What changed in this filing

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Item 1. Financial Statements

2020-10-30 compared with 2020-07-31 · 214 added, 159 removed, 690 unchanged (35% of the section changed)

3 unchanged sentences

(in thousands, except share data)

September 30,

2020 December 31,

48 unchanged sentences

For the Three Months Ended

June 30, For the Six Months Ended

September 30, For the Nine Months Ended

September 30,

2020 2019 2020 2019

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Net derivative (gain) loss 63,871 ( 100,889 ) ( 314,269 ) ( 3,463 )

Other operating (income) expense, net 8,046 ( 934 ) 8,612 ( 599 )

Other operating expense, net 1,562 1,021 10,174 422

Total operating expenses 384,147 290,840 1,703,284 1,120,084

16 unchanged sentences

For the Three Months Ended

June 30, For the Six Months Ended

September 30, For the Nine Months Ended

September 30,

2020 2019 2020 2019

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Balances, June 30, 2020 113,553,271 $ 1,136 $ 1,825,327 $ 465,310 $ ( 10,941 ) $ 2,280,832

Net loss — — — ( 98,292 ) — ( 98,292 )

Other comprehensive income — — — — 1,195 1,195

Cash dividends declared, $ 0.01 per share

— — — ( 1,146 ) — ( 1,146 )

Issuance of common stock upon vesting of RSUs and settlement of PSUs, net of shares used for tax withholdings 1,019,529 10 ( 1,567 ) — — ( 1,557 )

Stock-based compensation expense — — 4,164 — — 4,164

Other — — ( 88 ) — — ( 88 )

Balances, September 30, 2020 114,572,800 $ 1,146 $ 1,827,836 $ 365,872 $ ( 9,746 ) $ 2,185,108

The accompanying notes are an integral part of these condensed consolidated financial statements.

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (Continued)

(in thousands, except share data and dividends per share)

Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Stockholders’ Equity

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Balances, June 30, 2019 112,525,633 $ 1,125 $ 1,779,665 $ 1,033,051 $ ( 11,998 ) $ 2,801,843

Net income — — — 42,234 — 42,234

Other comprehensive income — — — — 190 190

Cash dividends declared, $ 0.05 per share

— — — ( 5,643 ) — ( 5,643 )

Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings 331,530 4 ( 1,644 ) — — ( 1,640 )

Stock-based compensation expense — — 6,766 — — 6,766

Balances, September 30, 2019 112,857,163 $ 1,129 $ 1,784,787 $ 1,069,642 $ ( 11,808 ) $ 2,843,750

The accompanying notes are an integral part of these condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Cash flows from operating activities:

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Stock-based compensation expense 15,437 18,758

Net derivative (gain) loss ( 378,140 ) 97,426

Derivative settlement gain (loss) 215,965 ( 879 )

Net derivative gain ( 314,269 ) ( 3,463 )

Derivative settlement gain 286,270 23,843

Amortization of debt discount and deferred financing costs 13,084 11,554

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Capital expenditures ( 419,777 ) ( 788,642 )

Other, net — 319

Acquisition of proved and unproved oil and gas properties ( 7,075 ) ( 2,581 )

Net cash used in investing activities ( 426,760 ) ( 778,703 )

3 unchanged sentences

Debt issuance costs related to 10.0% Senior Secured Notes due 2025 ( 12,886 ) —

Cash paid to repurchase 6.125% Senior Notes due 2022 ( 28,318 ) —

Cash paid to repurchase Senior Notes ( 94,262 ) —

Repayment of 1.50% Senior Convertible Notes due 2021 ( 53,508 ) —

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Investing activities:

Decrease in capital expenditure accruals and other $ ( 28,896 ) $ ( 10,097 )

Supplemental non-cash investing activities:

Carrying value of properties exchanged $ — $ 66,588

Supplemental non-cash financing activities:

Non-cash gain on extinguishment of debt, net $ 292,984 $ —

Increase (decrease) in capital expenditure accruals and other $ ( 17,405 ) $ 34,878

Non-cash investing and financing activities (2)(3)

Reconciliation of cash, cash equivalents, and restricted cash:

3 unchanged sentences

____________________________________________

(1) As of June 30, 2019, a portion of net proceeds from the sale of oil and gas properties was restricted for future property acquisitions.

Restricted cash is included in the other noncurrent assets line item on the accompanying unaudited condensed consolidated balance sheets (“accompanying balance sheets”).

(1) As of September 30, 2019, a portion of net proceeds from the sale of oil and gas properties was restricted for future property acquisitions.

(2) Please refer to Note 3 - Divestitures, Assets Held for Sale, and Acquisitions for discussion of the carrying value of properties exchanged during the nine months ended September 30, 2020, and 2019, respectively.

(3) Please refer to Note 5 - Long-Term Debt for discussion of the debt transactions executed during the nine months ended September 30, 2020.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Operating results for the periods presented are not necessarily indicative of expected results for the full year.

In connection with the preparation of the Company’s unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of June 30, 2020, and through the filing of this report.

In connection with the preparation of the Company’s unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of September 30, 2020, and through the filing of this report.

Additionally, certain prior period amounts have been reclassified to conform to current period presentation in the accompanying unaudited condensed consolidated financial statements.

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Please refer to Note 5 - Long-Term Debt for discussion of the use of the London Interbank Offered Rate (“LIBOR”) in connection with borrowings under the Credit Agreement.

In August 2020, the FASB issued ASU No.

2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) .

ASU 2020-06 was issued to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity.

The guidance is to be applied using either a modified retrospective or a fully retrospective method.

ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted.

The Company is evaluating the impact of ASU 2020-06 on its consolidated financial statements and related disclosures.

As disclosed in the 2019 Form 10-K , on January 1, 2020, the Company adopted ASU No.

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As expected, there was no material impact on the Company’s unaudited condensed consolidated financial statements or disclosures upon adoption of these ASUs.

There are no ASUs that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures that have been issued but not yet adopted by the Company as of June 30, 2020, or through the filing of this report.

There are no ASUs that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures that have been issued but not yet adopted by the Company as of September 30, 2020, or through the filing of this report.

Note 2 - Revenue from Contracts with Customers

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Oil, gas, and NGL production revenue presented within the accompanying unaudited condensed consolidated statements of operations (“accompanying statements of operations”) is reflective of the revenue generated from contracts with customers.

The tables below present oil, gas, and NGL production revenue by product type for each of the Company’s operating regions for the three and six months ended June 30, 2020, and 2019:

The tables below present oil, gas, and NGL production revenue by product type for each of the Company’s operating regions for the three and nine months ended September 30, 2020, and 2019:

Midland Basin South Texas Total

Three Months Ended

June 30, Three Months Ended

September 30, Three Months Ended

September 30,

2020 2019 2020 2019 2020 2019

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Midland Basin South Texas Total

Six Months Ended

June 30, Six Months Ended

Nine Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019 2020 2019

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The performance obligations are considered satisfied upon control transferring to a purchaser at the wellhead, inlet, or tailgate of the midstream processor’s processing facility, or other contractually specified delivery point.

The time period between production and satisfaction of performance obligations is generally less than one day;

The time period between

production and satisfaction of performance obligations is generally less than one day;

thus, there are no material unsatisfied or partially unsatisfied performance obligations at the end of the reporting period.

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As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the product.

Estimated revenue due to the Company is recorded within the accounts receivable line item on the accompanying balance sheets until payment is received.

The accounts receivable balances from contracts with customers within the accompanying balance sheets as of June 30, 2020, and December 31, 2019, were $ 60.9 million and $ 146.3 million, respectively.

Estimated revenue due to the Company is recorded within the accounts receivable line item on the accompanying unaudited condensed consolidated balance sheets (“accompanying balance sheets”) until payment is received.

The accounts receivable balances from contracts with customers within the accompanying balance sheets as of September 30, 2020, and December 31, 2019, were $ 79.3 million and $ 146.3 million, respectively.

To estimate accounts receivable from contracts with customers, the Company uses knowledge of its properties, historical performance, contractual arrangements, index pricing, quality and transportation differentials, and other factors as the basis for these estimates.

1 unchanged sentence

Note 3 - Divestitures, Assets Held for Sale, and Acquisitions

No material divestitures occurred during the first six months of 2020 and 2019, and there were no assets classified as held for sale as of June 30, 2020, or December 31, 2019.

No material acquisitions or acreage trades of oil and gas properties occurred during the first half of 2020.

During the first half of 2019, the Company completed several non-monetary acreage trades of primarily undeveloped properties located in Howard, Martin, and Midland Counties, Texas, resulting in the exchange of approximately 2,000 net acres, with $ 66.6 million of carrying value attributed to the properties transferred by the Company.

No material divestitures occurred during the first nine months of 2020 and 2019, and there were no assets classified as held for sale as of September 30, 2020, or December 31, 2019.

During the third quarter of 2020, the Company completed a non-monetary acreage trade of primarily undeveloped properties located in Upton County, Texas, resulting in the exchange of approximately 535 net acres, with $ 6.5 million of carrying value attributed to the properties transferred by the Company.

This trade was recorded at carryover basis with no gain or loss recognized.

Also during the third quarter of 2020, the Company acquired approximately 380 net acres of proved and unproved properties in Martin County, Texas, for $ 7.1 million.

During the first nine months of 2019, the Company completed several non-monetary acreage trades of primarily undeveloped properties located in Howard, Martin, and Midland Counties, Texas, resulting in the exchange of approximately 2,100 net acres, with $ 70.8 million of carrying value attributed to the properties transferred by the Company.

These trades were recorded at carryover basis with no gain or loss recognized.

Note 4 - Income Taxes

The provision for income taxes for the three and six months ended June 30, 2020, and 2019, consisted of the following:

The provision for income taxes for the three and nine months ended September 30, 2020, and 2019, consisted of the following:

For the Three Months Ended

June 30, For the Six Months Ended

September 30, For the Nine Months Ended

September 30,

2020 2019 2020 2019

9 unchanged sentences

The quarterly rate can also be affected by the proportional impacts of forecasted net income or loss for each period presented, as reflected in the table above.

A change in the Company’s effective tax rate between reporting periods will generally reflect differences in estimating permanent differences compared to changes in forecasted net income or loss.

Each quarter, the Company evaluates its deferred tax assets for potential realization, weighing both positive and negative evidence to determine, on a more likely than not basis, the future utilization by asset and jurisdiction.

When the significance of negative evidence outweighs the Company’s positive support of realization, a valuation allowance is recorded.

Subsequently, when the significance of positive evidence outweighs negative evidence that a deferred tax asset will be realized, the valuation allowance is released.

During the second quarter of 2020, the Company executed certain debt exchange transactions that resulted in cancellation of debt income and supported the utilization of its deferred tax assets.

As a result, the Company released the valuation allowance recorded in the previous quarter which increased the Company’s income tax benefit and tax benefit rate for the three months ended June 30, 2020.

During the third quarter of 2020, the proportional effect of recording discrete excess tax deficiencies from share-based compensation awards and other permanent items decreased the Company’s effective tax rate for the three months ended September 30, 2020, compared with the same period in 2019.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020.

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Note 5 - Long-Term Debt

The following table summarizes the Company’s total outstanding balance on its revolving credit facility, Senior Secured Notes net of unamortized discount and deferred financing costs, and Senior Unsecured Notes, net of unamortized deferred financing costs, as of September 30, 2020, and December 31, 2019:

As of September 30, 2020 As of December 31, 2019

(in thousands)

Revolving credit facility $ 178,000 $ 122,500

Senior Secured Notes (1)

Senior Unsecured Notes (1)

1,717,647 2,610,298

Total $ 2,353,038 $ 2,732,798

____________________________________________

(1) Senior Secured Notes and Senior Unsecured Notes have been defined below.

During the nine months ended September 30, 2020, the Company executed multiple transactions to reduce outstanding debt.

During the second quarter of 2020, the Company initiated an offer to exchange its outstanding senior unsecured notes, as presented in the Senior Unsecured Notes section below (“Senior Unsecured Notes”), other than the 1.50 % Senior Convertible Notes due 2021 (“2021 Senior Convertible Notes,” and together with the Senior Unsecured Notes, “Old Notes”), and a private exchange of its outstanding 2021 Senior Convertible Notes and portions of its outstanding Senior Unsecured Notes (“Private Exchange”), in each case for newly issued 10.0 % Senior Secured Second Lien Notes due January 15, 2025 (“2025 Senior Secured Notes”), referred to together as “Exchange Offers.” In connection with the Exchange Offers, the Company and its lenders amended the Credit Agreement to increase the amount of permitted second lien indebtedness to an aggregate amount of $ 1.0 billion, inclusive of the 2021 Senior Convertible Notes (“Permitted Second Lien Debt”).

13 unchanged sentences

6.625 % Senior Notes due 2027

Please refer to the Credit Agreement , Senior Secured Notes , and Senior Unsecured Notes sections below for additional information regarding the debt transactions conducted by the Company during the second quarter of 2020.

The Company retired $ 611.9 million and $ 107.0 million in aggregate principal amount of its Senior Unsecured Notes and 2021 Senior Convertible Notes, respectively, upon the closing of the Exchange Offers.

Upon closing, the Company paid $ 8.9 million of accrued and unpaid interest and accelerated $ 5.6 million of previously unamortized deferred financing costs associated with the retired Senior Unsecured Notes and 2021 Senior Convertible Notes and accelerated $ 6.1 million of previously unamortized debt discount associated with the retired 2021 Senior Convertible Notes.

The Exchange Offers resulted in a net gain on extinguishment of debt of $ 227.3 million.

The Company cancelled all retired Senior Unsecured Notes and 2021 Senior Convertible Notes upon the closing of the Exchange Offers.

Additionally, during the first and third quarters of 2020, the Company repurchased certain of its Senior Unsecured Notes in open market transactions.

During the three months ended September 30, 2020, the Company repurchased a total of $ 62.5 million in aggregate principal amount of its 6.125 % Senior Notes due 2022 (“2022 Senior Notes”) and $ 29.0 million in aggregate principal amount of its 5.0 % Senior Notes due 2024 (“2024 Senior Notes”) in open market transactions for a total settlement amount, excluding accrued interest, of $ 65.9 million.

In connection with the repurchases, the Company recorded a gain on extinguishment of debt of $ 25.1 million for the three months ended September 30, 2020.

This amount included discounts realized upon repurchase of $ 25.5 million partially offset by approximately $ 480,000 of accelerated unamortized deferred financing costs.

During the three months ended March 31, 2020, the Company repurchased a total of $ 40.7 million in aggregate principal amount of its 2022 Senior Notes in open market transactions for a total settlement amount, excluding accrued interest, of $ 28.3 million.

In connection with the repurchase, the Company recorded a gain on extinguishment of debt of $ 12.2 million for the three months ended March 31, 2020.

This amount included discounts realized upon repurchase of $ 12.4 million partially offset by approximately $ 235,000 of accelerated unamortized deferred financing costs.

The Company canceled all repurchased 2022 Senior Notes and 2024 Senior Notes upon settlement.

Please refer to the Credit Agreement and Senior Secured Notes sections below for additional information.

Credit Agreement

The Company’s Credit Agreement provides for a senior secured revolving credit facility with a maximum loan amount of $ 2.5 billion.

During the second quarter of 2020, the Company and its lenders completed the semi-annual borrowing base redetermination, and entered into the Third Amendment and the Fourth Amendment to the Credit Agreement (collectively, “Amendments”).

As a result of lower commodity prices and a corresponding decrease in the value of the Company’s proved reserves, the borrowing base and aggregate lender commitments were both reduced to $ 1.1 billion.

The Amendments permitted the Company to incur second lien debt of up to $ 827.5 million prior to the next scheduled redetermination date of October 1, 2020, provided that all principal amounts of such debt are used to redeem unsecured senior debt of the Company for less than or equal to 80 % of par value.

During the second quarter of 2020, as a result of lower commodity prices and a corresponding decrease in the value of the Company’s proved reserves, the borrowing base and aggregate lender commitments under the Credit Agreement were both reduced to $ 1.1 billion.

Also during the second quarter of 2020, the Company entered into the Third Amendment and the Fourth Amendment to the Credit Agreement (collectively, the “Amendments”), which permitted the Company to incur new second lien debt of up to $ 827.5 million prior to the fall semi-annual borrowing base redetermination, provided that all principal amounts of such debt are used to redeem unsecured senior debt of the Company for less than or equal to 80 % of par value.

The Amendments also permitted the Company to grant a second-priority security interest to the holders of the Company’s outstanding 2021 Senior Convertible Notes to secure the Company’s obligations under the 2021 Senior Convertible Notes.

As a result, the Company may incur Permitted Second Lien Debt in an aggregate amount of up to $ 1.0 billion.

As of June 30, 2020, the Company had $ 487.8 million of available Permitted Second Lien Debt capacity.

Additionally, the Amendments reduced the amount of dividends that the Company may declare and pay on an annual basis from $ 50.0 million to $ 12.0 million.

The Credit Agreement is scheduled to mature on September 28, 2023, except that, pursuant to the Amendments, newly issued Permitted Second Lien Debt used to redeem any portion of the remaining 6.125 % Senior Notes due 2022 (“2022 Senior Notes”) must have maturities on or after 180 days after September 28, 2023;

As of the filing of this report, the fall semi-annual borrowing base redetermination was in process.

The next scheduled borrowing base redetermination date is April 1, 2021.

The Credit Agreement is scheduled to mature on September 28, 2023, except that, pursuant to the Amendments, newly issued Permitted Second Lien Debt used to redeem any portion of the remaining 2022 Senior Notes must have maturities on or after 180 days after September 28, 2023;

otherwise, the maturity date of the Credit Agreement will be July 2, 2023.

Without regard to which maturity date is in effect, the maturity date could occur earlier on August 16, 2022, if the Company has

not completed certain repurchase, redemption, or refinancing activities associated with its 2022 Senior Notes, and does not have certain unused availability for borrowing under the Credit Agreement, as outlined in the Credit Agreement.

Without regard to which maturity date is in effect, the maturity date could occur earlier on August 16, 2022, if the Company has not completed certain repurchase, redemption, or refinancing activities associated with its 2022 Senior Notes, and does not have certain unused availability for borrowing under the Credit Agreement, as outlined in the Credit Agreement.

Interest and commitment fees associated with the revolving credit facility are accrued based on a borrowing base utilization grid set forth in the Credit Agreement.

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Please refer to Note 1 - Summary of Significant Accounting Policies for discussion of FASB ASU 2020-04, which provides guidance related to reference rate reform .

The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Agreement as of July 23, 2020, June 30, 2020, and December 31, 2019:

As of July 23, 2020 As of June 30, 2020 As of December 31, 2019

The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Agreement as of October 21, 2020, September 30, 2020, and December 31, 2019:

As of October 21, 2020 As of September 30, 2020 As of December 31, 2019

(in thousands)

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____________________________________________

(1) Unamortized deferred financing costs attributable to the revolving credit facility are presented as a component of the other noncurrent assets line item on the accompanying balance sheets and totaled $ 5.0 million and $ 5.9 million as of June 30, 2020, and December 31, 2019, respectively.

(1) Unamortized deferred financing costs attributable to the revolving credit facility are presented as a component of the other noncurrent assets line item on the accompanying balance sheets and totaled $ 4.7 million and $ 5.9 million as of September 30, 2020, and December 31, 2019, respectively.

These costs are being amortized over the term of the revolving credit facility on a straight-line basis.

1 unchanged sentence

Senior Secured Notes .

Senior Secured Notes, net of unamortized discount and deferred financing costs, included within the Senior Notes, net line item on the accompanying balance sheets as of June 30, 2020, consisted of the following:

As of June 30, 2020

Senior Secured Notes, net of unamortized discount and deferred financing costs, included within the Senior Notes, net line item on the accompanying balance sheets as of September 30, 2020, consisted of the following:

As of September 30, 2020

Principal Amount Unamortized Debt Discount Unamortized Deferred Financing Costs Principal Amount, Net

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The Company incurred fees of $ 12.9 million, which are being amortized as deferred financing costs over the life of the 2025 Senior Secured Notes.

Upon the issuance of the 2025 Senior Secured

Notes, the Company recorded $ 405.0 million as the initial carrying amount, which approximated their fair value at issuance.

Upon the issuance of the 2025 Senior Secured Notes, the Company recorded $ 405.0 million as the initial carrying amount, which approximated their fair value at issuance.

The excess of the principal amount of the 2025 Senior Secured Notes over its fair value was recorded as a debt discount.

The debt discount and deferred financing costs are amortized to interest expense through the maturity date.

The debt discount and deferred financing costs are being amortized to interest expense through the maturity date.

In connection with the issuance of the 2025 Senior Secured Notes, the Company entered into an indenture dated as of June 17, 2020, with UMB Bank, N.A., as trustee, governing the 2025 Senior Secured Notes (“2025 Notes Indenture”).

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Please refer to Note 5 - Long-Term Debt in the 2019 Form 10-K for additional detail on the Company’s 2021 Senior Convertible Notes and associated capped call transactions.

On June 17, 2020, the Company retired $ 107.0 million in aggregate principal amount of its 2021 Senior Convertible Notes that were exchanged in the Private Exchange.

As a result, the Company paid $ 740,000 of accrued and unpaid interest and recognized $ 6.1 million and $ 593,000 of previously unamortized debt discount and deferred financing costs, respectively, associated with the retired 2021 Senior Convertible Notes.

The 2021 Senior Secured Convertible Notes were not convertible at the option of holders as of June 30, 2020, or through the filing of this report.

The 2021 Senior Secured Convertible Notes were not convertible at the option of holders as of September 30, 2020, or through the filing of this report.

Notwithstanding the inability to convert, the if-converted value of the 2021 Senior Secured Convertible Notes did not exceed the principal amount.

The remaining debt discount and debt-related issuance costs are being amortized to the principal value of the 2021 Senior Secured Convertible Notes as interest expense through the maturity date of July 1, 2021.

Interest expense recognized on the 2021 Senior Secured Convertible Notes related to the stated interest rate and amortization of the debt discount totaled $ 2.6 million and $ 2.7 million for the three months ended June 30, 2020, and 2019, respectively, and totaled $ 5.4 million for each of the six months ended June 30, 2020, and 2019.

The Company has the ability to settle its 2021 Senior Secured Convertible Notes obligation, due July 1, 2021, with borrowings under its revolving credit facility.

The remaining debt discount and debt-related issuance costs are being amortized to the principal value of the 2021 Senior Secured Convertible Notes as interest expense through the maturity date.

Interest expense recognized on the 2021 Senior Secured Convertible Notes related to the stated interest rate and amortization of the debt discount totaled $ 1.1 million and $ 2.8 million for the three months ended September 30, 2020, and 2019, respectively, and totaled $ 6.6 million and $ 8.2 million for the nine months ended September 30, 2020, and 2019, respectively.

Senior Unsecured Notes .

Senior Unsecured Notes, net of unamortized deferred financing costs, included within the Senior Notes, net line item on the accompanying balance sheets as of June 30, 2020, and December 31, 2019, consisted of the following:

As of June 30, 2020 As of December 31, 2019

Senior Unsecured Notes, net of unamortized deferred financing costs, included within the Senior Notes, net line item on the accompanying balance sheets as of September 30, 2020, and December 31, 2019, consisted of the following:

As of September 30, 2020 As of December 31, 2019

Principal Amount Unamortized Deferred Financing Costs Principal Amount, Net Principal Amount Unamortized Deferred Financing Costs Principal Amount, Net

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Please refer to Note 5 - Long-Term Debt in the 2019 Form 10-K for additional detail on the Company’s Senior Unsecured Notes.

On June 17, 2020, the Company retired $ 611.9 million in aggregate principal amount of its Senior Unsecured Notes that were exchanged in the Exchange Offers.

As a result, the Company paid $ 8.1 million of accrued and unpaid interest and recognized $ 5.0 million of previously unamortized deferred financing costs associated with the retired Senior Unsecured Notes.

The Company cancelled all retired Senior Unsecured Notes upon closing of the Exchange Offers.

During the first quarter of 2020, the Company repurchased a total of $ 40.7 million in aggregate principal amount of its 2022 Senior Notes in open market transactions for a total settlement amount, excluding accrued interest, of $ 28.3 million.

In connection with the repurchase, the Company recorded a gain on extinguishment of debt of $ 12.2 million for the three months ended March 31, 2020.

This amount included discounts realized upon repurchase of $ 12.4 million partially offset by approximately $ 235,000 of accelerated unamortized deferred financing costs.

The Company canceled all repurchased 2022 Senior Notes upon cash settlement.

The Company is subject to certain covenants under the Credit Agreement and the indentures governing the Senior Secured Notes and the Senior Unsecured Notes that, among other terms, limit the Company’s ability to incur additional indebtedness, make restricted payments including dividends, sell assets, with respect to the Company’s restricted subsidiaries, permit the consensual restriction on the ability of such restricted subsidiaries to pay dividends or indebtedness owing to the Company or to any other restricted subsidiaries, create liens that secure debt, enter into transactions with affiliates, and merge or consolidate with another company.

The Company was in compliance with all such covenants as of June 30, 2020, and through the filing of this report.

The Company is subject to certain covenants under the Credit Agreement and the indentures governing the Senior Notes that, among other terms, limit the Company’s ability to incur additional indebtedness, make restricted payments including dividends, sell assets, with respect to the Company’s restricted subsidiaries, permit the consensual restriction on the ability of such restricted subsidiaries to pay dividends or indebtedness owing to the Company or to any other restricted subsidiaries, create liens that secure debt, enter into transactions with affiliates, and merge or consolidate with another company.

The Company was in compliance with all

covenants under the Credit Agreement and the indentures governing the Senior Notes as of September 30, 2020, and through the filing of this report.

Capitalized Interest

Capitalized interest costs for the three months ended June 30, 2020, and 2019, totaled $ 4.1 million and $ 5.0 million, respectively, and totaled $ 6.8 million and $ 9.9 million for the six months ended June 30, 2020, and 2019, respectively.

Capitalized interest costs for the three months ended September 30, 2020, and 2019, totaled $ 4.8 million and $ 4.2 million, respectively, and totaled $ 11.6 million and $ 14.1 million for the nine months ended September 30, 2020, and 2019, respectively.

The amount of interest the Company capitalizes generally fluctuates based on the amount borrowed, the Company’s capital program, and the timing and amount of costs associated with capital projects that are considered in progress.

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Drilling Rig Service Contracts .

During the first half of 2020, and through the filing of this report, the Company amended certain of its drilling rig contracts resulting in the reduction of day rates and potential early termination fees and the extension of contract terms.

As of the filing of this report, the Company’s drilling rig commitments totaled $ 17.6 million under contract terms extending through the second quarter of 2021.

During the nine months ended September 30, 2020, the Company amended certain of its drilling rig contracts resulting in the reduction of day rates and potential early termination fees and the extension of contract terms.

As of September 30, 2020, the Company’s drilling rig commitments totaled $ 12.2 million under contract terms extending through the second quarter of 2021.

If all of these contracts were terminated as of the filing of this report, the Company would avoid a portion of the contractual service commitments;

however, the Company would be required to pay $ 5.7 million in early termination fees.

The Company does not expect to incur material penalties with regard to its drilling rig contracts.

No material expenses related to early termination or standby fees were incurred by the Company during the nine months ended September 30, 2020, and the Company does not expect to incur material penalties with regard to its drilling rig contracts during the remainder of 2020.

Drilling and Completion Commitments .

During the first half of 2020, the Company entered into an agreement that includes minimum drilling and completion footage requirements on certain existing leases.

During the second quarter of 2020, the Company entered into an agreement that included minimum drilling and completion footage requirements on certain existing leases.

If these minimum requirements are not satisfied by March 31, 2021, the Company will be required to pay liquidated damages based on the difference between the actual footage drilled and completed and the minimum requirements.

As of June 30, 2020, the liquidated damages could range from zero to a maximum of $ 39.5 million, with the maximum exposure assuming no additional development activity occurred prior to March 31, 2021.

The Company also entered into an agreement that includes a minimum number of wells drilled and completed on certain existing leases.

As of September 30, 2020, the liquidated damages could range from zero to a maximum of $ 35.7 million, with the maximum exposure assuming no additional development activity occurred prior to March 31, 2021.

The Company also entered into an agreement that included a minimum number of wells drilled and completed on certain existing leases.

If these minimum requirements are not satisfied by December 31, 2021, the Company will be required to pay liquidated damages based on the difference between the actual number of wells drilled and completed and the minimum requirements.

As of June 30, 2020, the liquidated damages could range from zero to a maximum of $ 11.5 million, with the maximum exposure assuming no additional development activity occurred prior to December 31, 2021.

As of September 30, 2020, the liquidated damages could range from zero to a maximum of $ 11.5 million, with the maximum exposure assuming no additional development activity occurred prior to December 31, 2021.

As of the filing of this report, the Company expects to meet its obligations under both agreements.

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Equity Incentive Compensation Plan

As of June 30, 2020, 4.2 million shares of common stock were available for grant under the Company’s Equity Incentive Compensation Plan (“Equity Plan”).

As of September 30, 2020, 4.4 million shares of common stock were available for grant under the Company’s Equity Incentive Compensation Plan (“Equity Plan”).

Performance Share Units

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For PSUs granted in 2017, which the Company determined to be equity awards, the settlement criteria included a combination of the Company’s Total Shareholder Return (“TSR”) on an absolute basis, and the Company’s TSR relative to the TSR of certain peer companies over the associated three-year performance period.

The fair value of the PSUs granted in 2017 was measured on the grant date using a stochastic Monte Carlo simulation using geometric Brownian motion (“GBM Model”).

The fair value of the PSUs granted in 2017 was measured on the grant

date using a stochastic Monte Carlo simulation using geometric Brownian motion (“GBM Model”).

As these awards depend entirely on market-based settlement criteria, the associated compensation expense is recognized on a straight-line basis within general and administrative expense and exploration expense over the vesting periods of the respective awards.

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The Company records compensation expense associated with the issuance of PSUs based on the fair value of the awards as of the date of grant.

Total compensation expense recorded for PSUs was $ 2.8 million and $ 2.9 million for the three months ended June 30, 2020, and 2019, respectively, and $ 5.4 million and $ 5.7 million for the six months ended June 30, 2020, and 2019, respectively.

As of June 30, 2020, there was $ 10.0 million of total unrecognized compensation expense related to non-vested PSU awards, which is being amortized through 2022.

There were no material changes to the outstanding and non-vested PSUs during the six months ended June 30, 2020.

Subsequent to June 30, 2020, the Company settled all PSUs that were granted in 2017, which earned a 0.9 times multiplier, by issuing 485,060 net shares of the Company’s common stock in accordance with the terms of the applicable PSU awards.

Total compensation expense recorded for PSUs was $ 1.6 million and $ 2.9 million for the three months ended September 30, 2020, and 2019, respectively, and $ 7.0 million and $ 8.6 million for the nine months ended September 30, 2020, and 2019, respectively.

As of September 30, 2020, there was $ 8.1 million of total unrecognized compensation expense related to non-vested PSU awards, which is being amortized through 2022.

A summary of the status and activity of non-vested PSUs for the nine months ended September 30, 2020, is presented in the following table:

Weighted-Average Grant-Date Fair Value

Non-vested at beginning of year 2,022,585 $ 16.87

Granted — $ —

Vested ( 791,962 ) $ 15.85

Forfeited ( 45,731 ) $ 16.69

Non-vested at end of quarter 1,184,892 $ 17.56

____________________________________________

(1) The number of shares of common stock assumes a multiplier of one .

The actual final number of shares of common stock to be issued will range from zero to two times the number of PSUs awarded depending on the three-year performance multiplier.

During the nine months ended September 30, 2020, the Company settled 791,962 PSUs that were granted in 2017, which earned a 0.9 times multiplier.

The Company and the majority of grant participants mutually agreed to net share settle a portion of the awards to cover income and payroll tax withholdings, as provided for in the Equity Plan and applicable award agreements.

As a result, 215,451 shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those PSUs.

After withholding 215,451 shares to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those PSUs, 485,060 shares of the Company’s common stock were issued in accordance with the terms of the applicable PSU awards.

Employee Restricted Stock Units

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The fair value of an RSU is equal to the closing price of the Company’s common stock on the day of the grant.

Compensation expense for RSUs is recognized within general and administrative expense and exploration expense over the vesting

periods of the respective awards.

Total compensation expense recorded for employee RSUs was $ 2.7 million and $ 2.8 million for the three months ended June 30, 2020, and 2019, respectively and $ 5.3 million and $ 5.5 million for the six months ended June 30, 2020, and 2019, respectively.

As of June 30, 2020, there was $ 10.8 million of total unrecognized compensation expense related to non-vested RSU awards, which is being amortized through 2022.

There were no material changes to the outstanding and non-vested RSUs during the six months ended June 30, 2020.

Subsequent to June 30, 2020, the Company settled 587,088 RSUs that related to awards granted in previous years.

Compensation expense for RSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards.

Total compensation expense recorded for employee RSUs was $ 1.8 million and $ 2.9 million for the three months ended September 30, 2020, and 2019, respectively and $ 7.1 million and $ 8.4 million for the nine months ended September 30, 2020, and 2019, respectively.

As of September 30, 2020, there was $ 8.6 million of total unrecognized compensation expense related to non-vested RSU awards, which is being amortized through 2022.

A summary of the status and activity of non-vested RSUs granted to employees for the nine months ended September 30, 2020, is presented in the following table:

RSUs Weighted-Average Grant-Date Fair Value

Non-vested at beginning of year 1,532,131 $ 16.01

Granted — $ —

Vested ( 744,325 ) $ 16.74

Forfeited ( 77,814 ) $ 15.67

Non-vested at end of quarter 709,992 $ 15.29

During the nine months ended September 30, 2020, the Company settled 744,325 RSUs that related to awards granted in previous years.

As a result, the Company issued 420,562 net shares of common stock upon settlement of the awards.

The remaining 166,526 shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those RSUs.

As a result, 209,126 shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those RSUs.

Director Shares

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Shares issued during the second quarter of 2019 fully vested on December 31, 2019.

The Company did not issue any director shares during the third quarters of 2020 or 2019.

Employee Stock Purchase Plan

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The ESPP is intended to qualify under Section 423 of the Internal Revenue Code.

There were 297,013 and 184,079 shares issued under the ESPP during the second quarters of 2020, and 2019, respectively.

Total proceeds to the Company for the issuance of these shares was $ 947,000 and $ 2.0 million for the six months ended June 30, 2020, and 2019, respectively.

There were 297,013 and 184,079 shares issued under the ESPP during the nine months ended September 30, 2020, and 2019, respectively.

Total proceeds to the Company for the issuance of these shares was $ 947,000 and $ 2.0 million for the nine months ended September 30, 2020, and 2019, respectively.

The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model.

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For the Three Months Ended

June 30, For the Six Months Ended

September 30, For the Nine Months Ended

September 30,

2020 2019 2020 2019

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Amortization of net actuarial loss 238 239 713 718

Settlements 1,282 — 1,282 —

Net periodic benefit cost $ 2,809 $ 1,944 $ 5,862 $ 5,831

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Diluted net income or loss per common share is calculated by dividing net income or loss available to common stockholders by the diluted weighted-average number of common shares outstanding, which includes the effect of potentially dilutive securities.

As of June 30, 2019, potentially dilutive securities for this calculation consisted primarily of non-vested RSUs, contingent PSUs, and shares into which the 2021 Senior Convertible Notes were convertible, which were measured using the treasury stock method.

Shares of the Company’s common stock traded at an average closing price below the $ 40.50 conversion price applicable to the 2021 Senior Convertible Notes for the three and six months ended June 30, 2019, therefore, the 2021 Senior Convertible Notes had no dilutive impact.

As of September 30, 2019, potentially dilutive securities for this calculation consisted primarily of non-vested RSUs, contingent PSUs, and shares into which the 2021 Senior Convertible Notes were convertible, which were measured using the treasury stock method.

Shares of the Company’s common stock traded at an average closing price below the $ 40.50 conversion price applicable to the 2021 Senior Convertible Notes for the three and nine months ended September 30, 2019, therefore, the 2021 Senior Convertible Notes had no dilutive impact.

On April 29, 2020, pursuant to the Third Supplemental Indenture, the Company agreed that it will satisfy any conversion obligation with respect to the 2021 Senior Convertible Notes solely in cash.

As a result, the Company’s 2021 Senior Secured Convertible Notes are no longer convertible into shares of the Company’s common stock and thus, were not considered to be a potentially dilutive instrument as of June 30, 2020.

On June 17, 2020, the Company issued warrants to purchase up to an aggregate of approximately 5.9 million shares, or approximately five percent of its outstanding common stock, at an exercise price of $ 0.01 per share, as discussed in Note 5 - Long-Term Debt .

The Warrant Agreement dated as of June 17, 2020 (“Warrant Agreement”), states that the warrants are only exercisable upon the Triggering Date, as defined in Note 11 - Fair Value Measurements.

The warrants were not exercisable during the six months ended June 30, 2020, and therefore had no dilutive impact.

The warrants were not exercisable during the three and nine months ended September 30, 2020, and therefore had no dilutive impact.

Please refer to Note 11 - Fair Value Measurements for additional detail regarding the terms of the warrants.

As of June 30, 2020, potentially dilutive securities for this calculation consist primarily of non-vested RSUs, contingent PSUs, and warrants, which are measured using the treasury stock method.

As of September 30, 2020, potentially dilutive securities for this calculation consist primarily of non-vested RSUs, contingent PSUs, and warrants, which were measured using the treasury stock method.

Please refer to Note 7 - Compensation Plans and Note 11 - Fair Value Measurements in this report, and Note 9 - Earnings Per Share in the 2019 Form 10-K for additional detail on these potentially dilutive securities.

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For the Three Months Ended

June 30, For the Six Months Ended

September 30, For the Nine Months Ended

September 30,

2020 2019 2020 2019

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For the Three Months Ended

June 30, For the Six Months Ended

September 30, For the Nine Months Ended

September 30,

2020 2019 2020 2019

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The Company has entered into various commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows.

As of June 30, 2020, all derivative counterparties were members of the Company’s Credit Agreement lender group and all contracts were entered into for other-than-trading purposes.

As of September 30, 2020, all derivative counterparties were members of the Company’s Credit Agreement lender group and all contracts were entered into for other-than-trading purposes.

The Company’s commodity derivative contracts consist of swap and collar arrangements for oil production, and swap arrangements for gas and NGL production.

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The weighted-average fixed price differential represents the amount of net addition (reduction) to delivery month prices for the notional volumes covered by the swap contracts.

As of June 30, 2020, the Company had commodity derivative contracts outstanding through the fourth quarter of 2022 as summarized in the tables below.

As of September 30, 2020, the Company had commodity derivative contracts outstanding through the fourth quarter of 2022 as summarized in the tables below.

Contract Period

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(MBbl) (per Bbl)

Third quarter 2020 3,361 $ 56.43

Fourth quarter 2020 4,397 $ 57.03

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(MBbl) (per Bbl) (per Bbl)

Third quarter 2020 1,252 $ 55.00 $ 62.90

Fourth quarter 2020 610 $ 55.00 $ 61.90

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(MBbl) (per Bbl) (MBbl) (per Bbl)

Third quarter 2020 3,607 $ ( 0.62 ) 920 $ ( 8.01 )

Fourth quarter 2020 4,087 $ ( 0.38 ) 920 $ ( 8.01 )

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(MBbl) (per Bbl)

Third quarter 2020 3,077 $ ( 1.34 )

Fourth quarter 2020 2,503 $ ( 1.18 )

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(BBtu) (per MMBtu) (BBtu) (per MMBtu)

Third quarter 2020 4,493 $ 2.41 4,628 $ 1.08

Fourth quarter 2020 9,327 $ 2.39 4,872 $ 1.21

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(1) The Company has natural gas swaps in place that settle against Inside FERC Houston Ship Channel (“IF HSC”), Inside FERC West Texas (“IF WAHA”), and Platt’s Gas Daily West Texas (“GD WAHA”).

As of June 30, 2020, WAHA volumes were comprised of 71 percent IF WAHA and 29 percent GD WAHA.

As of September 30, 2020, WAHA volumes were comprised of 64 percent IF WAHA and 36 percent GD WAHA.

OPIS Propane Mont Belvieu Non-TET

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(MBbl) (per Bbl)

Third quarter 2020 409 $ 22.33

Fourth quarter 2020 466 $ 22.29

Commodity Derivative Contracts Entered Into Subsequent to June 30, 2020

Subsequent to June 30, 2020, the Company entered into the following commodity derivative contracts:

• fixed price NYMEX WTI oil swap contracts for 2021 through the fourth quarter of 2022 for a total of 3.7 MMBbl of oil production at a weighted-average contract price of $ 43.29 per Bbl;

• fixed price WTI Midland-NYMEX WTI oil basis swap contracts for 2021 for a total of 2.3 MMBbl of oil production at a weighted-average contract price of $ 0.21 per Bbl;

• a fixed price GD WAHA gas swap contract for the fourth quarter of 2021 for a total of 920 BBtu of gas production at a contract price of $ 1.99 per MMBtu;

• a fixed price OPIS Propane Mont Belvieu Non-TET swap contract for 2021 for a total of 0.4 MMBbl of propane production at a contract price of $ 19.74 per Bbl.

2021 392 $ 19.74

Commodity Derivative Contracts Entered Into Subsequent to September 30, 2020

Subsequent to September 30, 2020, the Company entered into the following commodity derivative contracts:

• fixed price NYMEX WTI oil swap contracts for the second quarter of 2021 for a total of 0.3 MMBbl of oil production at a weighted-average contract price of $ 42.53 per Bbl;

• fixed price GD WAHA gas swap contracts for the second and third quarters of 2021 for a total of 924 BBtu of gas production at a weighted-average contract price of $ 2.47 per MMBtu and for 2022 for a total of 2,911 BBtu of gas production at a weighted-average contract price of $ 2.46 per MMBtu;

• fixed price IF HSC gas swap contracts for the second quarter of 2021 for a total of 1,290 BBtu of gas production at a weighted-average contract price of $ 2.62 per MMBtu and for 2022 for a total of 15,015 BBtu of gas production at a weighted-average contract price of $ 2.58 per MMBtu;

• fixed price OPIS Propane Mont Belvieu Non-TET swap contracts for 2021 for a total of 0.9 MMBbl of propane production at a weighted-average contract price of $ 20.93 per Bbl.

Derivative Assets and Liabilities Fair Value

The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities, with the exception of derivative instruments that meet the “normal purchase normal sale” exclusion.

The Company does not designate its derivative commodity contracts as hedging instruments.

The fair value of the commodity derivative contracts was a net asset of $ 183.7 million and $ 21.5 million as of June 30, 2020, and December 31, 2019, respectively.

The Company does not designate its commodity derivative contracts as hedging instruments.

The fair value of the commodity derivative contracts was a net asset of $ 49.5 million and $ 21.5 million as of September 30, 2020, and December 31, 2019, respectively.

The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets, by category:

As of June 30, 2020 As of December 31, 2019

As of September 30, 2020 As of December 31, 2019

(in thousands)

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Offsetting of Derivative Assets and Liabilities

As of June 30, 2020, and December 31, 2019, all derivative instruments held by the Company were subject to master netting arrangements with various financial institutions.

As of September 30, 2020, and December 31, 2019, all derivative instruments held by the Company were subject to master netting arrangements with various financial institutions.

In general, the terms of the Company’s agreements provide for offsetting of amounts payable or receivable between it and the counterparty, at the election of both parties, for transactions that settle on the same date and in the same currency.

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Derivative Assets as of Derivative Liabilities as of

June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019

(in thousands)

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For the Three Months Ended

June 30, For the Six Months Ended

September 30, For the Nine Months Ended

September 30,

2020 2019 2020 2019

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NGL contracts ( 502 ) ( 14,758 ) ( 8,600 ) ( 24,403 )

Total derivative settlement (gain) loss $ ( 142,528 ) $ ( 4,090 ) $ ( 215,965 ) $ 879

Total net derivative settlement gain $ ( 70,305 ) $ ( 24,722 ) $ ( 286,270 ) $ ( 23,843 )

Net derivative (gain) loss:

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Credit Related Contingent Features

As of June 30, 2020, and through the filing of this report, all of the Company’s derivative counterparties were members of the Company’s Credit Agreement lender group.

As of September 30, 2020, and through the filing of this report, all of the Company’s derivative counterparties were members of the Company’s Credit Agreement lender group.

Under the Credit Agreement, the Company is required to provide mortgage liens on assets having a value equal to at least 85 percent of the total PV-9, as defined in the Credit Agreement, of the Company’s proved oil and gas properties evaluated in the most recent reserve report.

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• Level 3 – significant inputs to the valuation model are unobservable.

The following table is a listing of the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they are classified within the fair value hierarchy as of June 30, 2020:

Level 1 Level 2 Level 3

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Oil and Gas Properties and Other Property and Equipment

The Company had no assets included in total property and equipment, net, measured at fair value as of June 30, 2020, or December 31, 2019.

The Company had no assets included in total property and equipment, net, measured at fair value as of September 30, 2020, or December 31, 2019.

Proved oil and gas properties .

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The valuation includes consideration of the proved and unproved assets supported by the property and equipment, future cash flows associated with the assets, and fixed costs necessary to operate and maintain the assets.

No proved property impairment expense was recorded during the three months ended June 30, 2020.

For the six months ended June 30, 2020, the Company recorded impairment expense of $ 956.7 million related to its South Texas proved oil and gas properties and related support facilities due to the decrease in commodity price forecasts at the end of the first quarter of 2020, specifically decreases in oil and NGL prices.

The Company used a discount rate of 11 percent in its calculation of the present value of expected future cash flows based on the prevailing market-based weighed average cost of capital as of March 31, 2020.

No proved property impairment expense was recorded during the three or six months ended June 30, 2019.

No proved property impairment expense was recorded during the three months ended September 30, 2020.

For the nine months ended September 30, 2020, the Company recorded impairment expense of $ 956.7 million related to its South Texas proved oil and gas properties and related support facilities due to the decrease in commodity price forecasts at the end of the first quarter of 2020, specifically decreases in oil and NGL prices.

The Company used a discount rate of 11 percent in its calculation of the present value of expected future cash flows based on the prevailing market-based weighted average cost of capital as of March 31, 2020.

No proved property impairment expense was recorded during the three or nine months ended September 30, 2019.

The following table presents impairment of oil and gas properties expense and abandonment and impairment of unproved properties expense recorded during the periods presented:

For the Three Months Ended

June 30, For the Six Months Ended

September 30, For the Nine Months Ended

September 30,

2020 2019 2020 2019

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____________________________________________

(1) These impairments related to actual and anticipated lease expirations, as well as actual and anticipated losses on acreage due to title defects, changes in development plans, and other inherent acreage risks.

The balances in the unproved oil and gas properties line item on the accompanying balance sheets as of June 30, 2020, and December 31, 2019, are recorded at carrying value.

(2) Amounts may not calculate due to rounding.

The balances in the unproved oil and gas properties line item on the accompanying balance sheets as of September 30, 2020, and December 31, 2019, are recorded at carrying value.

Please refer to Note 1 - Summary of Significant Accounting Policies and Note 11 - Fair Value Measurements in the 2019 Form 10-K for more information regarding the Company’s approach in determining the fair value of its properties.

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The following table reflects the fair value of the Company’s Senior Note obligations measured using Level 1 inputs based on quoted secondary market trading prices.

These notes were not presented at fair value on the accompanying balance sheets as of June 30, 2020, or December 31, 2019, as they were recorded at carrying value, net of any unamortized discounts and deferred financing costs.

These notes were not presented at fair value on the accompanying balance sheets as of September 30, 2020, or December 31, 2019, as they were recorded at carrying value, net of any unamortized discounts and deferred financing costs.

Please refer to Note 5 - Long-Term Debt for additional discussion.

As of June 30, 2020 As of December 31, 2019

As of September 30, 2020 As of December 31, 2019

Principal Amount Fair Value Principal Amount Fair Value

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____________________________________________

(1) The Company’s 2021 Senior Convertible Notes became secured in the second quarter of 2020 upon closing of the Exchange Offers.

(1) The Company’s 2021 Senior Convertible Notes became secured in the second quarter of 2020 upon the closing of the Exchange Offers.

Please refer to Note 5 - Long-Term Debt for additional information.

The carrying value of the Company’s revolving credit facility approximates its fair value, as the applicable interest rates are floating, based on prevailing market rates.

As discussed in Note 5 - Long-Term Debt , the Company issued warrants to purchase up to an aggregate of approximately 5.9 million shares, or approximately five percent of its outstanding common stock, at an exercise price of $ 0.01 per share.

As discussed in Note 5 - Long-Term Debt , on June 17, 2020, the Company issued warrants to purchase up to an aggregate of approximately 5.9 million shares, or approximately five percent of its outstanding common stock, at an exercise price of $ 0.01 per share.

The warrants are exercisable any time from and after the Triggering Date, as subsequently defined, until June 30, 2023.

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The warrants issued are indexed to the Company’s common stock and are required to be settled through physical settlement or net share settlement if exercised.

The warrants were not exercisable during the six months ended June 30, 2020, or through the filing of this report.

The warrants were not exercisable during the nine months ended September 30, 2020, and through the filing of this report.

The fair value of the warrants on the issuance date was determined using a stochastic Monte Carlo simulation using the GBM Model.

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equity instruments.

The warrants were recorded in additional paid-in capital on the accompanying balance sheets at a fair value of $ 21.5 million, with no recurring fair value measurement required.

Upon issuance, the warrants were recorded in additional paid-in capital on the accompanying balance sheets at a fair value of $ 21.5 million, with no recurring fair value measurement required.

There have been no changes to the initial carrying amount of the warrants since issuance.

Note 12 - Leases

ASC Topic 842 - Leases (“Topic 842”), requires lessees to recognize operating and finance leases with terms greater than 12 months on the balance sheet.

As of June 30, 2020, the Company did not have any agreements in place that were classified as finance leases under Topic 842.

As of September 30, 2020, the Company did not have any agreements in place that were classified as finance leases under Topic 842.

Arrangements classified as operating leases are included on the accompanying balance sheets within the other noncurrent assets, other current liabilities, and other noncurrent liabilities line items.

As outlined in Topic 842, an ROU asset represents a lessee’s right to use an underlying asset for the lease term, while the associated lease liability represents the lessee’s obligations to make lease payments.

As outlined in Topic 842, a right-of-use (“ROU”) asset represents a lessee’s right to use an underlying asset for the lease term, while the associated lease liability represents the lessee’s obligations to make lease payments.

At the commencement date, which is the date on which a lessor makes an underlying asset available for use by a lessee, a lease ROU asset and corresponding lease liability is recognized based on the present value of the future lease payments.

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Based on expectations for those agreements with early termination options, there are no leases in which material early termination options are reasonably certain to be exercised by the Company.

For the three months ended June 30, 2020, and 2019, total costs related to operating leases, including short-term leases, and variable lease payments made for leases with initial lease terms greater than 12 months, were $ 62.2 million and $ 139.8 million, respectively.

For the six months ended June 30, 2020, and 2019, total lease costs were $ 135.0 million and $ 315.1 million, respectively.

For the three months ended September 30, 2020, and 2019, total costs related to operating leases, including short-term leases, and variable lease payments made for leases with initial lease terms greater than 12 months, were $ 49.9 million and $ 107.3 million, respectively.

For the nine months ended September 30, 2020, and 2019, total lease costs were $ 184.9 million and $ 422.4 million, respectively.

These totals do not reflect amounts that may be reimbursed by other third parties in the normal course of business, such as non-operating working interest owners.

Components of the Company’s total lease cost, whether capitalized or expensed, for the three and six months ended June 30, 2020, and 2019, consisted of the following:

For the Three Months Ended June 30, For the Six Months Ended June 30,

Components of the Company’s total lease cost, whether capitalized or expensed, for the three and nine months ended September 30, 2020, and 2019, consisted of the following:

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

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(1) Costs associated with short-term lease agreements relate primarily to operational activities where underlying lease terms are less than one year.

This amount is significant as it includes drilling and completion activities and field equipment rentals, most of which are contracted for 12 months or less.

This amount includes drilling and completion activities and field equipment rentals, most of which are contracted for 12 months or less.

It is expected that this amount will fluctuate primarily with the number of drilling rigs and completion crews the Company is operating under short-term agreements.

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Fluctuations in variable lease payments are driven by actual volumes delivered and the number of drilling rigs and completion crews operating under long-term agreements.

Right-of-use assets obtained in exchange for new operating lease liabilities totaled $ 745,000 for the three and six months ended June 30, 2020, and $ 10.5 million and $ 22.7 million for the three and six months ended June 30, 2019, respectively.

Cash paid for amounts included in the measurement of lease liabilities for the six months ended June 30, 2020, and 2019, was as follows:

For the Six Months Ended June 30,

Right-of-use assets obtained in exchange for new operating lease liabilities totaled zero and $ 745,000 for the three and nine months ended September 30, 2020, respectively, and $ 1.3 million and $ 24.0 million for the three and nine months ended September 30, 2019, respectively.

Cash paid for amounts included in the measurement of lease liabilities for the nine months ended September 30, 2020, and 2019, was as follows:

For the Nine Months Ended September 30,

(in thousands)

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Investing cash flows from operating leases $ 6,751 $ 20,256

Maturities for the Company’s operating lease liabilities included on the accompanying balance sheets as of June 30, 2020, were as follows:

As of June 30, 2020

Maturities for the Company’s operating lease liabilities included on the accompanying balance sheets as of September 30, 2020, were as follows:

As of September 30, 2020

(in thousands)

2020 (remaining after June 30, 2020) $ 7,161

2020 (remaining after September 30, 2020) $ 3,546

Thereafter 1,640

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(1) The weighted-average discount rate used to determine the operating lease liability as of June 30, 2020, was 6.9 percent.

Amounts recorded on the accompanying balance sheets for operating leases as of June 30, 2020, and December 31, 2019, were as follows:

As of June 30, 2020 As of December 31, 2019

(1) The weighted-average discount rate used to determine the operating lease liability as of September 30, 2020, was 6.9 percent.

Amounts recorded on the accompanying balance sheets for operating leases as of September 30, 2020, and December 31, 2019, were as follows:

As of September 30, 2020 As of December 31, 2019

(in thousands)

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Other noncurrent liabilities $ 14,471 $ 23,137

As of June 30, 2020, and through the filing of this report, the Company has no material lease arrangements which are scheduled to commence in the future.

As of September 30, 2020, and through the filing of this report, the Company has no material lease arrangements which are scheduled to commence in the future.

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 1. Financial Statements