HighPeak Energy, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is intended to assist you in understanding our business and results of operations together with our present financial condition. This section should be read in conjunction with our historical consolidated and combined financial statements and related notes. This discussion contains certain “ forward ‑ looking statements ” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. These forward-looking statements involve risks and uncertainties and actual results and the timing of events may differ materially from those contained in these forward ‑ looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil, NGL and natural gas, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties. Please read “ Cautionary Statement Regarding Forward ‑ Looking Statements. ” We assume no obligation to update any of these forward ‑ looking statements, except as required by applicable law. Overview HighPeak Energy, Inc., a Delaware corporation, was formed in October 2019 solely for the purpose of combining the businesses of Pure and HPK LP, referred to herein as the “HighPeak business combination,” which was completed on August 21, 2020. HPK LP was formed in August 2019 for the purpose combining the assets of HighPeak I and HighPeak II into one entity. HighPeak I was formed in June 2014 for the purpose of acquiring, exploring and developing oil and natural gas properties, although it had no activity until 2017. Beginning in late 2017, HighPeak I began acquiring its assets through an organic leasing campaign and a series of acquisitions consisting primarily of leasehold acreage and existing vertical producing wells. The Company’s assets are located primarily in Howard County, Texas, which lies within the north eastern part of the oil-rich Midland Basin. As of March 31, 2021, the assets consisted of two highly contiguous leasehold positions of approximately 58,452 gross (50,635 net) acres, approximately 37% of which were held by production, with an average working interest of 87%. Our acreage is composed of two core areas with the northern block named Flat Top and the southern block named Signal Peak. Approximately 97% of the operated acreage provides for horizontal wells with lateral lengths of 10,000 feet or greater. For the three months ended March 31, 2021, approximately 95% and 5% of production from the assets were attributable to liquids (both oil and NGL) and natural gas, respectively. As of March 31, 2021, HighPeak Energy was drilling with one (1) rig. We are the operator on approximately 95% of the net acreage across our assets. Further, as of March 31, 2021, there were approximately 124 gross (80.0 net) producing wells, including 28 gross (26.6 net) horizontal wells, with total sales volumes of approximately 7,263 Boe/d in March 2021. In addition, as of March 31, 2021, the Company was in the process of drilling two (2) wells and was in various stages of completing eight (8) wells. The financial results as presented in this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” consist of the historical results of HPK LP for the three months ended March 31, 2020 and the Company for the three months ended March 31, 2021. At the Closing of the HighPeak business combination on August 21, 2020, the Company’s “predecessors” for accounting purposes were HPK LP for the period from October 1, 2019 through August 21, 2020 and HighPeak I from January 1, 2017 through September 30, 2019 (collectively, the “Predecessors”). Outlook HighPeak Energy’s financial position and future prospects, including its revenues, operating results, profitability, liquidity, future growth and the value of its assets, depend primarily on prevailing commodity prices. The oil and natural gas industry is cyclical and commodity prices are highly volatile. For example, during the period from January 1, 2018 through March 31, 2021, the calendar month average NYMEX WTI crude oil price per Bbl ranged from a low of $16.70 to a high of $70.76, and the last trading day NYMEX natural gas price per MMBtu ranged from a low of $1.50 to a high of $4.72. For the month of April 2020, the calendar month average NYMEX WTI crude oil price was $16.70 per Bbl and the last trading day NYMEX natural gas price was $1.63 per MMBtu. Due to the absence of any debt, the Company has not historically entered into any hedges. With the addition of the Revolving Credit Facility in December 2020, HighPeak Energy entered into hedging arrangements in late-April 2021, prior to borrowing under the Revolving Credit Facility that is anticipated in the second quarter of 2021. 24 Financial and Operating Performance The Company's financial and operating performance for the three months ended March 31, 2021 and 2020 included the following highlights: • Net income was $4.7 million ($0.05 per diluted share) compared with a net loss of the Company’s Predecessor of $80.8 million for three months ended March 31, 2021 and 2020, respectively. The primary components of the $85.6 million increase in net income include: • a $76.5 million charge to expense during the three months ended March 31, 2020 related to an acquisition that was terminated in April 2020 primarily attributable to the downturn in oil prices related to COVID-19 whereby the Company had paid a $61.5 million nonrefundable deposit during 2019 plus a $15 million extension payment paid in 2020 that was also nonrefundable; • a $21.1 million increase in oil, NGL and natural gas revenues due to a 270% increase in daily sales volumes resulting from the Company’s successful horizontal drilling program in the Permian Basin, in addition to a 52% increase in average realized commodity prices per Boe; and • a $1.1 million decrease in general and administrative expenses primarily as a result of more general and administrative costs being allocated to drilling and completion operations and construction projects and producing properties due to increased activity and well count in the 2021 period compared with 2020, no business combination charges in 2021 compared with 2020, lower salaries and benefits due to the reduction in workforce that was initiated in the early stages of the COVID-19 pandemic in 2020 and lower exploration general and administrative expenses that are classified as exploration and abandonment expense now that they are identifiable and not included as a component of administration fees paid to a management company; and • a $162,000 decrease in the Company's oil and natural gas production costs due to the completion of the Company’s water disposal system infrastructure that came online in January 2021 coupled with the decreased reliance on generators for power along with other cost reduction efforts implemented by the company in response to the downturn in crude oil prices in 2020 as a result of the COVID-19 pandemic; partially offset by: • a $9.6 million increase in depletion, depreciation and amortization expense due to a 270% increase in overall sales volumes, plus a 5% increase in the depletion, depreciation and amortization rate from $25.83 to $27.25 per Boe, primarily as a result of costs incurred on the Company’s water disposal infrastructure which do not directly increase proved reserves and recently completed wells which did not meet the SEC guidelines to be included in our proved reserves as of March 31, 2021 ; • a $1.4 million increase in the production and ad valorem taxes due partially to an increase in production taxes per Boe from $1.67 to $2.53, or 51%, due to higher overall realized prices of 52% and an increase in ad valorem taxes per Boe from $0.70 to $0.97, or 39%, due to a greater proportion of horizontal wells which are valued higher for tax purposes in Texas; • a $1.1 million increase in the Company’s income tax expense due to the net income experienced during the three months ended March 31, 2021 and the fact that the Predecessor was a pass through entity for income tax purposes and did not recognize any tax expense or benefit on their financial statements; 25 • a $966,000 increase in stock-based compensation expense related to stock options that were granted in August 2020 upon the Company’s going public; and • a $188,000 increase in exploration and abandonment expenses primarily as a result of exploration general and administrative expenses that are being classified as a part of exploration and abandonment expense now that they are identifiable and not merely a component of administration fees paid to a management company plus $49,000 in abandoned leasehold costs related to various undeveloped leasehold costs that the Company opted not to renew. • During the three months ended March 31, 2021, average daily sales volumes totaled 5,290 Boe/d, compared with 1,428 Boe/d during the same period in 2020, an increase of 270% over the same period in 2020, due to the Company's successful horizontal drilling program in the Permian Basin. • Weighted average realized oil prices per Bbl increased during the three months ended March 31, 2021 to $58.36, compared with $40.76 for the same period in 2020. Weighted average NGL prices per Bbl increased during the three months ended March 31, 2021 to $27.82, compared with $12.29 for the same period in 2020. Weighted average natural gas prices per Mcf increased to $2.23 during the three months ended March 31, 2021, compared with $0.07 during the same period in 2020. • Cash provided by operating activities totaled $11.4 million for the three months ended March 31, 2021, compared with $6.0 million for the three months ended March 31, 2020. Recent Events Revolving Credit Facility. The Company entered into its Revolving Credit Facility in December 2020, but as of March 31, 2021, had not drawn on the Revolving Credit Facility. The Company anticipates that it will begin to draw on the Revolving Credit Facility in the second quarter of 2021 which currently has a $40.0 million borrowing base, but only a $20.0 million commitment at the Company’s election. In March 2021, the Company’s borrowing base was increased to $50.0 million, and the Company received an increased commitment to $50.0 million, subject to finalization of customary documentation. Exercises of Warrants and Options. During the three months ended March 31, 2021, the Company received cash of $9.1 million related to the exercise of 788,009 of its $11.50 warrants and $1.6 million cash related to the exercise of 154,268 of stock options by employees of the Company. Crude oil marketing contract. In May 2021, the Company entered into a crude oil marketing contract with Lion Oil Trading and Transportation, LLC (“Lion”) as the purchaser and DKL Permian Gathering, LLC (“DKL”) as the gatherer and transporter. The contract includes the Company’s current and future crude oil production from its horizontal wells in Flat Top where DKL will construct an oil gathering system and custody transfer meters to all the Company’s central tank batteries. The oil gathering system and custody transfer meters are expected to be operational by October 2021. This system will reduce the Company’s cost to transport its crude oil to market and significantly reduce the trucking traffic in and around our development at Flat Top. The contract contains a minimum volume commitment commencing October 2021 based on the gross barrels delivered at the Company’s central tank battery facilities and is 5,000 Bopd for the first year, 7,500 Bopd for the second year and 10,000 Bopd for the remaining eight years of the contract. However, the Company has the ability under the contract to cumulatively bank excess volumes delivered to offset future minimum volume commitments. The Company believes it will meet this minimum volume commitments based on the Company’s current gross production levels and the current Flat Top development plan. Natural gas purchasing replacement contract. In May 2021, the Company entered into a replacement gas purchase contract with WTG Gas Processing, L.P. (“WTG”) as the gatherer, processor and purchaser of the Company’s current and future gross natural gas production in Flat Top. The replacement contract provides the Company with improved natural gas and NGL pricing and requires WTG to expand its current low-pressure gathering system, which eliminates the need for in-field compression in Flat Top to accommodate the Company’s increased natural gas production volumes based on the current plan of development. In exchange for the improved pricing terms and expansion of the gathering system, the Company will provide WTG with certain aid-in-construction payments. The replacement contract does not contain minimum volume commitments. Once operational, the expanded natural gas gathering system will reduce flaring and the emission of greenhouse gases. COVID-19. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial and commodity markets. In addition, the pandemic has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. As a result, there has been a significant reduction in demand for and prices of oil and natural gas, which has adversely affected our business. There continues to be uncertainty around the extent and duration of disruption, including any resurgence, and we expect that the longer the period of such disruption continues, the greater the adverse impact will be on our business. The degree to which the COVID-19 pandemic or any other public health crisis adversely impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions taken by governmental authorities and third parties in response to the COVID-19 pandemic, its impact on the U.S. and world economies, the U.S. capital markets and market conditions, and how quickly and to what extent normal economic and operating conditions can resume. Derivative Financial Instruments Derivative financial instrument exposure. At March 31, 2021, the Company was not a party to any derivative financial instruments. New commodity derivative contracts. Subsequent to March 31, 2021, the Company entered into derivative contracts to hedge a portion of estimated future production. Refer to Note 16 of the Notes to Consolidated and Combined Financial Statements included in “Item 1. Condensed Consolidated and Combined Financial Statements (Unaudited)” for additional information regarding these commodity derivative contracts. 26 Operations and Drilling Highlights Average daily oil, NGL and natural gas sales volumes are as follows: Three Months Ended March 31, 2021 Oil (Bbls) 4,735 NGL (Bbls) 294 Natural Gas (Mcf) 1,568 Total (Boe) 5,290 The Company's liquids production was 95 percent of total production on a Boe basis for the three months ended March 31, 2021. Costs incurred are as follows (in thousands): Three Months Ended March 31, 2021 Unproved property acquisition costs $ 309 Proved acquisition costs - Total acquisitions 309 Development costs 2,777 Exploration costs 42,098 Total finding and development costs 45,184 Asset retirement obligations 154 Total costs incurred $ 45,338 The following table sets forth the total number of horizontal wells drilled and completed during the three months ended March 31, 2021: Three Months Ended March 31, 2021 Drilled Completed Gross Net Gross Net Flat Top area 4 4 6 5.2 Signal Peak area 2 1.4 - - Total 6 5.4 6 5.2 The Company currently plans to operate one (1) drilling rig and an average of one (1) frac fleet in the Permian Basin during the remainder of 2021. However, the scope, duration and magnitude of the direct and indirect effects of the COVID-19 pandemic are continuing to evolve and in ways that are difficult or impossible to anticipate. Given the dynamic nature of this situation, the Company is maintaining flexibility in its capital plan and will continue to evaluate drilling and completion activity on an economic basis, with future activity levels assessed monthly. During the three months ended March 31, 2021, the Company successfully completed and placed on production six horizontal wells in the Flat Top area, five (5) of which are in the Wolfcamp A and one (1) of which is in the Lower Spraberry formations. The Company had eight (8) wells in various stages of completion as of March 31, 2021, five (5) of which are in the Wolfcamp A and one (1) of which is in the Lower Spraberry formations located in the Flat Top area and one is in the Wolfcamp D and one is in the Wolfcamp C formations in the Signal Peak area. Subsequent to the end of the quarter, we placed six of these wells on production and many have begun to produce oil. As of March 31, 2021, the Company was in the process of drilling two (2) wells in the Flat Top area, one (1) in the Wolfcamp A and one (1) in the Lower Spraberry formations. 27 Results of Operations Factors Affecting the Comparability of the Predecessor Historical Financial Results The comparability of the predecessor results of operations among the periods presented, and for future periods, is impacted by the following factors: • As a corporation, under the Code, HighPeak Energy is subject to U.S. federal income taxes at a statutory rate of 21% of pretax earnings. This is a significant change from the Predecessor’s historical results because they were treated as partnerships for U.S. federal income tax purposes and, as such, the partners of the Predecessor reported their share of the Company’s income or loss on their respective income tax returns; • Our assets will incur certain additional general and administrative expenses related to being owned by a publicly traded company, that were not previously incurred in HPK LP’s cost structure, including, but not limited to, Securities Exchange Act of 1934, as amended (the “Exchange Act”), reporting expenses; expenses associated with Sarbanes-Oxley Act compliance; expenses associated with being listed on a national securities exchange; incremental independent auditor fees; incremental legal fees; investor relations expenses; registrar and transfer agent fees; incremental director and officer liability insurance costs; and independent director compensation; • During the three months ended March 31, 2020, HPK LP recognized a charge to expense of $76.5 million related to the termination of the Grenadier Acquisition. Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020 Oil, NGL and natural gas revenues. Average daily sales volumes are as follows: Three Months Ended March 31, 2021 2020 % Change Successor Predecessor Oil (Bbls) 4,735 1,220 288 % NGL (Bbls) 294 134 119 % Natural Gas (Mcf) 1,568 445 252 % Total (Boe) 5,290 1,428 270 % The increase in average daily Boe sales volumes for the three months ended March 31, 2021, compared with the same period in 2020 was due to the Company's successful horizontal drilling program. The oil, NGL and natural gas prices that the Company reports are based on the market prices received for each commodity. The weighted average realized prices are as follows: Three Months Ended March 31, 2021 2020 % Change Successor Predecessor Oil per Bbl $ 58.36 $ 40.76 43 % NGL per Bbl $ 27.82 $ 12.29 126 % Natural Gas per Mcf $ 2.23 $ 0.07 3,086 % Total per Boe $ 54.01 $ 35.58 52 % Oil and natural gas production costs. Oil and natural gas production costs in total and per Boe are as follows (in thousands, except percentages and per Boe amounts): Three Months Ended March 31, 2021 2020 % Change Successor Predecessor Lease operating expenses $ 2,227 $ 2,389 (7 )% Lease operating expenses per Boe $ 4.68 $ 18.39 (75 )% 28 The decrease in lease operating expenses can primarily be attributed to the completion of the Company’s water disposal system infrastructure that came online in January 2021 coupled with the decreased reliance on generators for power and other cost reduction efforts implemented by the company in response to the downturn in crude oil prices in 2020 as a result of the COVID-19 pandemic. Production and ad valorem taxes. Production and ad valorem taxes are as follows (in thousands, except percentages): Three Months Ended March 31, 2021 2020 % Change Successor Predecessor Production and ad valorem taxes $ 1,664 $ 308 440 % In general, production taxes and ad valorem taxes are directly related to commodity production volume and price changes; however, Texas ad valorem taxes are based upon prior year commodity prices, whereas production taxes are based upon current year commodity prices. Production and ad valorem taxes per Boe are as follows: Three Months Ended March 31, 2021 2020 % Change Successor Predecessor Production taxes per Boe $ 2.53 $ 1.67 51 % Ad valorem taxes per Boe $ 0.97 $ 0.70 39 % The increase in production taxes per Boe for the three months ended March 31, 2021, compared with the same period in 2020, was primarily due to the 52% increase in realized prices. The increase in ad valorem taxes per Boe for the three months ended March 31, 2021, compared with the same period in 2020, was primarily due to a large number of wells that have come on production during 2020 which did not incur ad valorem tax in 2020 and for which 2021 will be the first year that they will be assessed ad valorem taxes. In Texas, ad valorem taxes are based on a valuation of the wells on January 1 of a given year. Depletion, depreciation and amortization expense. Depletion, depreciation and amortization (“DD&A”) expense and DD&A expense per Boe are as follows (in thousands, except percentages and per Boe amounts): Three Months Ended March 31, 2021 2020 % Change Successor Predecessor DD&A expense $ 12,963 $ 3,356 286 % DD&A expense per Boe $ 27.22 $ 25.83 5 % The increase in DD&A was primarily due to the increased production associated with our successful horizontal drilling program. Also, the increase in DD&A per Boe was primarily the result of costs incurred on the Company’s water disposal infrastructure which do not directly increase proved reserves and recently completed wells which did not meet the SEC guidelines to be included in our proved reserves as of March 31, 2021 . General and administrative expense. General and administrative expense and general and administrative expense per Boe as well as stock-based compensation expense are as follows (in thousands, except percentages and per Boe amounts): Three Months Ended March 31, 2021 2020 % Change Successor Predecessor General and administrative expense $ 1,759 $ 2,861 (39 )% General and administrative expense per Boe $ 3.69 $ 22.03 (83 )% Stock based compensation expense $ 966 $ - 100 % 29 The decrease in general and administrative expense for the three months ended March 31, 2021, compared with the same period in 2020, is primarily a result of more general and administrative costs being allocated to drilling and completion operations and construction projects and producing properties due to increased activity and well count, no business combination charges in 2021, lower salaries and benefits due to the reduction in workforce that was initiated in the early stages of the COVID-19 pandemic in 2020 and lower exploration general and administrative expenses that are being classified as a part of exploration and abandonment expense now that they are identifiable and not included as a component of administration fees paid to a management company. The increase in noncash stock-based compensation expense is due to stock options being granted to officers and employees upon completion of the business combination. Income tax expense. Three Months Ended March 31, 2021 2020 % Change Successor Predecessor Income tax expense $ 1,115 $ - 100 % Effective income tax rate 19.0 % 0.0 % 100 % The change in income tax expense during the three months ended March 31, 2021, compared with the same period in 2020, was due to the fact that the Predecessor was treated as a partnership for U.S. federal income tax purposes and, as such, the partners of the Predecessor reported their share of the Company’s income or loss on their respective income tax returns. In contrast, HighPeak Energy is a corporation and is subject to U.S. federal income taxes on any income or loss following the business combination on August 21, 2020. The effective income tax rate differs from the statutory rate primarily due to permanent differences between GAAP income and taxable income. See Note 12 of Notes to Consolidated Financial Statements included in "Item 1. Condensed Consolidated and Combined Financial Statements (Unaudited)" for additional information. Liquidity and Capital Resources Liquidity . In response to the COVID-19 pandemic and commensurate decrease in oil, NGL and natural gas prices, the Company took steps during 2020 to reduce, defer or cancel certain planned capital expenditures, shut-in the majority of its production and reduce its overall cost structure commensurate with its expected level of activities. During July 2020, the Company began putting its wells back on production based on the recovery of oil and natural gas prices. Subsequent to the Closing of the HighPeak business combination, the Company began completing the twelve (12) wells that were drilled but not yet completed when operations were shut down early in 2020. The Company also began running one (1) drilling rig in September 2020. The Company drilled and completed a salt-water disposal well near the center of our current northern acreage operating area and completed phase one of a water disposal infrastructure system to dispose the water that we anticipate producing with the development drilling planned in 2021 and beyond. Also, in late December 2020, the Company entered into a Revolving Credit Facility with an initial borrowing base of $40.0 million; however, the Company elected to reduce the aggregate elected commitments to $20.0 million. The Revolving Credit Facility remained undrawn at March 31, 2021. Associated with the Revolving Credit Facility, the Company is required to enter into commodity hedging instruments, which it did in April 2021, to protect against price fluctuations on a portion of its proved developed producing reserves commencing prior to drawing on the Revolving Credit Facility. See Note 16 of the Notes to Consolidated and Combined Financial Statements included in “Item 1. Condensed Consolidated and Combined Financial Statements (Unaudited)” for additional information regarding these commodity derivative contracts. The Company's primary sources of short-term liquidity are (i) cash and cash equivalents, (ii) net cash provided by operating activities, (iii) borrowings from our Revolving Credit Facility, (iv) on an opportunistic basis, issuances of debt or equity securities and (v) other sources, such as sales of nonstrategic assets. As of March 31, 2021, the Company had no outstanding borrowings and approximately $20.0 million available to borrow under its Revolving Credit Facility. The Company also had unrestricted cash on hand of $9.6 million as of March 31, 2021. In March 2021, the Company’s borrowing base and bank commitments under the Revolving Credit Facility were increased to $50.0 million, subject to finalization of customary documentation. The Company's primary needs for cash are for (i) capital expenditures, (ii) acquisitions of oil and natural gas properties, (iii) payments of contractual obligations, and (iv) working capital obligations. Funding for these cash needs may be provided by any combination of the Company's sources of liquidity. Although the Company expects that its sources of funding will be adequate to fund its 2021 planned capital expenditures and provide adequate liquidity to fund other needs, no assurance can be given that such funding sources will be adequate to meet the Company's future needs. 2021 capital budget. The Company has set its capital budget for 2021 at approximately $115 to $125 million for drilling, completion, facilities and equipping oil wells plus $20 to $25 million for field infrastructure buildout and other costs. HighPeak Energy expects to fund its forecasted capital expenditures with cash on its balance sheet, cash generated by operations and through borrowings under its Revolving Credit Facility. The Company's capital expenditures for the three months ended March 31, 2021 were $45.2 million. 30 Capital resources . Cash flows from operating, investing and financing activities are summarized below (in thousands). Three Months Ended March 31, 2021 2020 % Change Successor Predecessor Net cash provided by operating activities $ 11,373 $ 6,028 89 % Net cash used in investing activities $ (31,921 ) $ (57,090 ) (44 )% Net cash provided by financing activities $ 10,634 $ 54,000 (80 )% Operating activities . The increase in net cash flow provided by operating activities for the three months ended March 31, 2021, compared with 2020, was primarily related to higher revenues associated with increased production volumes as a result of our successful horizontal drilling program and increased realized prices. Partially offsetting this increase was a greater accounts receivable balance resulting from the higher oil, NGL and natural gas revenues related to increased sales volumes and realized prices in the current period. Investing activities. The decrease in net cash used in investing activities for the three months ended March 31, 2021, compared with 2020, was primarily due to decreases in additions to oil and natural gas properties as the Company was running two rigs for a portion of the 2020 period compared with only one rig in 2021 and decreases in oil and natural gas acquisition costs. During the prior year period, the Company also funded an extension payment of $11.0 million related to an acquisition in 2020 that was terminated and funded notes receivable to Pure of $4.0 million related to the HighPeak business combination. Financing activities. The Company's significant financing activities are as follows: • 2021: The Company received $9.1 million from the exercise of 788,009 of the Company’s $11.50 warrants and $1.6 million from the exercise of 154,268 of stock options by employees of the Company. • 2020: The Company’s Predecessors received $54.0 million in capital contributions from its partners. Contractual obligations. The Company's contractual obligations include leases (primarily related to contracted drilling rigs, equipment and office facilities), capital funding obligations and other liabilities. Other joint owners in the properties operated by the Company could incur portions of the costs represented by these commitments. New Accounting Pronouncements Our historical condensed consolidated and combined financial statements and related notes to condensed consolidated and combined financial statements contain information that is pertinent to our management’s discussion and analysis of financial condition and results of operations. Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that our management make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. However, the accounting principles used by us generally do not change our reported cash flows or liquidity. Interpretation of the existing rules must be done, and judgments made on how the specifics of a given rule apply to us. In management’s opinion, the more significant reporting areas impacted by management’s judgments and estimates are the choice of accounting method for oil and natural gas activities, oil and natural gas reserve estimation, asset retirement obligations, impairment of long-lived assets, valuation of stock-based compensation, valuation of business combinations, accounting and valuation of nonmonetary transactions, litigation and environmental contingencies, valuation of financial derivative instruments, uncertain tax positions and income taxes. Management’s judgments and estimates in all the areas listed above are based on information available from both internal and external sources, including engineers, geologists and historical experience in similar matters. Actual results could differ from the estimates as additional information becomes known. There have been no material changes in our critical accounting policies and procedures during the three months ended March 31, 2021. See our disclosure of critical accounting policies in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 15, 2021. New accounting pronouncements issued but not yet adopted. The effects of new accounting pronouncements are discussed in Note 2 of Notes to Condensed Consolidated and Combined Financial Statements included in "Item 1. Condensed Consolidated and Combined Financial Statements (Unaudited)." 31