.

The gain is presented in “Gain (loss) on extinguishment of debt” in the unaudited condensed consolidated statements of operations for the year ended December 31, 2021.

As of March 31, 2022, the $0.2 million principal amount of the PPP Loan was repaid in full.

Critical Accounting Policies and Estimates

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Results of Operations

Three Months Ended September 30, 2021 and 2020

We reported net income of $13.1 million and a net loss of $153.1 million for the three months ended September 30, 2021 and 2020, respectively.

Three Months Ended March 31, 2022 and 2021

We reported a net loss of $92.7 million and $33.4 million for the three months ended March 31, 2022 and 2021, respectively.

The table included below sets forth financial information for the periods presented.

Three Months Ended

September 30,

In thousands (except per unit and per Boe amounts)

14 unchanged sentences

Accretion expense

Full cost ceiling impairment

Other income (expenses):

1 unchanged sentence

Interest expense and other

Gain (loss) on extinguishment of debt

Natural Gas - MMcf

15 unchanged sentences

Stock-based compensation

(1) Natural gas reserves are converted to oil reserves using a ratio of six Mcf to one Bbl of oil.

This ratio is based on energy equivalency, not price equivalency.

The price for a barrel of oil equivalent for natural gas is substantially lower than the price for a barrel of oil.

(1) Determined using a ratio of six Mcf of natural gas to one barrel of oil, condensate, or NGLs based on approximate energy equivalency.

This is an energy content correlation and does not reflect the value or price relationship between the commodities.

(2) Amounts exclude the impact of cash paid/received on settled contracts as we did not elect to apply hedge accounting.

Oil, natural gas and natural gas liquids revenues were $80.5 million and $39.4 million for the three months ended September 30, 2021 and 2020, respectively.

Oil, natural gas and natural gas liquids revenues were $81.4 million and $55.3 million for the three months ended March 31, 2022 and 2021, respectively.

The increase in revenues is primarily attributable to an approximate $18.42 per Boe increase in our average realized prices (excluding the effects of hedging arrangements).

The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, transportation take-away capacity constraints, inventory storage levels, quality of production, basis differentials and other factors.

For the three months ended September 30, 2021 and 2020, production averaged 17,728 Boe/d and 17,076 Boe/d, respectively.

Our average daily production increased in the three months ended September 30, 2021 when compared to the same period in the prior year due to new production brought online as a result of our 2021 capital program.

Lease operating expenses were $12.0 million and $10.1 million for the three months ended September 30, 2021 and 2020, respectively.

On a per unit basis, lease operating expenses were $7.34 per Boe and $6.42 per Boe for the three months ended September 30, 2021 and 2020, respectively.

For the three months ended March 31, 2022 and 2021, production averaged 14,767 Boe/d and 14,333 Boe/d, respectively.

In February 2021, we temporarily shut-in production due to inclement weather.

The estimated decrease in average daily oil and natural gas production associated with this temporary shut-in was approximately 1,300 Boe/d in the first three months of 2021.

Current year production was impacted by natural production declines on our existing producing wells.

We last brought new producing wells online in June 2021.

Lease operating expenses were $11.5 million and $9.5 million for the three months ended March 31, 2022 and 2021, respectively.

On a per unit basis, lease operating expenses were $8.67 per Boe and $7.34 per Boe for the three months ended March 31, 2022 and 2021, respectively.

The increase in lease operating expenses in 2022 results from a market increase in maintenance, power, and chemical costs.

Workover and other expenses were $1.0 million and $0.9 million for the three months ended September 30, 2021 and 2020, respectively.

On a per unit basis, workover and other expenses were $0.61 per Boe and $0.58 per Boe for the three months ended September 30, 2021 and 2020, respectively.

Workover and other expenses were $0.9 million and $0.6 million for the three months ended March 31, 2022 and 2021, respectively.

On a per unit basis, workover and other expenses were $0.65 per Boe and $0.43 per Boe for the three months ended March 31, 2022 and 2021, respectively.

The increased workover and other expenses in 2022 relate to more significant workover projects undertaken in the current year.

Taxes other than income were $3.1 million and $2.7 million for the three months ended September 30, 2021 and 2020, respectively.

Taxes other than income were $5.0 million and $3.2 million for the three months ended March 31, 2022 and 2021, respectively.

Most production taxes are based on realized prices at the wellhead.

As revenues or volumes from oil and natural gas sales increase or decrease, production taxes on these sales also increase or decrease.

On a per unit basis, taxes other than income were $1.89 per Boe and $1.73 per Boe for the three months ended September 30, 2021 and 2020, respectively.

Gathering and other expenses were $15.9 million and $13.5 million for the three months ended September 30, 2021 and 2020, respectively.

On a per unit basis, taxes other than income were $3.73 per Boe and $2.47 per Boe for the three months ended March 31, 2022 and 2021, respectively.

Gathering and other expenses were $15.3 million and $13.2 million for the three months ended March 31, 2022 and 2021, respectively.

Gathering and other expenses include gathering fees paid to third parties on our oil and natural gas production and operating expenses of our gathering support infrastructure.

Approximately $6.3 million and $3.8 million for the three months ended September 30, 2021 and 2020, respectively, relate to gathering and marketing fees paid to third parties on our oil and natural gas production.

Approximately $6.6 million and $4.0 million for the three months ended March 31, 2022 and 2021, respectively, relate to gathering and marketing fees paid to third parties on our oil and natural gas production.

Gathering and marketing fees increased in 2022 as we marketed higher quantities of sour gas production to third parties in the current year period.

Approximately $9.6 million and $9.7 million for the three months ended September 30, 2021 and 2020, respectively, relate to operating expenses on our treating equipment and gathering support facilities.

The decrease in treating equipment and gathering support facilities expenses in 2021 results from lower operating expenses associated with our treating equipment, as fewer sour gas production volumes were processed through our hydrogen sulfide treating plant in the current year period, which were partially offset by higher chemical costs to improve the quality of treated oil.

General and administrative expense was $4.0 million and $3.5 million for the three months ended September 30, 2021 and 2020, respectively.

The increase in general and administrative expense in the current year period is associated with an increase in payroll and professional fee costs partially offset by a decrease in information technology expenses incurred and the Employee Retention Credit.

On a per unit basis, general and administrative expenses were $2.46 per Boe and $2.22 per Boe for the three months ended September 30, 2021 and 2020, respectively.

Approximately $8.7 million and $9.2 million for the three months ended March 31, 2022 and 2021, respectively, relate to operating expenses on our treating equipment and gathering support facilities.

The decrease in treating equipment and gathering support facilities expenses in 2022 results from lower operating expenses associated with our treating equipment .

General and administrative expense was $4.6 million and $4.2 million for the three months ended March 31, 2022 and 2021, respectively.

The increase in general and administrative expense in the current year period is associated with an increase in salaries and benefits costs as well as professional fees incurred, which were partially offset by a decrease in corporate office lease expense.

On a per unit basis, general and administrative expenses were $3.46 per Boe and $3.28 per Boe for the three months ended March 31, 2022 and 2021, respectively.

Depletion for oil and natural gas properties is calculated using the unit of production method, which depletes the capitalized costs of evaluated properties plus future development costs based on the ratio of production for the current period to total reserve volumes of evaluated properties as of the beginning of the period.

Depletion expense was $10.7 million and $15.3 million for the three months ended September 30, 2021 and 2020, respectively.

On a per unit basis, depletion expense was $6.57 per Boe and $9.76 per Boe for the three months ended September 30, 2021 and 2020, respectively.

The lower depletion rate in the 2021 is attributable to the change in our depletable base as a result of full cost ceiling test impairments incurred in 2020.

Under the full cost method of accounting, we are required on a quarterly basis to determine whether the book value of our oil and natural gas properties (excluding unevaluated properties) is less than or equal to the “ceiling”, based upon the expected after tax present value (discounted at 10%) of the future net cash flows from our proved reserves.

excess of the net book value of our oil and natural gas properties over the ceiling must be recognized as a non-cash impairment expense.

At September 30, 2020, we recorded a full cost ceiling impairment of $128.3 million.

The ceiling test impairment was primarily driven by a decrease in the first-day-of-the-month average price for crude oil used in the ceiling test calculation, from $47.37 per barrel at June 30, 2020 to $43.63 per barrel at September 30, 2020.

The ceiling test impairment also reflects the transfer of $23.6 million of unevaluated property costs to the full cost pool due to our intent to focus available capital on Monument Draw.

Depletion expense was $10.1 million and $10.3 million for the three months ended March 31, 2022 and 2021, respectively.

On a per unit basis, depletion expense was $7.57 per Boe and $8.02 per Boe for the three months ended March 31, 2022 and 2021, respectively.

The depletable base of our unit of production calculation in 2022 was increased by future development costs associated with PUD reserve additions since the three months ended March 31, 2021.

We also experienced an increase in proved reserve volumes, primarily from PUD reserve additions, which resulted in a decrease to our depletion rate in 2022 as compared to 2021.

We enter into derivative commodity instruments to hedge our exposure to price fluctuations on our anticipated oil, natural gas and natural gas liquids production.

Consistent with prior years, we have elected not to designate any positions as cash flow hedges for accounting purposes, and accordingly, we recorded the net change in the mark-to-market value of these derivative contracts in the unaudited condensed consolidated statements of operations.

At September 30, 2021, we had a $0.9 million derivative asset, $0.8 million of which was classified as current, and we had a $83.8 million derivative liability, $74.3 million of which was classified as current.

We recorded a net derivative loss of $20.6 million ($22.4 million net unrealized loss and $1.8 million net realized gain on settled and early terminated contracts) for the three months ended September 30, 2021.

For the three months ended September 30, 2020, we recorded a net derivative loss of $15.8 million ($21.1 million net unrealized loss and $5.3 million net realized gain on settled and early terminated contracts).

During the three months ended September 30, 2020, we terminated certain derivative contracts in advance of their natural expiration dates and received proceeds of approximately $6.6 million, which were included in the $5.3 million net realized gains for the period.

During the three months ended September 30, 2021, we recorded a gain on the extinguishment of the forgiven portion of the PPP Loan and related accrued interest of $2.1 million.

We applied for forgiveness of the amount due on the PPP Loan based on the use of the loan proceeds on eligible expenses in accordance with the terms of the CARES Act.

Effective August 13, 2021, the principal amount of our PPP Loan was reduced from $2.2 million to $0.2 million by the SBA.

Nine Months Ended September 30, 2021 and 2020

We reported a net loss of $54.3 million and $166.0 million for the nine months ended September 30, 2021 and 2020, respectively.

The table included below sets forth financial information for the periods presented.

Nine Months Ended

September 30,

In thousands (except per unit and per Boe amounts)

Net income (loss)

Operating revenues:

Natural gas liquids

Operating expenses:

Lease operating

Workover and other

Taxes other than income

Gathering and other

Restructuring

General and administrative:

General and administrative

Stock-based compensation

Depletion, depreciation and accretion:

Depletion – Full cost

Depreciation – Other

Accretion expense

Full cost ceiling impairment

Other income (expenses):

Net gain (loss) on derivative contracts

Interest expense and other

Gain (loss) on extinguishment of debt

Natural Gas - MMcf

Natural gas liquids – MBbls

Total MBoe (1)

Average daily production – Boe (1)

Average price per unit (2) :

Oil price - Bbl

Natural gas price - Mcf

Natural gas liquids price - Bbl

Total per Boe (1)

Average cost per Boe:

Lease operating

Workover and other

Taxes other than income

Gathering and other

Restructuring

General and administrative:

General and administrative

Stock-based compensation

(1) Natural gas reserves are converted to oil reserves using a ratio of six Mcf to one Bbl of oil.

This ratio is based on energy equivalency, not price equivalency.

The price for a barrel of oil equivalent for natural gas is substantially lower than the price for a barrel of oil.

(2) Amounts exclude the impact of cash paid/received on settled contracts as we did not elect to apply hedge accounting.

Oil, natural gas and natural gas liquids revenues were $199.9 million and $104.5 million for the nine months ended September 30, 2021 and 2020, respectively.

The increase in revenues is primarily attributable to an approximate $23.35 per Boe increase in our average realized prices (excluding the effects of hedging arrangements).

For the nine months ended September 30, 2021 and 2020, production averaged 15,890 Boe/d and 16,712 Boe/d, respectively.

In February 2021, we temporarily shut-in production due to inclement weather.

In May and June 2020, we temporarily shut-in production in response to historically low commodity prices.

Current year production was also impacted by third-party processing curtailments and downtime resulting from facility upgrades and repairs.

Lease operating expenses were $31.6 million and $32.9 million for the nine months ended September 30, 2021 and 2020, respectively.

The decrease in lease operating expenses in 2021 results from decreased salt water disposal costs due to lower production volumes and less produced water partially offset by a market increase associated with maintenance, power, and chemical costs during the third quarter of 2021.

On a per unit basis, lease operating expenses were $7.29 per Boe and $7.18 per Boe for the nine months ended September 30, 2021 and 2020, respectively.

The increase in lease operating expenses on a per unit basis is attributed to the reduction in production volumes between the periods.

Workover and other expenses were $2.3 million and $2.8 million for the nine months ended September 30, 2021 and 2020, respectively.

On a per unit basis, workover and other expenses were $0.53 per Boe and $0.60 per Boe for the nine months ended September 30, 2021 and 2020, respectively.

The decreased workover and other expenses in 2021 relate to preventive operational measures previously undertaken to mitigate potential future failures in producing wells.

This decrease is partially offset by more significant workover projects undertaken in 2021.

Taxes other than income were $9.2 million and $7.1 million for the nine months ended September 30, 2021 and 2020, respectively.

Most production taxes are based on realized prices at the wellhead.

As revenues or volumes from oil and natural gas sales increase or decrease, production taxes on these sales also increase or decrease.

On a per unit basis, taxes other than income were $2.12 per Boe and $1.56 per Boe for the nine months ended September 30, 2021 and 2020, respectively.

Gathering and other expenses were $43.4 million and $39.3 million for the nine months ended September 30, 2021 and 2020, respectively.

Gathering and other expenses include gathering fees paid to third parties on our oil and natural gas production and operating expenses of our gathering support infrastructure.

Approximately $15.0 million and $9.0 million for the nine months ended September 30, 2021 and 2020, respectively, relate to gathering and marketing fees paid to third parties on our oil and natural gas production.

Gathering and marketing fees increased in 2021 as we marketed higher quantities of sour gas production to third parties in the current year period.

Approximately $28.5 million and $26.9 million for the nine months ended September 30, 2021 and 2020, respectively, relate to operating expenses on our treating equipment and gathering support facilities.

The increase in treating equipment and gathering support facilities expenses in 2021 results from higher electricity and buy back fuel costs incurred as a result of inclement weather in February 2021 and higher chemical costs to improve the quality of treated oil, which were partially offset by lower operating expenses associated with our treating equipment, as fewer sour gas production volumes were processed through our hydrogen sulfide treating plant in the current year period.

Also included are $3.4 million of rig stacking charges for the nine months ended September 30, 2020.

Restructuring expense was approximately $2.6 million for the nine months ended September 30, 2020.

During the nine months ended September 30, 2020, we incurred restructuring charges related to the consolidation into one corporate office and had reductions in our workforce due to efforts to improve efficiencies and go forward costs.

In May 2020, in furtherance of the consolidation into one corporate office, we exercised a one-time early termination option under the lease agreement for our office space in Denver, Colorado.

General and administrative expense was $11.8 million and $11.4 million for the nine months ended September 30, 2021 and 2020, respectively.

The increase in general and administrative expense in the current year period is associated with an increase in payroll costs, as the 2020 period included a $1.6 million reduction to general and administrative

expenses related to discretionary cash incentives.

In late March 2020, due to changes in market conditions and decreased commodity prices, we determined that previously accrued discretionary cash incentives related to 2019 would not be paid, causing a $1.6 million reduction to general and administrative expense in the 2020 period.

This increase is partially offset by a decrease in professional fees and information technology expenses, as well as the Employee Retention Credit.

On a per unit basis, general and administrative expenses were $2.72 per Boe and $2.50 per Boe for the nine months ended September 30, 2021 and 2020, respectively.

Depletion expense was $32.1 million and $46.9 million for the nine months ended September 30, 2021 and 2020, respectively.

On a per unit basis, depletion expense was $7.39 per Boe and $10.25 per Boe for the nine months ended September 30, 2021 and 2020, respectively.

The lower depletion rate in 2021 is attributable to the change in our depletable base as a result of full cost ceiling test impairments incurred in 2020.

Any excess of the net book value of our oil and natural gas properties over the ceiling must be recognized as a non-cash impairment expense.

At September 30, 2020, we recorded a full cost ceiling impairment of $128.3 million.

The ceiling test impairment also reflects the transfer of $23.6 million of unevaluated property costs to the full cost pool due to our intent to focus available capital on Monument Draw.

At June 30, 2020, we recorded a full cost ceiling impairment of $60.1 million.

The ceiling test impairment was primarily driven by a decrease in the first-day-of-the-month average price for crude oil used in the ceiling test calculation, from $55.96 per barrel at March 31, 2020 to $47.37 per barrel at June 30, 2020.

This average price decline was partially offset by favorable differentials and lower operating expenses.

We enter into derivative commodity instruments to economically hedge our exposure to price fluctuations on our anticipated oil, natural gas and natural gas liquids production.

We recorded a net derivative loss of $119.4 million ($69.1 million net unrealized loss and $50.3 million net realized loss on settled and early terminated contracts) for the nine months ended September 30, 2021.

For the nine months ended September 30, 2020, we recorded a net derivative gain of $67.7 million ($24.0 million net unrealized gain and $43.7 million net realized gain on settled and early terminated contracts).

During the nine months ended September 30, 2021, we recorded a gain on the extinguishment of the forgiven portion of the PPP Loan and related accrued interest of $2.1 million.

We applied for forgiveness of the amount due on the PPP Loan based on the use of the loan proceeds on eligible expenses in accordance with the terms of the CARES Act.

Effective August 13, 2021, the principal amount of our PPP Loan was reduced from $2.2 million to $0.2 million by the SBA.

At March 31, 2022, we had a $8.8 million derivative asset, $3.6 million of which was classified as current, and we had a $161.4 million derivative liability, $103.2 million of which was classified as current.

We recorded a net derivative loss of $123.9 million ($91.1 million net unrealized loss and $32.8 million net realized loss on settled contracts) for the three months ended March 31, 2022.

For the three months ended March 31, 2021, we recorded a net derivative loss of $45.7 million ($36.0 million net unrealized loss and $9.7 million net realized loss on settled and early terminated contracts).

Interest expense and other was $2.7 million and $1.4 million for the three months ended March 31, 2022 and 2021, respectively.

Interest expense and other increased in the current period due to higher interest and the amortization of debt issuance costs associated with our Term Loan Agreement and was partially offset by a $2.0 million change in fair value of the Change of Control Call Option.

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis