What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-08 · 89 added, 75 removed, 120 unchanged (58% of the section changed)

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• Critical Accounting Policies and Estimates.

The financial information with respect to the three-month periods ended March 31, 2024 and 2023, discussed below, is unaudited.

The financial information with respect to the three and six-month periods ended June 30, 2024 and 2023, 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 charts below show production by product and percent revenues for the three-month periods ended March 31, 2024 and 2023:

Total MBoe production for the three-month period ended March 31, 2024 was comprised of approximately 15.1% oil, 58.2% natural gas and 26.7% NGL compared to 17.4% oil, 54.6% natural gas and 28.0% NGL in the first quarter of 2023 .

The charts below show production by product and percent revenues for the three and six-month periods ended June 30, 2024 and 2023:

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Total MBoe production for the three-month period ended June 30, 2024 was comprised of approximately 13.6% oil, 54.3% natural gas and 32.1% NGL compared to 18.1% oil, 54.2% natural gas and 27.7% NGL in 2023.

Total MBoe production for the six-month period ended June 30, 2024 was comprised of approximately 14.3% oil, 56.3% natural gas and 29.4% NGL compared to 17.8% oil, 54.4% natural gas and 27.8% NGL in 2023 .

Recent Events

• In January 2024, the Board approved a one-time cash dividend of $1.50 per share of the Company's common stock, which was paid on February 20, 2024 to shareholders of record as of the close of business on February 5, 2024.

The aggregate total payout was approximately $55.6 million.

Additionally, in March 2024, the Board increased the on-going quarterly dividend to $0.11 per share which was first paid on March 29, 2024, to shareholders of record as of the close of business on March 15, 2024.

The aggregate total payout was $4.1 million.

The $0.11 per share dividend is subject to quarterly approval by the Board.

• On May 2, 2024, the Board declared a cash dividend of $0.11 per share of the Company’s common stock, payable on May 31, 2024 to shareholders of record on May 17, 2024.

We will continue to focus on growing the value and cash 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) artificial lift conversions to more efficient and cost effective systems, (2) high-graded re-fracturing and recompletion and (3) limited opportunistic leasing in proven areas around or adjacent to our area of operations that could further bolster future development.

While commodity price futures are not yet at preferred levels to resume drilling or further well reactivations at this time, we retain the development option over a reasonable tenor, since our assets are 99% held by production.

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 2024 and beyond.

We will also continue to maintain optionality to execute on value accretive merger and acquisition opportunities that could bring synergies, leverage our core competencies, compliment our portfolio of assets, further utilize our NOLs or otherwise yield attractive returns for our shareholders.

• On June 13, 2024, the Company closed on the acquisition of producing oil and gas assets intermediately adjacent to its assets in Alfalfa, Grant and Woods counties in Oklahoma for $2.1 million, subject to customary post-closing adjustments.

• On July 29, 2024, the Company entered into a purchase and sale agreement to acquire certain producing assets and leasehold interests in the Western Anadarko Basin for cash consideration of $144 million, before customary purchase price adjustments, with an effective date of July 1, 2024.

The Company also entered into a joint development agreement governing its participation in the future development of certain leasehold interests acquired in the acquisition.

The transaction is expected to be funded with cash on hand and is targeted to close by the end of the third quarter of 2024.

• On August 6, 2024, the Board declared a cash dividend of $0.11 per share of the Company’s common stock, payable on August 30, 2024 to shareholders of record on August 16, 2024.

• Subsequent to June 30, 2024, the Company entered into oil and NGL derivative contracts.

See “Note 11 — Subsequent Events” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for additional information regarding our commodity derivative contracts.

We recently announced the entry into a purchase and sale agreement to acquire assets in the Western Anadarko Basin.

These assets include 42 producing wells, 4 drilled uncompleted (“DUC”) wells and leasehold interest in 11 drilling and spacing units (“DSUs”).

While we will continue to be responsible stewards of our incumbent asset base, upon consummation of the transaction, our focus will expand to include the efficient integration of these new assets, utilizing our low-cost operating expertise.

The transaction also provides the potential for expanded activity, which could include the completion of 3 operated DUC wells this year.

We will work with our joint development partner, who has a demonstrable history of successful operations in the play, to plan and initiate a drilling campaign, potentially as early as the fourth quarter of this year.

We will assume operatorship of the new wells after they are producing.

More information and updated guidance will be provided, subject to closing the acquisition, which we anticipate will occur before the end of the third quarter.

We remain focused on growing the value of our asset base in a safe, responsible and efficient manner, while exercising prudent capital allocations to projects that provide high rates of returns in the current commodity price environment.

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These standalone projects include (1) artificial lift conversions to more efficient and cost-effective systems, (2) high-graded re-fracturing and recompletion and (3) opportunistic leasing that could bolster future development and complement the recently acquired Cherokee assets.

Our incumbent leasehold remains approximately 99% held by production, which cost-effectively maintains its development option over a reasonable tenor.

These assets have higher relative gas content for which prices are not yet at optimal levels to resume development or material reactivations.

However, we will continue to monitor forward-looking commodity prices, project results, costs and other factors that could influence returns on investments over an expanded portfolio.

These and other factors will continue to shape our development decisions in 2024 and beyond.

We remain vigilant in evaluating further merger and acquisition opportunities, with consideration of our strong balance sheet and commitment to our capital return program.

Consolidated Results of Operations

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Three-month periods ended

March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 30, 2023

June 30, 2024 March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023

NYMEX Oil (per Bbl) $ 81.81 $ 77.50 $ 78.53 $ 82.25 $ 73.54

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Conversely, during periods of declining oil and natural gas market prices, our commodity derivative contracts may partially offset declining revenues and cash flows to the extent strike prices for our contracts are above market prices at the time of settlement.

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

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Consolidated revenues for the three-month periods ended March 31, 2024 and 2023 are presented in the table below (in thousands):

Three Months Ended March 31,

2024 2023 Change

See “Note 3 — Derivatives” and “Note 11 — Subsequent Events” 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, 2024 and 2023 are presented in the table below (in thousands):

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

2024 2023 Change 2024 2023 Change

Oil $ 14,732 $ 19,584 $ (4,852) $ 30,331 $ 38,994 $ (8,663)

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Total revenues $ 25,977 $ 33,419 $ (7,442) $ 56,260 $ 76,566 $ (20,306)

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Oil, Natural Gas and NGL Production and Pricing

Our production and pricing information for the three-month periods ended March 31, 2024 and 2023 is shown in the table below:

Three Months Ended March 31,

2024 2023 Change

Our production and pricing information for the three-month periods ended June 30, 2024 and 2023 is shown in the table below:

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

2024 2023 Change 2024 2023 Change

Production data

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

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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-month period ended March 31, 2024 are shown in the table below (in thousands):

Three Months Ended March 31, 2024

Q1 2023 oil, natural gas and NGL revenues $ 43,147

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, 2024 are shown in the table below (in thousands):

Three Months Ended June 30, 2024 Six Months Ended June 30, 2024

2023 oil, natural gas and NGL revenues $ 33,419 $ 76,566

Change due to production volumes (4,372) (7,269)

Change due to average prices (3,070) (13,037)

Q1 2024 oil, natural gas and NGL revenues $ 30,283

Oil, natural gas, and NGL revenues decreased primarily due to lower commodity prices.

Production volumes for the three months ended March 31, 2024 decreased primarily due to the natural declines of our producing wells, as well as an increase in downtime associated with inclement weather for the period.

There were no new wells or completions during the period, as the Company defers higher level of capital investment for higher commodity periods to maximizes returns.

2024 oil, natural gas and NGL revenues $ 25,977 $ 56,260

Oil, natural gas, and NGL revenues decreased primarily due to lower commodity prices and production volumes.

Production volumes decreased primarily due to the natural declines of our producing wells, as well as an increase in downtime associated with inclement weather for the period.

See "Item 1A—Risk Factors" included in our 2023 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-month periods ended March 31, 2024 and 2023 consisted of the following (in thousands):

Three Months Ended March 31,

2024 2023 Change

Operating expenses for the three-month periods ended June 30, 2024 and 2023 consisted of the following (in thousands):

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

2024 2023 Change 2024 2023 Change

Lease operating expenses $ 8,738 $ 8,802 $ (64) $ 19,630 $ 20,496 $ (866)

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Production, ad valorem, and other taxes (% of oil, natural gas and NGL revenue) 7.1 % 8.2 % (1.1) % 6.6 % 8.5 % (1.9) %

The decrease in lease operating expenses for the three-month periods ended March 31, 2024 was primarily due to decreases in utility costs and expense workovers.

Production, ad valorem, and other taxes for the three-month periods ended March 31, 2024 decreased primarily due to lower commodity prices and related revenues.

Production, ad valorem, and other taxes for the three month period ended March 31, 2024 decreased as a percentage of oil, natural gas and NGL revenue primarily due to a decrease in ad valorem taxes as a result of decreased valuation assessments on our oil and gas properties.

The increase in depreciation and depletion for oil and natural gas properties was primarily the result a decrease in proved reserves at March 31, 2024, driven by lower SEC prices (as defined below), which increased our depletion rate.

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Lease operating expenses decreased for the six months ended June 30, 2024 compared to the same period in 2023 due to a reduction in utility costs and expense workovers.

The increase in lease operating expenses per Boe were primarily due to decreased production volumes for the three and six-months ended June 30, 2024.

Production, ad valorem, and other taxes for the three and six-month periods ended June 30, 2024 decreased primarily due to lower commodity prices, sales volumes, and related revenues.

Production, ad valorem, and other taxes for the three and six-month periods ended June 30, 2024 decreased as a percentage of oil, natural gas and NGL revenue primarily due to a decrease in ad valorem taxes as a result of decreased valuation assessments on our oil and gas properties.

The increase in depreciation and depletion for oil and natural gas properties was primarily the result of a decrease in proved reserves at June 30, 2024 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 March 31, 2024 were $77.48 per barrel of oil and $2.45 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 June 30, 2024 were $79.00 per barrel of oil and $2.32 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-month periods ended March 31, 2024 or 2023.

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 March 31, 2024 full cost ceiling test and resulted in material ceiling limitation impairments.

therefore, no full cost ceiling limitation impairments were recorded during the three or six-month periods ended June 30, 2024 or 2023.

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, 2024 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.

Based on the SEC prices over the trailing ten months ended April 30, 2024, as well as two months of NYMEX strip pricing for May and June of 2024 as of April 30, 2024, we estimate the SEC prices utilized in the June 30, 2024 full cost ceiling test may be $79.60 per barrel of oil and $2.34 per MMBtu of natural gas (the "estimated second quarter prices").

Applying these estimated second quarter prices, and holding all other inputs constant to those used in the calculation of our March 31, 2024 ceiling test, we expect that no full cost ceiling limitation impairment is indicated for the second quarter of 2024.

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Based on the SEC prices over the trailing ten months ended July 31, 2024, as well as two months of NYMEX strip pricing for August and September of 2024 as of July 25, 2024, we estimate the SEC prices utilized in the September 30, 2024 full cost ceiling test may be $79.10 per barrel of oil and $2.23 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, 2024 ceiling test, we expect that no full cost ceiling limitation impairment is indicated for the third quarter of 2024.

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-month periods ended March 31, 2024 and 2023 consisted of the following (in thousands):

Three Months Ended March 31,

2024 2023 Change

Other operating expenses for the three and six-month periods ended June 30, 2024 and 2023 consisted of the following (in thousands):

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

2024 2023 Change 2024 2023 Change

General and administrative $ 3,050 $ 2,476 $ 574 $ 6,382 $ 5,385 $ 997

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Total other operating expenses $ 3,164 $ 2,711 $ 453 $ 6,487 $ 4,137 $ 2,350

The increase in general and administrative expenses for the three months ended March 31, 2024 was primarily the result of an increase in service and personnel costs.

The following table summarizes derivative activity for the three-month periods ended March 31, 2024 and 2023 (in thousands):

Three Months Ended March 31,

The increase in general and administrative expenses for the three and six-month periods ended June 30, 2024 was primarily the result of an increase in service and personnel costs.

The following table summarizes derivative activity for the three and six-month periods ended June 30, 2024 and 2023 (in thousands):

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

2024 2023 2024 2023

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

Settlement gains (losses) on derivative contracts $ — $ — $ — $ 5,876

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Our derivative contracts were not designated as accounting hedges and, as a result, changes in their fair values were recorded each quarter as a component of operating expenses.

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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-month periods ended March 31, 2024 and 2023 are presented in the table below (in thousands):

Three Months Ended March 31,

Our other income (expense) for the three and six-month periods ended June 30, 2024 and 2023 are presented in the table below (in thousands):

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

2024 2023 2024 2023

Other income (expense)

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Total other income $ 2,574 $ 2,830 $ 5,281 $ 5,384

Interest income, net during the three-month periods ended March 31, 2024 and 2023 is primarily comprised of interest income on cash deposits.

Interest income, net during the three and six-month periods ended June 30, 2024 and 2023 is primarily comprised of interest income on cash deposits.

Liquidity and Capital Resources

As of March 31, 2024, our cash and cash equivalents, including restricted cash was $208.5 million.

As of June 30, 2024, our cash and cash equivalents, including restricted cash was $211.3 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 March 31, 2024.

We had no outstanding term or revolving debt obligations as of June 30, 2024.

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.

Dividend payments to shareholders of $59.7 million were the primary drivers in the reduction of working capital to $184.5 million at March 31, 2024 compared to $228.5 million at December 31, 2023.

Dividend payments to shareholders of $64.0 million were the primary drivers in the reduction of working capital to $191.0 million at June 30, 2024 compared to $228.5 million at December 31, 2023.

This activity was partially offset by cash flows from operations.

In January 2024, the Board approved a one-time cash dividend of $1.50 per share of the Company's common stock, which was paid on February 20, 2024 to shareholders of record as of the close of business on February 5, 2024.

The aggregate total payout was approximately $55.6 million.

The aggregate total payout was $4.1 million.

The $0.11 per share dividend is subject to quarterly approval by the Board.

Dividend payments for the three-month period ended March 31, 2024 totaled $59.7 million, which included $0.1 million in dividends on vested stock awards.

Dividend payments for the six-month period ended June 30, 2024 totaled $64.0 million, which included $0.3 million of dividends on vested stock awards.

Dividend payments for the six-month period ended June 30, 2023 totaled $73.8 million.

See Note 8 for further discussion of the Company’s dividends.

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

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Our cash flows for the three-month periods ended March 31, 2024 and 2023 are presented in the following table and discussed below (in thousands):

Three Months Ended March 31,

Our cash flows for the six-month periods ended June 30, 2024 and 2023 are presented in the following table and discussed below (in thousands):

Six Months Ended June 30,

Cash flows provided by operating activities $ 27,093 $ 63,852

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Cash flows used in financing activities (1)

(64,626) (74,269)

Net (decrease) increase in cash and cash equivalents and restricted cash $ (42,652) $ (33,441)

(1) Includes $64.0 million and $73.8 million in dividend payments for the six-month periods ended June 30, 2024 and 2023, respectively.

Cash Flows from Operating Activities

The $24.2 million decrease in cash flows from operations for the three-month period ended March 31, 2024 compared to the same period in 2023 is primarily due to a decrease in revenues from lower commodity prices.

The $36.8 million decrease in cash flows from operations for the six-month period ended June 30, 2024 compared to the same period in 2023 is primarily due to a decrease in revenues from lower commodity prices and sales volumes.

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Cash Flows from Investing Activities

Our cash flows used in investing activities during the three-month periods ended March 31, 2024 and 2023 reflect capital expenditures of $1.1 million and $9.4 million, respectively, primarily related to capital expenditures made for capital workovers, well reactivation and drilling in 2023.

Our cash flows used in investing activities during the six-month periods ended June 30, 2024 and 2023 reflect capital expenditures of $3.6 million and $24.3 million, respectively, primarily related to capital expenditures made for capital workovers, well reactivation and drilling in 2023.

Given the decline in natural gas prices, we have prudently elected to defer our drilling option for higher commodity price environments to maximize returns.

Capital expenditures for the three-month periods ended March 31, 2024 and 2023 are summarized below (in thousands):

Three Months Ended March 31,

Additionally, the Company acquired producing oil and gas assets for $2.1 million during the six-months ended June 30, 2024.

Capital expenditures for the six-month periods ended June 30, 2024 and 2023 are summarized below (in thousands):

Six Months Ended June 30,

Capital Expenditures

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Capital expenditures (on an accrual basis) 3,368 21,156

Acquisitions 2,103 —

Capital expenditures, including acquisitions 5,471 21,156

Changes in accounts payable and accrued expenses 278 4,376

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Cash Flows from Financing Activities

Cash used in financing activities for the three-month period ended March 31, 2024 consisted primarily of $59.7 million in cash dividends, $0.1 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 $0.2 million.

Cash used in financing activities for the three-month period ended March 31, 2023 consisted primarily of $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 $0.1 million.

Cash used in financing activities for the six-month period ended June 30, 2024 consisted primarily of $64.0 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 $0.4 million.

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.

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 March 31, 2024, our contractual obligations included asset retirement obligations, leases and other individually insignificant obligations.

At June 30, 2024, 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 2023 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 three months of 2024.

We did not have any material changes in critical accounting policies, estimates, judgments and assumptions during the first six months of 2024.

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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