SM Energy Co 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes forward-looking statements. Please refer to the Cautionary Information about Forward-Looking Statements section of this report for important information about these types of statements. Additionally, the following discussion includes sequential quarterly comparison to the financial information presented in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 , filed with the SEC on August 4, 2022. Throughout the following discussion, we explain changes between the three months ended September 30, 2022, and the three months ended June 30, 2022 (“sequential quarterly” or “sequentially”), as well as the year-to-date (“YTD”) change between the nine months ended September 30, 2022, and the nine months ended September 30, 2021 (“YTD 2022-over-YTD 2021”). Overview of the Company General Overview Our strategic objective is to be a premier operator of top-tier oil and gas assets. Our purpose is to make people’s lives better by responsibly producing energy supplies, contributing to domestic energy security and prosperity, and having a positive impact in the communities where we live and work. Our long-term vision is to sustainably grow value for all of our stakeholders. Our strategy for achieving our goals is to focus on high-quality economic drilling, completion, and production opportunities. Our investment portfolio is comprised of oil and gas producing assets in the state of Texas, specifically in the Midland Basin of West Texas and in the Maverick Basin of South Texas. With our continued success in generating cash flows and reducing our outstanding principal debt balance, our short-term goals include returning value to stockholders in a sustainable and repeatable way through our Stock Repurchase Program and recently increased fixed dividend payments. We are committed to exceptional safety, health, and environmental stewardship; supporting the professional development of a diverse and thriving team of employees; making a positive impact in the communities where we live and work; and transparency in reporting on our progress in these areas. We have prioritized ESG initiatives by, among other things, integrating enhanced environmental and social programs throughout the organization and setting near-term and medium-term goals that include reducing flaring and greenhouse gas emissions intensity and maintaining low methane emissions intensity. Additionally, we are implementing systems to track additional ESG metrics, to improve future reporting, and to increase employee awareness. The Environmental, Social and Governance Committee of our Board of Directors oversees, among other things, the development and implementation of the Company’s ESG policies, programs and initiatives, and, together with management, reports to our Board of Directors regarding such matters. Further demonstrating our commitment to sustainable operations and environmental stewardship, compensation for our executives and eligible employees under our long-term incentive plan, and compensation for all employees under our short-term incentive plan is calculated based on, in part, certain Company-wide performance-based metrics that include key financial, operational, environmental, health, and safety measures. Global commodity and financial markets remain subject to heightened levels of uncertainty and volatility as a result of inflation, macroeconomic uncertainty, the ongoing conflict between Russia and Ukraine and associated economic and trade sanctions on Russia, and the Pandemic. These issues have contributed to increased service provider costs, supply chain disruptions, a rise in interest rates, and could have further industry-specific impacts, which may require us to adjust our business plan. For additional detail, please refer to the Risk Factors section in Part I, Item 1A of our 2021 Form 10-K . Despite continuing impacts of geopolitical issues and future macroeconomic uncertainty, we expect to maintain our ability to sustain strong operational performance and financial stability while maximizing returns, improving leverage metrics, and maximizing the value of our top-tier Midland Basin and South Texas assets. Areas of Operations Our Midland Basin assets are comprised of approximately 80,000 net acres located in the Permian Basin in West Texas (“Midland Basin”). In the third quarter of 2022, drilling and completion activities within our RockStar and Sweetie Peck positions continued to focus primarily on development optimization and further delineating our Midland Basin position. Our Midland Basin position provides substantial future development opportunities within multiple oil-rich intervals, including the Spraberry and Wolfcamp formations. Our South Texas assets are comprised of approximately 155,000 net acres located in the Maverick Basin in Dimmit and Webb Counties, Texas (“South Texas”). In the third quarter of 2022, our operations in South Texas were focused on production from both the Austin Chalk formation and Eagle Ford shale formation, and further development of the Austin Chalk formation. Our overlapping acreage position in the Maverick Basin covers a significant portion of the western Eagle Ford shale and Austin Chalk formations, and includes acreage across the oil, gas-condensate, and dry gas windows with gas composition amenable to processing for NGL extraction. Our 2022 capital program is expected to be between $870.0 million and $900.0 million. Our financial and operational flexibility allows us to continually monitor the economic environment and adjust our activity level as warranted. Our 2022 capital program remains focused on highly economic oil development projects in both our Midland Basin and South Texas assets. We believe that our high-quality asset portfolio is capable of generating strong returns in the current macroeconomic environment, which we expect will 25 enable us to grow cash flows, improve leverage metrics, and maintain strong financial flexibility. Please refer to Overview of Liquidity and Capital Resources below for discussion of how we expect to fund the remainder of our 2022 capital program. Third Quarter 2022 Overview and Outlook for the Remainder of 2022 During the third quarter of 2022, our Board of Directors authorized the Stock Repurchase Program and increased our fixed dividend to $0.60 per share annually, to be paid in quarterly increments of $0.15 per share, both of which align with our goal to implement a sustainable and repeatable capital return program that creates long-term value for our stockholders. During the three months ended September 30, 2022, we repurchased and subsequently retired 452,734 shares of our outstanding common stock at a cost of $20.2 million. Please refer to Note 3 - Equity in Part I, Item 1 of this report for additional discussion. Financial and Operational Results. Average net daily equivalent production for the three months ended September 30, 2022, decreased six percent sequentially to 137.8 MBOE, consisting of decreases in oil volumes of nine percent, or 5.8 MBbl per day, gas volumes of three percent, or 9.9 MMcf per day, and NGL volumes of six percent, or 1.4 MBbl per day. Oil and NGL realized prices, before the effect of derivative settlements (“realized price” or “realized prices”), decreased sequentially by 15 percent and 14 percent, respectively, as a result of decreases in benchmark commodity prices during the third quarter of 2022. Realized prices for gas remained flat sequentially. Total realized price per BOE decreased 12 percent sequentially. The decrease in total realized price per BOE and the decrease in total net equivalent production volumes resulted in a 16 percent sequential decrease in oil, gas, and NGL production revenue, which was $827.6 million for the three months ended September 30, 2022, compared with $990.4 million for the three months ended June 30, 2022. Oil, gas, and NGL production expense per BOE of $12.62 for the three months ended September 30, 2022, increased two percent sequentially, primarily as a result of increases in lease operating expense (“LOE”) per BOE and ad valorem tax expense per BOE, mostly offset by a decrease in production tax expense per BOE. We recorded a net derivative gain of $137.6 million for the three months ended September 30, 2022, compared with a net derivative loss of $104.2 million for the three months ended June 30, 2022. Included within these amounts are derivative settlement losses of $186.3 million and $240.6 million for the three months ended September 30, 2022, and June 30, 2022, respectively. Operational and financial activities during the three months ended September 30, 2022, resulted in the following: • Net cash provided by operating activities of $513.4 million for the three months ended September 30, 2022, compared with $542.6 million for the three months ended June 30, 2022. • Net income of $481.2 million, or $3.87 per diluted share, for the three months ended September 30, 2022, compared with net income of $323.5 million, or $2.60 per diluted share, for the three months ended June 30, 2022. • Adjusted EBITDAX, a non-GAAP financial measure, for the three months ended September 30, 2022, of $460.2 million, compared with $559.7 million for the three months ended June 30, 2022. Please refer to the caption Non-GAAP Financial Measures below for additional discussion and our definition of adjusted EBITDAX and reconciliations to net income (loss) and net cash provided by operating activities. Please refer to Overview of Selected Production and Financial Information, Including Trends and Comparison of Financial Results and Trends Between the Three Months Ended September 30, 2022, and June 30, 2022, and Between the Nine Months Ended September 30, 2022, and 2021 below for additional discussion. Operational Activities. In our Midland Basin program, we operated three drilling rigs and two completion crews, drilled 12 gross (10 net) wells and completed 15 gross (14 net) wells during the third quarter of 2022. Net equivalent production volumes decreased sequentially by five percent to 7.2 MMBOE. Costs incurred in our Midland Basin program during the three months ended September 30, 2022, totaled $129.0 million, or 51 percent of our total costs incurred for the period. During the remainder of 2022, we anticipate operating three drilling rigs and one completion crew. Activity is expected to focus primarily on developing the Spraberry and Wolfcamp formations within our RockStar and Sweetie Peck positions. In our South Texas program, we operated two drilling rigs and averaged one completion crew, drilled eight gross (eight net) wells and completed 17 gross (17 net) wells during the third quarter of 2022. Net equivalent production volumes decreased sequentially by five percent to 5.5 MMBOE. Costs incurred in our South Texas program during the three months ended September 30, 2022, totaled $110.7 million, or 44 percent of our total costs incurred for the period. During the remainder of 2022, we anticipate operating two drilling rigs and one completion crew, focused primarily on developing the Austin Chalk formation. 26 The table below provides a quarterly summary of changes in our drilled but not completed well count and current year drilling and completion activity in our operated programs for the three and nine months ended September 30, 2022: Midland Basin South Texas (1) Total Gross Net Gross Net Gross Net Wells drilled but not completed at December 31, 2021 30 27 32 32 62 59 Wells drilled 16 14 9 9 25 23 Wells completed (6) (5) (13) (13) (19) (18) Wells drilled but not completed at March 31, 2022 40 36 28 28 68 64 Wells drilled (2) 16 13 11 10 27 23 Wells completed (2) (7) (7) (2) (2) (9) (9) Wells drilled but not completed at June 30, 2022 (3) 49 41 37 36 86 78 Wells drilled 12 10 8 8 20 18 Wells completed (15) (14) (17) (17) (32) (31) Wells drilled but not completed at September 30, 2022 (3) 46 38 28 27 74 65 ____________________________________________ (1) The South Texas drilled but not completed well count includes 11 gross (11 net) wells that were not included in our five-year development plan at December 31, 2021. (2) Wells drilled and wells completed during the three months ended June 30, 2022, exclude one drilled and completed well that was subsequently abandoned, outside of our core areas of operations . (3) Amounts may not calculate due to rounding. Costs Incurred. Costs incurred in oil and gas property acquisition, exploration, and development activities, whether capitalized or expensed, totaled $253.8 million and $677.4 million for the three and nine months ended September 30, 2022, respectively, and were primarily incurred in our Midland Basin and South Texas programs as further detailed in Operational Activities above. 27 Production Results. The table below presents our production by product type for each of our assets for the sequential quarterly periods and the YTD 2022-over-YTD 2021 periods: For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 Midland Basin Production: Oil (MMBbl) 4.5 4.9 14.7 18.5 Gas (Bcf) 16.1 16.0 47.5 38.9 NGLs (MMBbl) — — — — Equivalent (MMBOE) 7.2 7.6 22.6 25.0 Average net daily equivalent (MBOE per day) 78.1 83.2 82.9 91.6 Relative percentage 57 % 57 % 57 % 68 % South Texas Production: Oil (MMBbl) 1.2 1.2 3.6 1.7 Gas (Bcf) 14.9 15.5 46.3 38.2 NGLs (MMBbl) 1.8 1.9 5.9 3.8 Equivalent (MMBOE) 5.5 5.8 17.2 11.8 Average net daily equivalent (MBOE per day) 59.7 63.4 63.0 43.2 Relative percentage 43 % 43 % 43 % 32 % Total Production: Oil (MMBbl) 5.7 6.1 18.3 20.2 Gas (Bcf) 31.0 31.5 93.8 77.1 NGLs (MMBbl) 1.8 1.9 5.9 3.8 Equivalent (MMBOE) 12.7 13.3 39.8 36.8 Average net daily equivalent (MBOE per day) 137.8 146.6 145.8 134.8 ____________________________________________ Note: Amounts may not calculate due to rounding. Please refer to Overview of Selected Production and Financial Information, Including Trends and Comparison of Financial Results and Trends Between the Three Months Ended September 30, 2022, and June 30, 2022, and Between the Nine Months Ended September 30, 2022, and 2021 below for discussion on production. Oil, Gas, and NGL Prices Our financial condition and the results of our operations are significantly affected by the prices we receive for our oil, gas, and NGL production, which can fluctuate dramatically. When we refer to realized oil, gas, and NGL prices below, the disclosed price represents the average price for the respective period before the effect of derivative settlements. While quoted NYMEX oil and gas and OPIS NGL prices are generally used as a basis for comparison within our industry, the prices we receive are affected by quality, energy content, location and transportation differentials, and contracted pricing benchmarks for these products. 28 The following table summarizes commodity price data, as well as the effect of derivative settlements, for the three months ended September 30, 2022, June 30, 2022, and September 30, 2021: For the Three Months Ended September 30, 2022 June 30, 2022 September 30, 2021 Oil (per Bbl): Average NYMEX contract monthly price $ 91.56 $ 108.41 $ 70.56 Realized price $ 92.66 $ 108.64 $ 69.30 Effect of oil derivative settlements $ (21.22) $ (29.19) $ (19.13) Gas: Average NYMEX monthly settle price (per MMBtu) $ 8.20 $ 7.17 $ 4.01 Realized price (per Mcf) $ 7.58 $ 7.66 $ 5.12 Effect of gas derivative settlements (per Mcf) $ (2.00) $ (1.69) $ (1.23) NGLs (per Bbl): Average OPIS price (1) $ 42.47 $ 50.05 $ 40.39 Realized price $ 36.36 $ 42.08 $ 36.87 Effect of NGL derivative settlements $ (2.11) $ (4.13) $ (16.65) ____________________________________________ (1) Average OPIS price per barrel of NGL, historical or strip, assumes a composite barrel product mix of 37% Ethane, 32% Propane, 6% Isobutane, 11% Normal Butane, and 14% Natural Gasoline for all periods presented. This product mix represents the industry standard composite barrel and does not necessarily represent our product mix for NGL production. Realized prices reflect our actual product mix. Given the uncertainty surrounding (a) the ongoing conflict between Russia and Ukraine, (b) the economic and trade sanctions that certain countries have imposed on Russia, (c) production output from the Organization of the Petroleum Exporting Countries (“OPEC”) plus other non-OPEC oil producing countries (collectively referred to as “OPEC+”), and the potential impacts of these issues on global commodity and financial markets, we expect benchmark prices for oil, gas, and NGLs to remain volatile for the foreseeable future, and we cannot reasonably predict the timing or likelihood of any future impacts that may result, which could include further inflation, supply chain disruptions, a continued rise in interest rates, and industry-specific impacts. In addition to supply and demand fundamentals, as global commodities, the prices for oil, gas, and NGLs are affected by real or perceived geopolitical risks in various regions of the world as well as the relative strength of the United States dollar compared to other currencies. Our realized prices at local sales points may also be affected by infrastructure capacity in the areas of our operations and beyond. The following table summarizes 12-month strip prices for NYMEX WTI oil, NYMEX Henry Hub gas, and OPIS NGLs as of October 27, 2022, and September 30, 2022: As of October 27, 2022 As of September 30, 2022 NYMEX WTI oil (per Bbl) $ 83.78 $ 75.32 NYMEX Henry Hub gas (per MMBtu) $ 5.14 $ 5.85 OPIS NGLs (per Bbl) $ 33.81 $ 32.91 We use financial derivative instruments as part of our financial risk management program. We have a financial risk management policy governing our use of derivatives, and decisions regarding entering into commodity derivative contracts are overseen by a financial risk management committee consisting of certain of our senior executive officers and finance personnel. We make decisions about the amount of our expected production that we cover by derivatives based on the amount of debt on our balance sheet, the level of capital commitments and long-term obligations we have in place, and the terms and futures prices that are made available by our approved counterparties. With our current commodity derivative contracts, we believe we have partially reduced our exposure to volatility in commodity prices and basis differentials in the near term. Our use of costless collars for a portion of our derivatives allows us to participate in some of the upward movements in oil and gas prices while also setting a price floor below which we are insulated from further price decreases. Please refer to Note 10 - Derivative Financial Instruments in Part I, Item 1 of this report and to Commodity Price Risk in Overview of Liquidity and Capital Resources below for additional information regarding our oil, gas, and NGL derivatives. 29 Financial Results of Operations and Additional Comparative Data The tables below provide information regarding selected production and financial information for the three months ended September 30, 2022, and the preceding three quarters: For the Three Months Ended September 30, June 30, March 31, December 31, 2022 2022 2022 2021 (in millions) Production (MMBOE) 12.7 13.3 13.8 14.6 Oil, gas, and NGL production revenue $ 827.6 $ 990.4 $ 858.7 $ 852.4 Oil, gas, and NGL production expense $ 160.0 $ 165.6 $ 144.7 $ 143.3 Depletion, depreciation, amortization, and asset retirement obligation liability accretion $ 145.9 $ 154.8 $ 159.5 $ 200.0 Exploration $ 14.2 $ 20.9 $ 9.0 $ 12.6 General and administrative $ 28.4 $ 28.3 $ 25.0 $ 37.1 Net income $ 481.2 $ 323.5 $ 48.8 $ 424.9 ____________________________________________ Note: Amounts may not calculate due to rounding. Selected Performance Metrics For the Three Months Ended September 30, June 30, March 31, December 31, 2022 2022 2022 2021 Average net daily equivalent production (MBOE per day) 137.8 146.6 153.3 158.3 Lease operating expense (per BOE) $ 5.64 $ 5.11 $ 4.25 $ 4.21 Transportation costs (per BOE) $ 2.87 $ 2.87 $ 2.74 $ 2.61 Production taxes as a percent of oil, gas, and NGL production revenue 4.9 % 5.1 % 4.7 % 4.8 % Ad valorem tax expense (per BOE) $ 0.93 $ 0.69 $ 0.58 $ 0.22 Depletion, depreciation, amortization, and asset retirement obligation liability accretion (per BOE) $ 11.50 $ 11.60 $ 11.56 $ 13.74 General and administrative (per BOE) $ 2.24 $ 2.12 $ 1.81 $ 2.55 ____________________________________________ Note: Amounts may not calculate due to rounding. 30 Overview of Selected Production and Financial Information, Including Trends For the Three Months Ended Amount Change Between Periods Percent Change Between Periods For the Nine Months Ended Amount Change Between Periods Percent Change Between Periods September 30, June 30, September 30, September 30, 2022 2022 2022 2021 Net production volumes: (1) Oil (MMBbl) 5.7 6.1 (0.5) (8) % 18.3 20.2 (1.9) (9) % Gas (Bcf) 31.0 31.5 (0.6) (2) % 93.8 77.1 16.7 22 % NGLs (MMBbl) 1.8 1.9 (0.1) (5) % 5.9 3.8 2.1 56 % Equivalent (MMBOE) 12.7 13.3 (0.7) (5) % 39.8 36.8 3.0 8 % Average net daily production: (1) Oil (MBbl per day) 61.7 67.5 (5.8) (9) % 66.9 73.9 (6.9) (9) % Gas (MMcf per day) 336.5 346.3 (9.9) (3) % 343.7 282.5 61.2 22 % NGLs (MBbl per day) 20.1 21.4 (1.4) (6) % 21.6 13.9 7.8 56 % Equivalent (MBOE per day) 137.8 146.6 (8.8) (6) % 145.8 134.8 11.0 8 % Oil, gas, and NGL production revenue (in millions): (1) Oil production revenue $ 525.9 $ 667.0 $ (141.1) (21) % $ 1,800.3 $ 1,300.5 $ 499.7 38 % Gas production revenue 234.6 241.3 (6.8) (3) % 645.9 327.0 319.0 98 % NGL production revenue 67.1 82.0 (15.0) (18) % 230.5 118.1 112.4 95 % Total oil, gas, and NGL production revenue $ 827.6 $ 990.4 $ (162.8) (16) % $ 2,676.7 $ 1,745.5 $ 931.1 53 % Oil, gas, and NGL production expense (in millions): (1) Lease operating expense $ 71.5 $ 68.1 $ 3.3 5 % $ 198.2 $ 164.2 $ 34.0 21 % Transportation costs 36.4 38.3 (1.8) (5) % 112.4 101.4 11.0 11 % Production taxes 40.2 50.0 (9.8) (20) % 130.7 80.4 50.3 63 % Ad valorem tax expense 11.9 9.2 2.7 29 % 29.0 16.2 12.8 79 % Total oil, gas, and NGL production expense $ 160.0 $ 165.6 $ (5.6) (3) % $ 470.2 $ 362.1 $ 108.1 30 % Realized price: Oil (per Bbl) $ 92.66 $ 108.64 $ (15.98) (15) % $ 98.52 $ 64.50 $ 34.02 53 % Gas (per Mcf) $ 7.58 $ 7.66 $ (0.08) (1) % $ 6.88 $ 4.24 $ 2.64 62 % NGLs (per Bbl) $ 36.36 $ 42.08 $ (5.72) (14) % $ 39.04 $ 31.19 $ 7.85 25 % Per BOE $ 65.27 $ 74.23 $ (8.96) (12) % $ 67.23 $ 47.43 $ 19.80 42 % Per BOE data: (1) Oil, gas, and NGL production expense: Lease operating expense $ 5.64 $ 5.11 $ 0.53 10 % $ 4.98 $ 4.46 $ 0.52 12 % Transportation costs 2.87 2.87 — — % 2.82 2.75 0.07 3 % Production taxes 3.17 3.75 (0.58) (15) % 3.28 2.18 1.10 50 % Ad valorem tax expense 0.93 0.69 0.24 35 % 0.73 0.44 0.29 66 % Total oil, gas, and NGL production expense (1) $ 12.62 $ 12.41 $ 0.21 2 % $ 11.81 $ 9.84 $ 1.97 20 % Depletion, depreciation, amortization, and asset retirement obligation liability accretion $ 11.50 $ 11.60 $ (0.10) (1) % $ 11.56 $ 15.61 $ (4.05) (26) % General and administrative $ 2.24 $ 2.12 $ 0.12 6 % $ 2.05 $ 2.03 $ 0.02 1 % Derivative settlement loss (2) $ (14.69) $ (18.03) $ 3.34 19 % $ (14.95) $ (13.05) $ (1.90) (15) % Earnings per share information (in thousands, except per share data): (3) Basic weighted-average common shares outstanding 123,195 121,910 1,285 1 % 122,318 118,224 4,094 3 % Diluted weighted-average common shares outstanding 124,279 124,343 (64) — % 124,233 118,224 6,009 5 % Basic net income (loss) per common share $ 3.91 $ 2.65 $ 1.26 48 % $ 6.98 $ (3.29) $ 10.27 312 % Diluted net income (loss) per common share $ 3.87 $ 2.60 $ 1.27 49 % $ 6.87 $ (3.29) $ 10.16 309 % 31 ______________________________________ (1) Amounts and percentage changes may not calculate due to rounding. (2) Derivative settlements for the three months ended September 30, 2022, and for the nine months ended September 30, 2022, and 2021, are included within the net derivative (gain) loss line item in the accompanying statements of operations. (3) Please refer to Note 9 - Earnings Per Share in Part I, Item 1 of this report for additional discussion. Average net daily equivalent production for the three months ended September 30, 2022, decreased six percent sequentially, consisting of six percent decreases from both our Midland Basin and South Texas assets primarily due to the effects of delayed well completions which were largely related to the supply chain, and impacts to production associated with offset activity. Average net daily equivalent production for the nine months ended September 30, 2022, increased eight percent compared with the same period in 2021, driven by an increase of 46 percent from our South Texas assets which was the result of increased capital allocation to our Austin Chalk assets, and strong well performance. We present certain information on a per BOE basis in order to evaluate our performance relative to our peers and to identify and measure trends we believe may require additional analysis and discussion. Our realized price on a per BOE basis decreased $8.96 sequentially as a result of decreases in oil and NGL benchmark prices. The impact on oil, gas, and NGL production revenues resulting from these decreases was partially offset by a decrease in the loss on the settlement of our commodity derivative contracts of $3.34 per BOE. Our realized price on a per BOE basis increased $19.80 YTD 2022-over-YTD 2021 as a result of increased benchmark commodity prices. The positive impact on oil, gas, and NGL production revenues resulting from this increase was partially offset by an increase in the loss on the settlement of our commodity derivative contracts of $1.90 per BOE. LOE on a per BOE basis increased 10 percent sequentially and 12 percent YTD 2022-over-YTD 2021. These increases were the result of increased workover activity and increased service provider costs which have been impacted by inflation. The sequential quarterly increase was also driven by a five percent decrease in total net equivalent production volumes. For the full-year 2022, we expect LOE on a per BOE basis to increase, compared with 2021, due to increases in service provider costs and workover activity, which we expect to be partially offset by increasing activity in the Austin Chalk, where operating costs are lower than in the Midland Basin. We anticipate volatility in LOE on a per BOE basis as a result of changes in total production, changes in our overall production mix, timing of workover projects, and industry activity, all of which impact total LOE. Transportation costs on a per BOE basis remained flat sequentially and increased three percent YTD 2022-over-YTD 2021. The YTD 2022-over-YTD 2021 increase was the result of a 46 percent increase in net daily equivalent production volumes from our South Texas assets which was partially offset by transportation contract cost reductions. In general, we expect total transportation costs to fluctuate relative to changes in gas and NGL production from our South Texas assets. For the full-year 2022, we expect transportation costs on an absolute basis to increase compared with 2021, as a result of increased activity in South Texas in 2022, where we incur a majority of our transportation costs. The impact of the expected increase in net equivalent production volumes from our South Texas assets is expected to outweigh the impact of transportation contract cost reductions, resulting in an expected increase in transportation costs on a per BOE basis for the full-year 2022, compared with 2021. Production tax expense on a per BOE basis decreased 15 percent sequentially as a result of decreases in realized prices, and increased 50 percent YTD 2022-over-YTD 2021, as a result of increases in realized prices during the period. Our overall production tax rate for the three and nine months ended September 30, 2022, was 4.9 percent, compared with 5.1 percent for the three months ended June 30, 2022, and 4.6 percent for the nine months ended September 30, 2021. We generally expect production tax expense to correlate with oil, gas, and NGL production revenue on an absolute and per BOE basis. Product mix, the location of production, and incentives to encourage oil and gas development can also impact the amount of production tax expense that we recognize. Ad valorem tax expense on a per BOE basis increased 35 percent sequentially and 66 percent YTD 2022-over-YTD 2021 as a result of changes to the expected value assessments of our producing properties, which are driven by increases in commodity prices. The sequential quarterly increase was further impacted by a decrease in total net equivalent production volumes. We anticipate volatility in ad valorem tax expense on a per BOE and absolute basis as the valuation of our producing properties changes. Depletion, depreciation, amortization, and asset retirement obligation liability accretion (“DD&A”) expense on a per BOE basis remained flat sequentially and decreased 26 percent YTD 2022-over-YTD 2021 as a result of increased estimated proved reserves at year-end 2021 and increased activity in our Austin Chalk program, which has lower DD&A rates compared with our Midland Basin assets. Our DD&A rate fluctuates as a result of impairments, divestiture activity, carrying cost funding and sharing arrangements with third parties, changes in our production mix, and changes in our total estimated proved reserve volumes. We expect DD&A expense per BOE and DD&A expense on an absolute basis to decrease in 2022, compared with 2021, primarily as a result of increased estimated proved reserves and increased activity in our Austin Chalk program. General and administrative (“G&A”) expense on a per BOE basis increased six percent sequentially as a result of decreased total net equivalent production volumes, and remained flat YTD 2022-over-YTD 2021. Despite inflationary pressures, for the full-year 2022 we currently expect G&A expense to decrease slightly on an absolute basis and to decrease on a per BOE basis, compared with 32 2021. However, G&A expense could fluctuate based on the results of the Company’s full year financial and operational performance metrics. Please refer to Comparison of Financial Results and Trends Between the Three Months Ended September 30, 2022, and June 30, 2022, and Between the Nine Months Ended September 30, 2022, and 2021 below for additional discussion of operating expenses. Comparison of Financial Results and Trends Between the Three Months Ended September 30, 2022, and June 30, 2022, and Between the Nine Months Ended September 30, 2022, and 2021 Average net daily equivalent production, production revenue, and production expense Sequential Quarterly Changes. The following table presents changes in our average net daily equivalent production, production revenue, and production expense, by area, between the three months ended September 30, 2022, and June 30, 2022: Net Equivalent Production Decrease Production Revenue Decrease Production Expense Increase (Decrease) (MBOE per day) (in millions) (in millions) Midland Basin (5.1) $ (127.5) $ (8.3) South Texas (3.7) (35.3) 2.7 Total (8.8) $ (162.8) $ (5.6) __________________________________________ Note: Amounts may not calculate due to rounding. Average net daily equivalent production volumes decreased six percent, consisting of six percent decreases from both our Midland Basin and South Texas assets. Our realized oil, gas, and NGL prices decreased 15 percent, one percent, and 14 percent, respectively. The 12 percent decrease in total realized price per BOE, combined with a six percent decrease in average net daily equivalent production volumes, resulted in a 16 percent decrease in oil, gas, and NGL production revenue. Total production expense decreased three percent, primarily driven by a decrease in production tax expense, partially offset by increases in LOE and ad valorem tax expense. YTD 2022-over-YTD 2021 Changes. The following table presents changes in our average net daily equivalent production, production revenue, and production expense, by area, between the nine months ended September 30, 2022, and 2021: Net Equivalent Production Increase (Decrease) Production Revenue Increase Production Expense Increase (MBOE per day) (in millions) (in millions) Midland Basin (8.7) $ 416.7 $ 57.4 South Texas 19.7 514.4 50.7 Total 11.0 $ 931.1 $ 108.1 __________________________________________ Note: Amounts may not calculate due to rounding. Average net daily equivalent production volumes increased eight percent, consisting of an increase of 46 percent from our South Texas assets partially offset by a decrease of 10 percent from our Midland Basin assets. Realized prices for oil, gas, and NGLs increased 53 percent, 62 percent, and 25 percent, respectively. As a result of increases in benchmark commodity prices and production volumes, oil, gas, and NGL production revenue increased 53 percent. Total production expense increased 30 percent, primarily as a result of increases in production tax expense and LOE. Please refer to Overview of Selected Production and Financial Information, Including Trends above for additional discussion, including discussion of trends on a per BOE basis. Depletion, depreciation, amortization, and asset retirement obligation liability accretion For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 (in millions) Depletion, depreciation, amortization, and asset retirement obligation liability accretion $ 145.9 $ 154.8 $ 460.2 $ 574.4 33 DD&A expense decreased six percent sequentially and 20 percent YTD 2022-over-YTD 2021. The sequential quarterly decrease was primarily driven by a five percent decrease in net equivalent production volumes, and the YTD 2022-over-YTD 2021 decrease was driven by increased estimated proved reserves at year-end 2021 and increased activity in our Austin Chalk program, which has lower DD&A rates compared with our Midland Basin assets. Please refer to Overview of Selected Production and Financial Information, Including Trends above for additional discussion of DD&A expense on a per BOE basis. Exploration For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 (in millions) Geological, geophysical, and other expenses $ 6.8 $ 13.7 $ 21.8 $ 5.3 Overhead 7.4 7.2 22.3 21.4 Total $ 14.2 $ 20.9 $ 44.1 $ 26.7 __________________________________________ Note: Prior periods have been adjusted to conform to the current period presentation. Exploration expense decreased 32 percent sequentially and increased 65 percent YTD 2022-over-YTD 2021, as a result of unsuccessful exploration efforts outside of our core areas of operations which primarily impacted the three months ended June 30, 2022. Exploration expense fluctuates based on actual geological and geophysical studies we perform within an exploratory area, exploratory dry hole expense incurred, and changes in the amount of allocated overhead. Impairment For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 (in millions) Impairment $ 1.1 $ 4.4 $ 6.5 $ 26.3 Impairment expense recorded during the periods presented consists entirely of unproved property abandonments and impairments related to actual and anticipated lease expirations, as well as actual and anticipated losses of acreage due to title defects, changes in development plans, and other inherent acreage risks. Impairment expense decreased YTD 2022-over-YTD 2021, as a result of fewer actual and anticipated lease expirations and title defects. We expect proved property impairments to occur more frequently in periods of declining or depressed commodity prices, and that the frequency of unproved property abandonments and impairments will fluctuate with the timing of lease expirations or title defects, and changing economics associated with decreases in commodity prices. Additionally, changes in drilling plans, unsuccessful exploration activities, and downward engineering revisions may result in proved and unproved property impairments. Future impairments of proved and unproved properties are difficult to predict; however, based on our commodity price assumptions as of October 27, 2022, we do not expect any material oil and gas property impairments in the fourth quarter of 2022 resulting from commodity price impacts. We expect abandonment and impairment expense related to unproved properties to decrease for the full-year 2022, compared with 2021. General and administrative For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 (in millions) General and administrative $ 28.4 $ 28.3 $ 81.7 $ 74.9 G&A expense increased nine percent YTD 2022-over-YTD 2021 as a result of increased compensation expense. Please refer to the section Overview of Selected Production and Financial Information, Including Trends above for additional discussion of G&A expense on a per BOE basis. 34 Net derivative (gain) loss For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 (in millions) Net derivative (gain) loss $ (137.6) $ 104.2 $ 385.2 $ 924.2 Net derivative (gain) loss is a result of changes in derivative fair values associated with fluctuations in the forward price curves for the commodities underlying our outstanding derivative contracts and the monthly cash settlements of our derivative positions during the period. The net derivative gain for the three months ended September 30, 2022, resulted from decreases in oil and NGL benchmark prices. The net derivative losses for the three months ended June 30, 2022, and for the nine months ended September 30, 2022, and 2021, resulted from increases in benchmark commodity prices. Please refer to Note 10 - Derivative Financial Instruments in Part I, Item 1 of this report for additional discussion. Other operating expense, net For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 (in millions) Other operating expense, net $ 1.2 $ 1.1 $ 2.6 $ 44.7 Other operating expense, net, recorded during the third quarter of 2021 related to legal settlements, including the settlement of the SPM NAM LLC et al. case. Please refer to Legal Proceedings in Part I, Item 3 of our 2021 Form 10-K for additional discussion. Interest expense For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 (in millions) Interest expense $ (22.8) $ (35.5) $ (97.7) $ (120.3) Interest expense decreased 36 percent sequentially and 19 percent YTD 2022-over-YTD 2021 as a result of the reduction in the aggregate principal amount of our Senior Notes through various transactions in 2021 and 2022, including the redemption of our 2024 Senior Notes on February 14, 2022, and the redemption of our 2025 Senior Secured Notes on June 17, 2022. As a result of these transactions, we expect interest expense to decrease for the full-year 2022, compared with 2021. Total interest expense can vary based on the timing and amount of borrowings under our revolving credit facility. Please refer to Note 5 - Long-Term Debt in Part I, Item 1 of this report and Overview of Liquidity and Capital Resources below for additional discussion. Loss on extinguishment of debt For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 (in millions) Loss on extinguishment of debt $ — $ (67.2) $ (67.6) $ (2.1) The redemption of our 2025 Senior Secured Notes on June 17, 2022, resulted in a net loss on extinguishment of debt of $67.2 million, which included $33.5 million of premium paid, $26.3 million of accelerated unamortized debt discount, and $7.4 million of accelerated unamortized deferred financing costs. The Tender Offer and 2022 Senior Notes Redemption completed during the second quarter of 2021 resulted in a net loss on extinguishment of debt of $2.1 million, which included $1.5 million of accelerated unamortized deferred financing costs and $0.6 million of net premiums paid during the nine months ended September 30, 2021. Please refer to Note 5 - Long-Term Debt in Part I, Item 1 of this report for additional discussion of these transactions. 35 Income tax (expense) benefit For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 (in millions, except tax rate) Income tax (expense) benefit $ (119.4) $ (86.7) $ (219.0) $ 0.1 Effective tax rate 19.9 % 21.1 % 20.4 % — % The sequential quarterly decrease in the effective tax rate is primarily due to the effect of recorded discrete adjustments related to excess tax benefits from stock-based compensation awards which were partially offset by discrete adjustments related to compensation limits for certain covered individuals. Additionally, as a result of commodity price increases during 2022, compared with 2021, and cumulative financial statement income exceeding cumulative financial statement losses over the prior three years, we anticipate that the valuation allowance recorded against the derivative deferred tax asset as of September 30, 2022, will be reversed at year-end 2022. The effect of this anticipated reversal is included in the effective tax rate for the three and nine months ended September 30, 2022. The YTD 2022-over-YTD 2021 increase in the effective tax rate was primarily due to the effect of higher forecast income for the year ended December 31, 2022, compared with the amount of forecast net income for the full-year 2021 as of September 30, 2021. The tax rates for each period presented reflect the effect of valuation allowance adjustments, the proportional effects of excess tax benefits from stock-based compensation awards, and limits on expensing of certain covered individual’s compensation. Based on current projections, we estimate that between six percent and eight percent of full-year 2022 income tax expense will be current. During the nine months ended September 30, 2022, we made estimated federal income tax payments of $10.0 million. Changes in federal income tax laws or enactment of proposed legislation to increase the corporate tax rate and eliminate or reduce certain oil and gas industry deductions could have a material impact on our effective tax rate and current tax expense. The enactment of the Inflation Reduction Act on August 16, 2022, is currently not expected to have a material effect on our consolidated financial statements. Please refer to Note 4 - Income Taxes in Part I, Item 1 of this report for additional discussion. Overview of Liquidity and Capital Resources Based on the current commodity price environment, we believe we have sufficient liquidity and capital resources to execute our business plan while continuing to meet our current financial obligations. We continue to manage the duration and level of our drilling and completion service commitments in order to maintain flexibility with regard to our activity level and capital expenditures. Sources of Cash For the nine months ended September 30, 2022, our capital program was funded with cash flows from operating activities and we expect that to continue for the remainder of 2022. As of September 30, 2022, our cash and cash equivalents balance was $498.4 million, which was an increase of $231.3 million from our cash and cash equivalents balance as of June 30, 2022. Although we expect cash flows from operations to be sufficient to fund our expected 2022 capital program, we may also use borrowings under our revolving credit facility or raise funds through new debt or equity offerings or from other sources of financing. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our current stockholders could be diluted, and these newly issued securities may have rights, preferences, or privileges senior to those of certain existing stockholders and bondholders. Additionally, we may enter into carrying cost and sharing arrangements with third parties for certain exploration or development programs. All of our sources of liquidity can be affected by the general conditions of the broader economy, force majeure events, fluctuations in commodity prices, operating costs, tax law changes, and volumes produced, all of which affect us and our industry. Our credit ratings affect the availability of and cost for us to borrow additional funds. Three major credit rating agencies have upgraded our credit ratings during 2022, reflecting our top-tier assets and operational performance, the redemption of our 2024 Senior Notes, and our strong liquidity profile, among other factors. Most recently, one major credit rating agency upgraded our credit rating upon our announcement of the Stock Repurchase Program in September 2022, citing our strong operational performance, ability to consistently generate cash flows with proceeds used to reduce gross debt, strong liquidity profile, and our use of financial derivative instruments as part of our financial risk management program. The credit rating agencies have also cited our priorities of improving our leverage metrics and continuing to reduce total debt, which we have achieved through the redemption of our 2025 Senior Secured Notes, and our expected ability to generate meaningful cash flows, among other reasons for the rating upgrades. 36 We have no control over the market prices for oil, gas, or NGLs, although we may be able to influence the amount of our realized revenues from our oil, gas, and NGL sales through the use of derivative contracts as part of our commodity price risk management program. Commodity derivative contracts may limit the prices we receive for our oil, gas, and NGL sales if oil, gas, or NGL prices rise substantially over the price established by the commodity derivative contract. Please refer to Note 10 - Derivative Financial Instruments in Part I, Item 1 of this report for additional information about our oil, gas, and NGL derivative contracts currently in place and the timing of settlement of those contracts. Credit Agreement On August 2, 2022, we entered into the Credit Agreement which provides for a senior secured revolving credit facility with a maximum loan amount of $3.0 billion, an initial borrowing base of $2.5 billion, and initial aggregate lender commitments totaling $1.25 billion. As of September 30, 2022, the borrowing base and aggregate lender commitments under the Credit Agreement remained unchanged. No individual bank participating in the Credit Agreement represents more than 10 percent of the aggregate lender commitment. We must comply with certain financial and non-financial covenants under the terms of the Credit Agreement. We were in compliance with all financial and non-financial covenants under the Credit Agreement as of September 30, 2022, and through the filing of this report. Please refer to Note 5 - Long-Term Debt in Part I, Item 1 of this report for additional discussion, as well as the presentation of the outstanding balance, total amount of letters of credit, and available borrowing capacity under the Credit Agreement as of October 27, 2022, September 30, 2022, and December 31, 2021. We had no revolving credit facility borrowings during the nine months ended September 30, 2022. Our daily weighted-average revolving credit facility debt balance for the nine months ended September 30, 2021, was $134.6 million. Cash flows provided by our operating activities, proceeds received from divestitures of properties, capital markets activities including open market debt repurchases, debt redemptions, repayment of scheduled debt maturities, and our capital expenditures, including acquisitions, all impact the amount we borrow under our revolving credit facility. Weighted-Average Interest and Weighted-Average Borrowing Rates Our weighted-average interest rate includes paid and accrued interest, fees on the unused portion of the aggregate commitment amount under the Credit Agreement, letter of credit fees, and the non-cash amortization of deferred financing costs. Our weighted-average interest rate was impacted by the non-cash amortization of the discount related to our 2025 Senior Secured Notes and our 2021 Senior Secured Convertible Notes for the periods during which they were outstanding. Our weighted-average borrowing rate includes paid and accrued interest only. The following table presents our weighted-average interest rates and our weighted-average borrowing rates for the periods presented: For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 Weighted-average interest rate 7.0 % 8.1 % 7.8 % 7.7 % Weighted-average borrowing rate 6.4 % 7.1 % 7.0 % 6.7 % Our weighted-average interest rates and our weighted-average borrowing rates decreased sequentially, due to the redemption of the 2025 Senior Secured Notes on June 17, 2022. We expect our weighted-average interest rates and weighted-average borrowing rates to decrease for the full-year 2022 compared with 2021, primarily as a result of the redemption of our 2025 Senior Secured Notes. Our weighted-average interest rate and weighted-average borrowing rate are impacted by the occurrence and timing of long-term debt issuances and redemptions and the average outstanding balance on our revolving credit facility. Additionally, our weighted-average interest rates are impacted by the fees paid on the unused portion of our aggregate lender commitments. The rates disclosed in the above table do not reflect certain amounts associated with the repurchase or redemption of Senior Notes, such as the acceleration of unamortized deferred financing costs and unamortized discounts, as these amounts are netted against the associated gain or loss on extinguishment of debt. The 2021 Senior Secured Convertible Notes were retired upon maturity on July 1, 2021, the 2024 Senior Notes were redeemed on February 14, 2022, and the 2025 Senior Secured Notes were redeemed on June 17, 2022. After these dates, the weighted-average interest rate was no longer impacted by the non-cash amortization of deferred financing costs, or for the 2021 Senior Secured Convertible Notes and the 2025 Senior Secured Notes, the non-cash amortization of the discounts. Uses of Cash We use cash for the development, exploration, and acquisition of oil and gas properties; for the payment of operating and general and administrative costs, income taxes, dividends, and debt obligations, including interest; and for repurchases of shares of our common stock under the Stock Repurchase Program. Expenditures for the development, exploration, and acquisition of oil and gas properties are the primary use of our capital resources. During the nine months ended September 30, 2022, we spent approximately $591.8 million on capital expenditures. This amount differs from the costs incurred amount of $677.4 million for the nine months ended 37 September 30, 2022, as costs incurred is an accrual-based amount that also includes asset retirement obligations, geological and geophysical expenses, acquisitions of oil and gas properties, and exploration overhead amounts. The amount and allocation of our future capital expenditures will depend upon a number of factors, including our cash flows from operating, investing, and financing activities, our ability to execute our development program, and the number and size of acquisitions that we complete. In addition, the impact of oil, gas, and NGL prices on investment opportunities, the availability of capital, tax law changes, and the timing and results of our exploration and development activities may lead to changes in funding requirements for future development. We periodically review our capital expenditure budget and guidance to assess if changes are necessary based on current and projected cash flows, acquisition and divestiture activities, debt requirements, and other factors. Our 2022 capital program is expected to be between $870.0 million and $900.0 million. We will continue to monitor the economic environment through the remainder of the year and adjust our activity level as warranted. We may from time to time repurchase shares of our common stock, or repurchase or redeem all or portions of our outstanding debt securities, for cash, through exchanges for other securities, or a combination of both. Such repurchases or redemptions may be made in open market transactions, privately negotiated transactions, tender offers, pursuant to contractual provisions, or otherwise. Any such repurchases or redemptions will depend on prevailing market conditions, our liquidity requirements, contractual restrictions or covenants, compliance with securities laws, and other factors. The amounts involved in any such transaction may be material. On September 7, 2022, we announced that our Board of Directors approved the Stock Repurchase Program authorizing us to repurchase up to $500.0 million in aggregate value of our common stock through December 31, 2024. We intend to fund repurchases from available working capital and cash provided by operating activities. Stock repurchases may also be funded with borrowings under the Credit Agreement. The timing, as well as the number and value of our shares repurchased under the Stock Repurchase Program, will be determined by certain authorized officers of the Company at their discretion and will depend on a variety of factors, including the market price of our common stock, general market and economic conditions and applicable legal requirements. During the three months ended September 30, 2022, we repurchased and subsequently retired 452,734 shares of our common stock at a cost of $20.2 million, and as of September 30, 2022, $479.8 million remained available under the Stock Repurchase Program for repurchases of our common stock. Please refer to Note 3 - Equity in Part I, Item 1 of this report for additional discussion. The Stock Repurchase Program terminates and supersedes the August 1998 authorization to repurchase common stock, under which 3,072,184 shares remained available for repurchase prior to termination. On February 14, 2022, we redeemed all of the $104.8 million of aggregate principal amount outstanding of our 2024 Senior Notes at a redemption price equal to 100 percent of the principal amount of the 2024 Senior Notes on the date of redemption, plus accrued and unpaid interest. On June 17, 2022, we redeemed all of the $446.7 million of aggregate principal amount outstanding of our 2025 Senior Secured Notes at a redemption price equal to 107.5 percent of the principal amount of the 2025 Senior Secured Notes on the date of the redemption. We paid total consideration of $480.2 million, including premium, and paid $18.9 million of accrued interest related to the 2025 Senior Secured Notes. During the second quarter of 2021, we issued our 2028 Senior Notes and used the net cash proceeds of $392.8 million to repurchase $193.1 million and $172.3 million of outstanding principal amount of our 2022 Senior Notes and 2024 Senior Notes, respectively, through the Tender Offer, and to redeem the remaining $19.3 million of 2022 Senior Notes then outstanding through the 2022 Senior Notes Redemption. We paid total consideration of $385.3 million, including net premiums, and paid $5.2 million of accrued interest related to the 2022 Senior Notes and 2024 Senior Notes. The 2021 Senior Secured Convertible Notes matured on July 1, 2021, and on that day, we used borrowings under our revolving credit facility to retire at par the outstanding principal amount of $65.5 million. Please refer to Note 5 - Long-Term Debt in Part I, Item 1 of this report for additional discussion. These transactions were completed as part of our strategy for 2022 to reduce absolute debt and improve our leverage metrics. Analysis of Cash Flow Changes Between the Nine Months Ended September 30, 2022, and 2021 The following tables present changes in cash flows between the nine months ended September 30, 2022, and 2021, for our operating, investing, and financing activities. The analysis following each table should be read in conjunction with our accompanying statements of cash flows in Part I, Item 1 of this report. Operating activities For the Nine Months Ended September 30, Amount Change Between Periods 2022 2021 (in millions) Net cash provided by operating activities $ 1,398.0 $ 730.1 $ 667.9 Net cash provided by operating activities increased for the nine months ended September 30, 2022, compared with the same period in 2021, primarily due to a $985.3 million increase in cash received from oil, gas, and NGL production revenues, net of transportation costs and production taxes partially offset by a $218.8 million increase in cash paid on settled derivative trades and an increase in cash paid for LOE, ad valorem taxes, and G&A expense of $50.8 million. Net cash provided by operating activities is also affected by working capital changes and the timing of cash receipts and disbursements. 38 Investing activities For the Nine Months Ended September 30, Amount Change Between Periods 2022 2021 (in millions) Net cash used in investing activities $ (592.4) $ (544.8) $ (47.6) Net cash used in investing activities increased for the nine months ended September 30, 2022, compared with the same period in 2021, primarily due to increased capital expenditures of $41.6 million. Financing activities For the Nine Months Ended September 30, Amount Change Between Periods 2022 2021 (in millions) Net cash used in financing activities $ (639.9) $ (155.6) $ (484.3) Net cash used in financing activities for the nine months ended September 30, 2022, related to $480.2 million of cash paid, including premium, to redeem our 2025 Senior Secured Notes, and $104.8 million of cash paid to redeem our 2024 Senior Notes. These redemptions were made using cash on hand. Additionally, we paid $25.1 million for the net share settlement of employee and director stock awards and $20.2 million to repurchase and subsequently retire 452,734 shares of our common stock under the Stock Repurchase Program. Net cash used in financing activities for the nine months ended September 30, 2021, related to net repayments under our revolving credit facility of $93.0 million and $65.5 million of cash paid to retire our 2021 Senior Secured Convertible Notes. Additionally, we paid $385.3 million of net cash, including net premiums, to fund the Tender Offer and the 2022 Senior Notes Redemption, and we received net cash proceeds of $392.8 million from the issuance of our 2028 Senior Notes. Interest Rate Risk We are exposed to market risk due to the floating interest rate associated with any outstanding balance on our revolving credit facility. Our Credit Agreement allows us to fix the interest rate for all or a portion of the principal balance of our revolving credit facility for a period up to six months. To the extent that the interest rate is fixed, interest rate changes will affect the revolving credit facility’s fair value but will not impact results of operations or cash flows. Conversely, for the portion of the revolving credit facility that has a floating interest rate, interest rate changes will not affect the fair value but will impact future results of operations and cash flows. Changes in interest rates do not impact the amount of interest we pay on our fixed-rate Senior Notes, but can impact their fair values. As of September 30, 2022, our outstanding principal amount of fixed-rate debt totaled $1.6 billion and we had no floating-rate debt outstanding. Please refer to Note 8 - Fair Value Measurements in Part I, Item 1 of this report for additional discussion on the fair values of our Senior Notes. Commodity Price Risk The prices we receive for our oil, gas, and NGL production directly impact our revenue, profitability, access to capital, and future rate of growth. Oil, gas, and NGL prices are subject to unpredictable fluctuations resulting from a variety of factors that are typically beyond our control, including changes in supply and demand associated with the broader macroeconomic environment and weather-related events. The markets for oil, gas, and NGLs have been volatile, especially over the last decade, and remain subject to heightened levels of uncertainty and volatility related to (a) the ongoing conflict between Russia and Ukraine, (b) the economic and trade sanctions that certain countries have imposed on Russia, (c) production output from OPEC+, and the associated potential impacts of these issues on global commodity and financial markets. These issues have contributed to inflation, supply chain disruptions, a rise in interest rates, and could have further industry-specific impacts, which may require us to adjust our business plan. The realized prices we receive for our production also depend on numerous factors that are typically beyond our control. Based on our production for the nine months ended September 30, 2022, a 10 percent decrease in our average realized oil, gas, and NGL prices, before the effects of derivative settlements, would have reduced our oil, gas, and NGL production revenues by approximately $180.0 million, $64.6 million, and $23.0 million, respectively. If commodity prices had been 10 percent lower, our net derivative settlements for the nine months ended September 30, 2022, would have offset the declines in oil, gas, and NGL production revenue by approximately $128.2 million. We enter into commodity derivative contracts in order to reduce the risk of fluctuations in commodity prices. The fair value of our commodity derivative contracts is largely determined by estimates of the forward curves of the relevant price indices. As of September 30, 2022, a 10 percent increase or decrease in the forward curves associated with our oil, gas, and NGL commodity derivative instruments would have changed our net derivative positions for these products by approximately $79.2 million, $10.3 million, and $1.0 million, respectively. 39 Off-Balance Sheet Arrangements We have not participated in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We evaluate our transactions to determine if any variable interest entities exist. If we determine that we are the primary beneficiary of a variable interest entity, that entity is consolidated into our consolidated financial statements. We have not been involved in any unconsolidated SPE transactions during the nine months ended September 30, 2022, or through the filing of this report. Critical Accounting Policies and Estimates Please refer to the corresponding section in Part II, Item 7 and to Note 1 - Summary of Significant Accounting Policies included in Part II, Item 8 of our 2021 Form 10-K for discussion of our accounting policies and estimates. Accounting Matters Please refer to Note 1 - Summary of Significant Accounting Policies in Part I, Item 1 of this report for information on new authoritative accounting guidance. 40 Non-GAAP Financial Measures Adjusted EBITDAX represents net income (loss) before interest expense, interest income, income taxes, depletion, depreciation, amortization and asset retirement obligation liability accretion expense, exploration expense, property abandonment and impairment expense, non-cash stock-based compensation expense, derivative gains and losses net of settlements, gains and losses on divestitures, gains and losses on extinguishment of debt, and certain other items. Adjusted EBITDAX excludes certain items that we believe affect the comparability of operating results and can exclude items that are generally non-recurring in nature or whose timing and/or amount cannot be reasonably estimated. Adjusted EBITDAX is a non-GAAP measure that we believe provides useful additional information to investors and analysts, as a performance measure, for analysis of our ability to internally generate funds for exploration, development, acquisitions, and to service debt. We are also subject to financial covenants under our Credit Agreement as further described in Note 5 - Long-Term Debt in Part I, Item 1 of this report. In addition, adjusted EBITDAX is widely used by professional research analysts and others in the valuation, comparison, and investment recommendations of companies in the oil and gas exploration and production industry, and many investors use the published research of industry research analysts in making investment decisions. Adjusted EBITDAX should not be considered in isolation or as a substitute for net income (loss), income (loss) from operations, net cash provided by operating activities, or other profitability or liquidity measures prepared under GAAP. Because adjusted EBITDAX excludes some, but not all items that affect net income (loss) and may vary among companies, the adjusted EBITDAX amounts presented may not be comparable to similar metrics of other companies. Our revolving credit facility provides a material source of liquidity for us. Under the terms of our Credit Agreement, if we failed to comply with the covenants that establish a maximum permitted ratio of total funded debt, as defined in the Credit Agreement, to adjusted EBITDAX, we would be in default, an event that would prevent us from borrowing under our revolving credit facility and would therefore materially limit a significant source of our liquidity. In addition, if we are in default under our revolving credit facility and are unable to obtain a waiver of that default from our lenders, lenders under that facility and under the indentures governing each series of our outstanding Senior Notes would be entitled to exercise all of their remedies for default. The following table provides reconciliations of our net income (loss) (GAAP) and net cash provided by operating activities (GAAP) to adjusted EBITDAX (non-GAAP) for the periods presented: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Net income (loss) (GAAP) $ 481,240 $ 85,593 $ 853,489 $ (388,671) Interest expense 22,825 40,861 97,708 120,268 Income tax expense (benefit) 119,379 (39) 218,951 (95) Depletion, depreciation, amortization, and asset retirement obligation liability accretion 145,865 202,701 460,169 574,375 Exploration (1) 13,203 7,801 41,152 23,742 Impairment 1,077 8,750 6,466 26,250 Stock-based compensation expense 5,105 4,498 13,858 14,191 Net derivative (gain) loss (137,577) 209,146 385,180 924,183 Derivative settlement loss (186,299) (213,555) (595,080) (480,262) (Gain) loss on extinguishment of debt — (5) 67,605 2,139 Other, net (4,663) 905 (5,064) 2,407 Adjusted EBITDAX (non-GAAP) 460,155 346,656 1,544,434 818,527 Interest expense (22,825) (40,861) (97,708) (120,268) Income tax (expense) benefit (119,379) 39 (218,951) 95 Exploration (1)(2) (11,993) (7,801) (27,959) (23,742) Amortization of debt discount and deferred financing costs 1,303 3,905 8,910 13,350 Deferred income taxes 110,048 (68) 202,996 (282) Other, net (457) 5,171 (461) (9,708) Net change in working capital 96,518 21,078 (13,230) 52,170 Net cash provided by operating activities (GAAP) $ 513,370 $ 328,119 $ 1,398,031 $ 730,142 ____________________________________________ (1) Stock-based compensation expense is a component of the exploration expense and general and administrative expense line items on the accompanying statements of operations. Therefore, the exploration line items shown in the reconciliation above will vary from the amount shown on the accompanying statements of operations for the component of stock-based compensation expense recorded to exploration expense. (2) For the three and nine months ended September 30, 2022, amounts are net of certain capital expenditures related to unsuccessful exploration efforts outside of our core areas of operations. 41