What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-03 · 76 added, 75 removed, 129 unchanged (54% of the section changed)

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• Critical Accounting Policies and Estimates.

The financial information with respect to the three and six-month periods ended June 30, 2023 and 2022, discussed below, is unaudited.

The financial information with respect to the three and nine-month periods ended September 30, 2023 and 2022, discussed below, is unaudited.

In the opinion of management, this information contains all adjustments, which consist only of normal recurring adjustments unless otherwise disclosed, necessary to state fairly the accompanying unaudited condensed consolidated financial statements.

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Mid-Continent region (“Mid-Con”).

The chart below shows production by product for the three and six-month periods ended June 30, 2023 and 2022:

The chart below shows production by product for the three and nine-month periods ended September 30, 2023 and 2022:

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Total MBoe production for the three-month period ended June 30, 2023 was comprised of approximately 18.1% oil, 54.2% natural gas and 27.7% NGL compared to 12.8% oil, 53.8% natural gas and 33.4% NGL in 2022.

The increase in oil production was primarily driven by the newly drilled wells as part of the Company’s capital development program.

The decrease in total MBoe was primarily driven by a reduction of NGL production, as one of the Company’s purchasers elected to retain more ethane in the natural gas stream, which had more favorable market pricing at the time of sales.

Total MBoe production for the six-month period ended June 30, 2023 was comprised of approximately 17.8% oil, 54.4% natural gas and 27.8% NGL compared to 13.1% oil, 53.8% natural gas and 33.1% NGL in 2022.

Total MBoe production for the three-month period ended September 30, 2023 was comprised of approximately 16.8% oil, 55.5% natural gas and 27.7% NGL compared to 15.8% oil, 53.7% natural gas and 30.5% NGL in 2022.

The increase in oil production was primarily driven by the newly drilled wells as part of our capital development program.

The decrease in total MBoe was primarily driven by a reduction of NGL production, as one of our purchasers elected to retain more ethane in the natural gas stream, which had more favorable market pricing at the time of sales, as well as natural decline of its producing assets.

These factors were partially offset by production added during the third quarter from an acquisition that closed on July 11, 2023, which increased our ownership interest in twenty-six wells we operate.

Total MBoe production for the nine-month period ended September 30, 2023 was comprised of approximately 17.4% oil, 54.8% natural gas and 27.8% NGL compared to 14.0% oil, 53.8% natural gas and 32.2% NGL in 2022.

Recent Events

• In May 2023, the Board approved a one-time cash dividend of $2.00 per share of the Company’s common stock, which was paid on June 7, 2023 to shareholders of record as of the close of business on May 24, 2023.

The aggregate total payout was approximately $73.8 million.

Additionally, in May 2023, the Board announced that it plans a regular quarterly dividend of $0.10 per share of the Company’s common stock, to commence after the second quarter and to be first payable in August 2023, subject to quarterly approval by the Board.

• In May 2023, the Board approved a stock buyback program authorizing the repurchase of up to $75 million of the Company’s outstanding common stock in open market transactions.

• On July 12, 2023, the Company announced the closing of an acquisition which increases its interest in twenty-six producing wells operated by the Company within the Northwest Stack play for approximately $11.3 million, with an effective date of April 1, 2023.

Average net production associated with the acquired interests for the first quarter of 2023 was approximately 500 barrels of oil equivalent per day (~30% oil).

We expect the low decline profile and oilier content associated with these properties and interests further strengthen the Company’s commodity price realizations, operating margins and cash flow.

• On August 1, 2023, the Board declared a cash dividend of $0.10 per share of the Company’s common stock, payable on August 28, 2023 to shareholders of record on August 14, 2023.

• On July 11, 2023, we closed an acquisition which increased our ownership interest in twenty-six producing wells operated by the Company within the Northwest Stack play for $10.6 million, after customary post-closing adjustments, with an effective date of April 1, 2023.

• On August 1, 2023, the Board declared a cash dividend of $0.10 per share of our common stock, payable on August 28, 2023 to shareholders of record on August 14, 2023.

The aggregate total payout was $3.7 million.

• On November 2, 2023, the Board declared a cash dividend of $0.10 per share of the Company’s common stock, payable on November 27, 2023 to shareholders of record on November 13, 2023.

We will continue to focus on growing the cash value generation capability of our asset base in a safe, responsible and efficient manner, while exercising prudent capital allocations to projects we believe provide high rates of returns in the current commodity price environment.

These projects include (1) a continuation of our well reactivation program, (2) artificial lift conversions to more efficient and cost effective systems and (3) limited opportunistic leasing in proven areas around or adjacent to our area of operations that could further bolster future development.

Given near term commodity price dynamics, and that our Mid-Con assets are 99% held by production, which preserves the tenor of our development option, we concluded our drilling and completion program in the second quarter of 2023.

These projects include (1) artificial lift conversions to more efficient and cost effective systems, (2) a continuation of our well reactivation program and (3) limited opportunistic leasing in proven areas around or adjacent to our area of operations that could further bolster future development.

Given the commodity price dynamics during the year, and that our Mid-Con assets are 99% held by production, which preserves the tenor of our development option, we concluded our drilling and completion program in the second quarter of 2023.

We will continue to monitor forward-looking commodity prices, results, costs and other factors that could influence returns on investments, which will continue to shape our disciplined development decisions in 2023 and beyond.

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To provide information on the general trend in pricing, the average New York Mercantile Exchange ("NYMEX") prices for oil and natural gas are shown in the tables below:

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Three-month periods ended

June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022

September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022

NYMEX Oil (per Bbl) $ 82.25 $ 73.54 $ 75.93 $ 82.79 $ 93.06

NYMEX Natural gas (per Mcf) $ 2.69 $ 2.26 $ 2.74 $ 5.76 $ 8.32

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In order to reduce our exposure to price fluctuations, from time to time we may enter into commodity derivative contracts for a portion of our anticipated future oil, natural gas and NGL production as discussed in “Item 3.

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See “Note 3 — Derivatives” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for additional information regarding our commodity derivatives.

Consolidated revenues for the three and six-month periods ended June 30, 2023 and 2022 are presented in the table below (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Consolidated revenues for the three and nine-month periods ended September 30, 2023 and 2022 are presented in the table below (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 Change 2023 2022 Change

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Total revenues $ 38,149 $ 70,899 $ (32,750) $ 114,715 $ 198,146 $ (83,431)

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Oil, Natural Gas and NGL Production and Pricing

Our production and pricing information for the three and six-month periods ended June 30, 2023 and 2022 is shown in the

Three Months Ended June 30, Six Months Ended June 30,

Our production and pricing information for the three and nine-month periods ended September 30, 2023 and 2022 is shown in the table below:

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 Change 2023 2022 Change

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(1) Prices represent actual average sales prices for the periods presented and do not include effects of derivative settlements.

Variances in oil, natural gas and NGL revenues attributable to changes in the average prices received for our production and total production volumes sold for the three and six-month periods ended June 30, 2023 are shown in the table below (in thousands):

Three Months Ended June 30, 2023 Six Months Ended June 30, 2023

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Variances in oil, natural gas and NGL revenues attributable to changes in the average prices received for our production and total production volumes sold for the three and nine-month periods ended September 30, 2023 are shown in the table below (in thousands):

Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023

2022 oil, natural gas and NGL revenues $ 70,899 $ 198,146

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2023 oil, natural gas and NGL revenues $ 38,149 $ 114,715

Revenue for the three and six-month periods ended June 30, 2023 decreased almost entirely due to a reduction in commodity prices.

Revenue for the three and nine-month periods ended September 30, 2023 decreased almost entirely due to a reduction in commodity prices.

See "Item 1A—Risk Factors" included in our 2022 Form 10-K for additional discussion of the potential impact these events may have on our future revenues.

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Operating Expenses

Operating expenses for the three and six-month periods ended June 30, 2023 and 2022 consisted of the following (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Operating expenses for the three and nine-month periods ended September 30, 2023 and 2022 consisted of the following (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 Change 2023 2022 Change

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Production, ad valorem, and other taxes (% of oil, natural gas and NGL revenue) 5.3 % 6.7 % (1.4) % 7.4 % 6.9 % 0.5 %

The decrease in lease operating expenses for the three-month period ended June 30, 2023 was primarily due to a reduction in utility costs and lower workover expenses.

Despite market driven inflationary pressures and higher production costs associated with more producing wells from the Company’s well reactivation and development programs, lease operating expenses for the six-month period ended June 30, 2023 were kept relatively consistent, compared to the same period in 2022.

Production, ad valorem, and other taxes for the three and six-month periods ended June 30, 2023 decreased primarily due to lower commodity prices and related revenues.

Production, ad valorem, and other taxes for the three and six-month periods ended June 30, 2023 increased as a percentage of oil, natural gas and NGL revenue due to an increase in ad valorem taxes as a result of higher oil and gas property valuation assessments by local jurisdictions who use historical commodity price averages that were higher than current commodity prices, when determining ad valorem tax assessments.

The increase in depreciation and depletion for oil and natural gas properties was primarily the result of capital expenditures for the third quarter of 2022 through the second quarter of 2023 and a decrease in proved reserves at June 30, 2023, primarily as a result of lower SEC prices (as defined below), which increased our depletion rate.

The increase in lease operating expenses for the three and nine-month periods ended September 30, 2023 was primarily due to inflationary pressures and higher production costs associated with more producing wells from our well reactivations and prior development program as well as increased ownership interest from our July 2023 acquisition.

Production, ad valorem, and other taxes for the three and nine-month periods ended September 30, 2023 decreased primarily due to lower commodity prices and related revenues.

Production, ad valorem, and other taxes for the three month period ended September 30, 2023 decreased as a percentage of oil, natural gas and NGL revenue primarily due to recovery of ad valorem tax payments from our working interest partners.

Production, ad valorem, and other taxes for the nine-month period ended September 30, 2023 increased as a percentage of oil, natural gas and NGL revenue primarily due to higher oil and gas property valuation assessments by local jurisdictions who use historical commodity price averages that were higher than current commodity prices, when determining ad valorem tax assessments.

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The increase in depreciation and depletion for oil and natural gas properties was primarily the result of capital expenditures for the fourth quarter of 2022 through the third quarter of 2023 and a decrease in proved reserves at September 30, 2023, primarily as a result of lower SEC prices (as defined below), which increased our depletion rate.

A ceiling limitation calculation is performed at the end of each quarter.

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Calculation of the full cost ceiling test is based on, among other factors, trailing twelve-month first-day-of-the-month index prices (“SEC prices”) as adjusted for price differentials and other contractual arrangements.

The SEC prices utilized in the calculation of proved reserves included in the full cost ceiling test at June 30, 2023 were $82.82 per barrel of oil and $4.76 per MMBtu of natural gas, before price differential adjustments.

The SEC prices utilized in the calculation of proved reserves included in the full cost ceiling test at September 30, 2023 were $78.54 per barrel of oil and $3.42 per MMBtu of natural gas, before price differential adjustments.

The ceiling limitation was not exceeded;

therefore, no full cost ceiling limitation impairments were recorded during the three and six-month periods ended June 30, 2023 or 2022.

During certain periods within the past five years, the SEC prices used in the full cost ceiling test have been lower than the SEC prices used for the June 30, 2023 full cost ceiling test and resulted in material ceiling limitation impairments.

therefore, no full cost ceiling limitation impairments were recorded during the three and nine-month periods ended September 30, 2023 or 2022.

During certain periods within the past five years, the SEC prices used in the full cost ceiling test have been lower than the SEC prices used for the September 30, 2023 full cost ceiling test and resulted in material ceiling limitation impairments.

Full cost pool ceiling limitation impairments have no impact to our cash flow or liquidity.

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Based on the SEC prices over the trailing ten months ended July 31, 2023, as well as two months of NYMEX strip pricing for August and September of 2023 as of July 18, 2023, we estimate the SEC prices utilized in the September 30, 2023 full cost ceiling test may be $77.22 per barrel of oil and $3.43 per MMBtu of natural gas (the "estimated third quarter prices").

Applying these estimated third quarter prices, and holding all other inputs constant to those used in the calculation of our June 30, 2023 ceiling test, we expect that no full cost ceiling limitation impairment is indicated for the third quarter of 2023.

Based on the SEC prices over the trailing ten months ended October 1, 2023, as well as two months of NYMEX strip pricing for November and December of 2023 as of October 25, 2023, we estimate the SEC prices utilized in the December 31, 2023 full cost ceiling test may be $79.52 per barrel of oil and $2.66 per MMBtu of natural gas (the "estimated year-end prices").

Applying these estimated year-end prices, and holding all other inputs constant to those used in the calculation of our September 30, 2023 ceiling test, we expect that no full cost ceiling limitation impairment is indicated for the fourth quarter of 2023.

Any actual full cost ceiling limitation impairment recognized in future quarters may fluctuate significantly from projected amounts based on the outcome of numerous other factors such as declines in the actual trailing twelve-month SEC prices, lower NGL pricing, changes in estimated future development costs and operating expenses, and other adjustments to our levels of proved reserves.

Other Operating Expenses

Other operating expenses for the three and six-month periods ended June 30, 2023 and 2022 consisted of the following (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Other operating expenses for the three and nine-month periods ended September 30, 2023 and 2022 consisted of the following (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 Change 2023 2022 Change

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Employee termination benefits — — — 19 — 19

(Gain) loss on derivative contracts — — — (1,447) 1,064 (2,511)

Gain on derivative contracts — (4,258) 4,258 (1,447) (3,194) 1,747

Other operating (income) expense (31) (25) (6) (152) (140) (12)

Total other operating expenses $ 2,630 $ (1,825) $ 4,455 $ 6,767 $ 4,467 $ 2,300

The change in general and administrative expenses for the three and six-month periods ended June 30, 2023 is primarily due to a one-time $0.4 million legal retainer refund received in the second quarter of 2022, related to the 2016 bankruptcy, which lowered general and administrative expenses for the three and six-month periods ended June 30, 2022.

The following table summarizes derivative activity for the three and six-month periods ended June 30, 2023 and 2022 (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

The increase in general and administrative expenses for the three months ended September 30, 2023 was primarily the result of an increase in computer software upgrades.

The nine months ended September 30, 2022 benefited from a one-time $0.4 million legal retainer refund received in the second quarter of 2022, related to the 2016 bankruptcy, which lowered general and administrative expenses.

Other increases in general and administrative expenses for the nine months ended September 30, 2023 included higher technology, service and personnel costs.

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The following table summarizes derivative activity for the three and nine-month periods ended September 30, 2023 and 2022 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

(Gain) loss on derivative contracts $ — $ — $ (1,447) $ 1,064

Gain on derivative contracts $ — $ (4,258) $ (1,447) $ (3,194)

Realized settlement gains (losses) on derivative contracts $ — $ 218 $ 5,876 $ (867)

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Quantitative and Qualitative Disclosures about Market Risk” included in Part I of this Quarterly Report.

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Other Income (Expense)

Our other income (expense) for the three and six-month periods ended June 30, 2023 and 2022 are presented in the table below (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Our other income (expense) for the three and nine-month periods ended September 30, 2023 and 2022 are presented in the table below (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Other income, net 31 147 88 235

Total other income (expense) $ 2,830 $ (15) $ 5,384 $ (91)

Interest income (expense), net during the three and six-month periods ended June 30, 2023 is primarily comprised of interest income received from cash deposits.

Interest expense incurred during the three and six-month ended June 30, 2022 is primarily comprised of interest related to letters of credit and interest paid on royalty obligations.

Total other income $ 2,486 $ 135 $ 7,870 $ 44

Interest income (expense), net during the three and nine-month periods ended September 30, 2023 is primarily comprised of interest income received from cash deposits.

Interest expense incurred during the three and nine-month ended September 30, 2022 is primarily comprised of interest related to vehicle leases and letters of credit.

Liquidity and Capital Resources

As of June 30, 2023, our cash and cash equivalents, including restricted cash was $224.0 million.

For the next twelve months, we expect to have ample liquidity with cash on hand and cash from operations.

We had no outstanding term or revolving debt obligations as of June 30, 2023.

As of September 30, 2023, our cash and cash equivalents, including restricted cash was $232.2 million.

We expect our cash on hand and cash from operations to be adequate to meet our short and long-term liquidity needs.

We had no outstanding term or revolving debt obligations as of September 30, 2023.

Working Capital and Sources and Uses of Cash

Our principal sources of liquidity for the next year include cash flows from operations and cash on hand.

Our working capital decreased to $198.7 million at June 30, 2023, compared to $241.6 million at December 31, 2022.

The decrease in working capital was primarily the result of a decrease in cash and cash equivalents due to our dividend payment to shareholders of $73.8 million and $24.3 million in capital expenditures, offset by cash flows from operations.

Dividend payments to shareholders of $77.8 million, $25.7 million in capital expenditures, and $11.2 million related to an acquisition of proved reserves were the primary drivers in the reduction of working capital to $205.1 million at September 30, 2023 compared to $241.6 million at December 31, 2022.

This activity was partially offset by cash flows from operations.

In May 2023, the Board approved a one-time cash dividend of $2.00 per share of the Company’s common stock, which was paid on June 7, 2023 to shareholders of record as of the close of business on May 24, 2023.

The aggregate total payout was approximately $73.8 million.

The aggregate total payout was $73.8 million.

Additionally, in May 2023, the Board announced plans for a regular quarterly dividend of $0.10 per share, subject to quarterly approval by the Board.

In August 2023, the Board declared a cash dividend of $0.10 per share of the Company’s common stock, which was paid on August 28, 2023 to shareholders of record as of the close of business on August 14, 2023.

The aggregate total payout was $3.7 million.

In addition to the quarterly dividend payments, the Company paid $0.3 million in cash dividends on vested stock awards during the three and nine-month periods ended September 30, 2023.

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Our cash flows from operations are substantially dependent on current and future prices for oil, natural gas and NGL, which historically have been, and may continue to be, volatile.

Cash flows from operations are also affected by timing of cash receipts and disbursements and changes in other working capital assets and liabilities.

Our cash flows for the six-month periods ended June 30, 2023 and 2022 are presented in the following table and discussed below (in thousands):

Six Months Ended June 30,

Our cash flows for the nine-month periods ended September 30, 2023 and 2022 are presented in the following table and discussed below (in thousands):

Nine Months Ended September 30,

Cash flows provided by operating activities $ 89,359 $ 134,630

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Cash Flows from Operating Activities

The $15.3 million decrease in cash flows from operations for the six-month period ended June 30, 2023 compared to the same period in 2022 is primarily due to a decrease in revenues from lower commodity prices and production.

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The $45.3 million decrease in cash flows from operations for the nine-month period ended September 30, 2023 compared to the same period in 2022 is primarily due to a decrease in revenues from lower commodity prices.

Cash Flows from Investing Activities

Our cash flows used in investing activities during the six-month period ended June 30, 2023 reflects capital expenditures of $24.3 million primarily related to capital expenditures made for drilling, capital workovers, and well reactivations.

Our cash flows used in investing activities during the nine-month period ended September 30, 2023 reflects capital expenditures of $25.7 million primarily related to capital expenditures made for drilling, capital workovers, and well reactivations and $11.2 million related to an acquisition of proved reserves, which increased ownership interests in properties operated by the Company.

We received $1.4 million of proceeds from the sale of equipment related to our oil and gas assets.

Our cash flows used in investing activities during the six-month period ended June 30, 2022 reflects capital expenditures of $12.0 million primarily related to capital expenditures made for drilling, capital workovers, well reactivations, inventory purchases and $1.4 million related to an acquisition of proved reserves, which increased interests in properties operated by the Company.

We received $0.3 million of proceeds from the sale of assets.

Capital expenditures for the six-month periods ended June 30, 2023 and 2022 are summarized below (in thousands):

Six Months Ended June 30,

Our cash flows used in investing activities during the nine-month period ended September 30, 2022 reflects capital expenditures of $31.1 million primarily related to capital expenditures made for drilling, capital workovers, well reactivations, inventory purchases and $1.4 million related to an acquisition of proved reserves, which increased ownership interests in properties operated by the Company.

Cash outflows were partially offset by $0.4 million of proceeds from the sale of assets.

Capital expenditures for the nine-month periods ended September 30, 2023 and 2022 are summarized below (in thousands):

Nine Months Ended September 30,

Capital Expenditures

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Inventory material transfers to oil and natural gas properties (1,246) —

Total cash paid for capital expenditures $ 24,327 $ 13,390

Total cash paid for capital expenditures, including acquisitions $ 36,913 $ 32,560

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Cash Flows from Financing Activities

Cash used in financing activities for the six-month period ended June 30, 2023 consisted primarily of $73.8 million in cash dividends, $0.2 million of cash used for tax withholdings paid in exchange for shares withheld on employee vested stock awards that were settled by net exercise, and finance lease payments of $0.3 million.

Cash used in financing activities for the six-month period ended June 30, 2022 consisted primarily of $0.2 million of cash used to pay employee tax obligations, for vested stock awards that were settled by net exercise, and finance lease payments of $0.2 million offset by immaterial proceeds from the exercise of stock options.

Cash used in financing activities for the nine-month period ended September 30, 2023 consisted primarily of $77.8 million in cash dividends, $0.9 million of cash used for tax withholdings paid in exchange for shares withheld on employee vested stock awards that were settled by net exercise, and finance lease payments of $0.4 million.

Cash used in financing activities for the nine-month period ended September 30, 2022 consisted primarily of $1.2 million of cash used to pay employee tax obligations for vested stock awards that were settled by net exercise and $0.3 million in finance lease payments, offset by immaterial proceeds from the exercise of stock options.

Net exercises of stock awards allows the holder of a stock award to tender back to us a number of shares at fair value upon the vesting of such stock award, that equals the employee payroll tax obligation due.

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Contractual Obligations and Off-Balance Sheet Arrangements

At June 30, 2023, our contractual obligations included asset retirement obligations, leases and other individually insignificant obligations.

At September 30, 2023, our contractual obligations included asset retirement obligations, leases and other individually insignificant obligations.

Additionally, we have certain financial instruments representing potential commitments that were incurred in the normal course of business to support our operations, including surety bonds.

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There were no other significant changes in total contractual obligations and off-balance sheet arrangements from those reported in the 2022 Form 10-K.

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Critical Accounting Policies and Estimates

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For a discussion of recent accounting pronouncements, newly adopted and recent accounting pronouncements not yet adopted, see “Note 1—Basis of Presentation” to the accompanying unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report.

We did not have any material changes in critical accounting policies, estimates, judgments and assumptions during the first six months of 2023.

We did not have any material changes in critical accounting policies, estimates, judgments and assumptions during the first nine months of 2023.

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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