SM Energy Co 10-Q

ITEM 1. FINANCIAL STATEMENTS SM ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share data) March 31, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 477,869 $ 444,998 Accounts receivable 187,810 233,297 Derivative assets 81,062 48,677 Prepaid expenses and other 9,535 10,231 Total current assets 756,276 737,203 Property and equipment (successful efforts method): Proved oil and gas properties 10,483,159 10,258,368 Accumulated depletion, depreciation, and amortization ( 6,339,303 ) ( 6,188,147 ) Unproved oil and gas properties, net of valuation allowance of $ 37,904 and $ 38,008 , respectively 497,127 487,192 Wells in progress 342,875 287,267 Other property and equipment, net of accumulated depreciation of $ 57,338 and $ 56,512 , respectively 45,694 38,099 Total property and equipment, net 5,029,552 4,882,779 Noncurrent assets: Derivative assets 15,373 24,465 Other noncurrent assets 68,957 71,592 Total noncurrent assets 84,330 96,057 Total assets $ 5,870,158 $ 5,716,039 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 522,279 $ 532,289 Derivative liabilities 30,723 56,181 Other current liabilities 10,144 10,114 Total current liabilities 563,146 598,584 Noncurrent liabilities: Revolving credit facility — — Senior Notes, net 1,572,991 1,572,210 Asset retirement obligations 110,163 108,233 Deferred income taxes 330,782 280,811 Derivative liabilities 3,639 1,142 Other noncurrent liabilities 59,642 69,601 Total noncurrent liabilities 2,077,217 2,031,997 Commitments and contingencies (note 6) Stockholders’ equity: Common stock, $ 0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 120,517,918 and 121,931,676 shares, respectively 1,205 1,219 Additional paid-in capital 1,743,567 1,779,703 Retained earnings 1,489,032 1,308,558 Accumulated other comprehensive loss ( 4,009 ) ( 4,022 ) Total stockholders’ equity 3,229,795 3,085,458 Total liabilities and stockholders’ equity $ 5,870,158 $ 5,716,039 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 SM ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data) For the Three Months Ended March 31, 2023 2022 Operating revenues and other income: Oil, gas, and NGL production revenue $ 570,778 $ 858,721 Other operating income 2,727 1,055 Total operating revenues and other income 573,505 859,776 Operating expenses: Oil, gas, and NGL production expense 142,348 144,691 Depletion, depreciation, amortization, and asset retirement obligation liability accretion 154,189 159,481 Exploration 18,428 9,046 General and administrative 27,669 24,996 Net derivative (gain) loss ( 51,329 ) 418,521 Other operating expense, net 10,153 1,305 Total operating expenses 301,458 758,040 Income from operations 272,047 101,736 Interest expense ( 22,459 ) ( 39,387 ) Other non-operating income (expense), net 4,470 ( 724 ) Income before income taxes 254,058 61,625 Income tax expense ( 55,506 ) ( 12,861 ) Net income $ 198,552 $ 48,764 Basic weighted-average common shares outstanding 121,671 121,907 Diluted weighted-average common shares outstanding 122,294 124,179 Basic net income per common share $ 1.63 $ 0.40 Diluted net income per common share $ 1.62 $ 0.39 Dividends per common share $ 0.15 $ 0.01 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 SM ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands) For the Three Months Ended March 31, 2023 2022 Net income $ 198,552 $ 48,764 Other comprehensive income, net of tax: Pension liability adjustment 13 182 Total other comprehensive income, net of tax 13 182 Total comprehensive income $ 198,565 $ 48,946 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 SM ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (in thousands, except share data and dividends per share) Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Stockholders’ Equity Common Stock Retained Earnings Shares Amount Balances, December 31, 2022 121,931,676 $ 1,219 $ 1,779,703 $ 1,308,558 $ ( 4,022 ) $ 3,085,458 Net income — — — 198,552 — 198,552 Other comprehensive income — — — — 13 13 Cash dividends declared, $ 0.15 per share — — — ( 18,078 ) — ( 18,078 ) Stock-based compensation expense — — 4,318 — — 4,318 Purchase of shares under Stock Repurchase Program ( 1,413,758 ) ( 14 ) ( 40,454 ) — — ( 40,468 ) Balances, March 31, 2023 120,517,918 $ 1,205 $ 1,743,567 $ 1,489,032 $ ( 4,009 ) $ 3,229,795 Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Stockholders’ Equity Common Stock Retained Earnings Shares Amount Balances, December 31, 2021 121,862,248 $ 1,219 $ 1,840,228 $ 234,533 $ ( 12,849 ) $ 2,063,131 Net income — — — 48,764 — 48,764 Other comprehensive income — — — — 182 182 Cash dividends declared, $ 0.01 per share — — — ( 1,218 ) — ( 1,218 ) Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings 1,929 — ( 24 ) — — ( 24 ) Stock-based compensation expense — — 4,274 — — 4,274 Balances, March 31, 2022 121,864,177 $ 1,219 $ 1,844,478 $ 282,079 $ ( 12,667 ) $ 2,115,109 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 SM ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) For the Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net income $ 198,552 $ 48,764 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation, amortization, and asset retirement obligation liability accretion 154,189 159,481 Stock-based compensation expense 4,318 4,274 Net derivative (gain) loss ( 51,329 ) 418,521 Derivative settlement gain (loss) 5,076 ( 168,183 ) Amortization of debt discount and deferred financing costs 1,371 4,010 Deferred income taxes 49,968 11,948 Other, net ( 4,295 ) 1,239 Net change in working capital ( 26,216 ) ( 137,962 ) Net cash provided by operating activities 331,634 342,092 Cash flows from investing activities: Capital expenditures ( 240,712 ) ( 150,127 ) Other, net 307 — Net cash used in investing activities ( 240,405 ) ( 150,127 ) Cash flows from financing activities: Cash paid to repurchase Senior Notes — ( 104,770 ) Repurchase of common stock ( 40,068 ) — Dividends paid ( 18,290 ) — Other, net — ( 24 ) Net cash used in financing activities ( 58,358 ) ( 104,794 ) Net change in cash, cash equivalents, and restricted cash 32,871 87,171 Cash, cash equivalents, and restricted cash at beginning of period 444,998 332,716 Cash, cash equivalents, and restricted cash at end of period $ 477,869 $ 419,887 Supplemental schedule of additional cash flow information: Operating activities: Cash paid for interest, net of capitalized interest $ ( 33,882 ) $ ( 64,204 ) Investing activities: Increase in capital expenditure accruals and other $ 66,873 $ 15,627 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 SM ENERGY COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Summary of Significant Accounting Policies Description of Operations SM Energy Company, together with its consolidated subsidiaries (“SM Energy” or the “Company”), is an independent energy company engaged in the acquisition, exploration, development, and production of oil, gas, and NGLs in the state of Texas. Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Quarterly Report on Form 10-Q, and Regulation S-X. These financial statements do not include all information and notes required by GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the 2022 Form 10-K . In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. 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 March 31, 2023, 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. Significant Accounting Policies The significant accounting policies followed by the Company are set forth in Note 1 - Summary of Significant Accounting Policies in the 2022 Form 10-K and are supplemented by the notes to the unaudited condensed consolidated financial statements included in this report. These unaudited condensed consolidated financial statements should be read in conjunction with the 2022 Form 10-K . Recently Issued Accounting Standards As of March 31, 2023, and through the filing of this report, no Accounting Standards Updates have been issued and not yet adopted that are applicable to the Company and that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures. Note 2 - Revenue from Contracts with Customers The Company recognizes its share of revenue from the sale of produced oil, gas, and NGLs from its Midland Basin and South Texas assets. 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 table below presents oil, gas, and NGL production revenue by product type for each of the Company’s operating areas for the three months ended March 31, 2023, and 2022: Midland Basin South Texas Total Three Months Ended March 31, Three Months Ended March 31, Three Months Ended March 31, 2023 2022 2023 2022 2023 2022 (in thousands) Oil production revenue $ 320,135 $ 493,895 $ 100,703 $ 113,407 $ 420,838 $ 607,302 Gas production revenue 49,789 102,273 43,942 67,776 93,731 170,049 NGL production revenue 177 152 56,032 81,218 56,209 81,370 Total $ 370,101 $ 596,320 $ 200,677 $ 262,401 $ 570,778 $ 858,721 Relative percentage 65 % 69 % 35 % 31 % 100 % 100 % The Company recognizes oil, gas, and NGL production revenue at the point in time when custody and title (“control”) of the product transfers to the purchaser, which differs depending on the applicable contractual terms. Transfer of control drives the 9 presentation of transportation, gathering, processing, and other post-production expenses (“fees and other deductions”) within the accompanying statements of operations. Fees and other deductions incurred by the Company prior to control transfer are recorded within the oil, gas, and NGL production expense line item on the accompanying statements of operations. When control is transferred at or near the wellhead, sales are based on a wellhead market price that is impacted by fees and other deductions incurred by the purchaser subsequent to the transfer of control. Revenue is recorded in the month when performance obligations are satisfied. However, settlement statements from the purchasers of hydrocarbons and the related cash consideration are received 30 to 90 days after production has occurred. 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 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 March 31, 2023, and December 31, 2022, were $ 146.2 million and $ 184.5 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. Differences between estimates and actual amounts received for product sales are recorded in the month that payment is received from the purchaser. The time period between production and satisfaction of performance obligations is generally less than one day, therefore there are no material unsatisfied or partially unsatisfied performance obligations at the end of the reporting period. Please refer to Note 1 - Summary of Significant Accounting Policies and Note 2 - Revenue from Contracts with Customers in the 2022 Form 10-K for more information regarding the Company’s revenue recognition policy and the application of the guidance in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, and for more information regarding the types of contracts under which oil, gas, and NGL production revenue is generated. Note 3 - Equity Stock Repurchase Program During 2022, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to $ 500.0 million in aggregate value of its common stock through December 31, 2024 (“Stock Repurchase Program”). The Stock Repurchase Program permits the Company to repurchase shares of its common stock from time to time in open market transactions, through privately negotiated transactions or by other means in accordance with federal securities laws and subject to certain provisions of the Credit Agreement and the indentures governing the Senior Notes, as defined in Note 5 - Long-Term Debt . Please refer to Note 3 - Equity in the 2022 Form 10-K for additional information regarding the Company’s Stock Repurchase Program. During the three months ended March 31, 2023, the Company utilized net cash provided by operating activities to repurchase and subsequently retire 1,413,758 shares of its common stock at a weighted-average share price of $ 28.32 for a total cost of $ 40.0 million, excluding taxes, commissions, and fees. As of March 31, 2023, $ 402.8 million remained available for repurchases of the Company’s outstanding common stock under the Stock Repurchase Program. Note 4 - Income Taxes The provision for income taxes for the three months ended March 31, 2023, and 2022, consists of the following: For the Three Months Ended March 31, 2023 2022 (in thousands) Current portion of income tax expense: Federal $ ( 4,998 ) $ ( 609 ) State ( 540 ) ( 304 ) Deferred portion of income tax expense ( 49,968 ) ( 11,948 ) Income tax expense $ ( 55,506 ) $ ( 12,861 ) Effective tax rate 21.8 % 20.9 % Recorded income tax expense or benefit differs from the amount that would be provided by applying the statutory United States federal income tax rate to income or loss before income taxes. These differences primarily relate to the effect of state income taxes, excess tax benefits and deficiencies from stock-based compensation awards, tax deduction limitations on the compensation of covered individuals, changes in valuation allowances, the cumulative effect of other smaller permanent differences, and can also reflect 10 the cumulative effect of an enacted tax rate change, in the period of enactment, on the Company’s net deferred tax asset and liability balances. The Company commissioned a multi-year research and development (“R&D”) credit study in 2022, which is expected to be completed in late 2023, and is expected to favorably impact the Company’s effective tax rate and future tax obligations when the results are recorded. The Company’s policy is to not record an R&D credit until it is claimed on a filed tax return, which had not occurred as of the filing of this report. For all years before 2019, the Company is generally no longer subject to United States federal or state income tax examinations by tax authorities. Note 5 - Long-Term Debt Credit Agreement The Company’s Credit Agreement provides for a senior secured revolving credit facility with a maximum loan amount of $ 3.0 billion. As of March 31, 2023, the borrowing base and aggregate lender commitments under the Credit Agreement were $ 2.5 billion and $ 1.25 billion, respectively. Subsequent to March 31, 2023, the semi-annual borrowing base redetermination was completed, which reaffirmed both the Company’s borrowing base and aggregate lender commitments at existing amounts. The next scheduled borrowing base redetermination date is October 1, 2023. The Credit Agreement is scheduled to mature on the earlier of (a) August 2, 2027 (“Stated Maturity Date”), or (b) 91 days prior to the maturity date of any of the Company’s outstanding Senior Notes, as defined below, to the extent that, on or before such date, the respective Senior Notes have not been repaid, exchanged, repurchased, refinanced, or otherwise redeemed in full, and, if refinanced or exchanged, with a scheduled maturity date that is not earlier than at least 180 days after the Stated Maturity Date. 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, as presented in Note 5 - Long-Term Debt in the 2022 Form 10-K . At the Company’s election, borrowings under the Credit Agreement may be in the form of Secured Overnight Financing Rate (“SOFR”), Alternate Base Rate (“ABR”), or Swingline loans. SOFR loans accrue interest at SOFR plus the applicable margin from the utilization grid, and ABR and Swingline loans accrue interest at a market-based floating rate, plus the applicable margin from the utilization grid. Commitment fees are accrued on the unused portion of the aggregate lender commitment amount at rates from the utilization grid. The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Agreement as of April 21, 2023, March 31, 2023, and December 31, 2022: As of April 21, 2023 As of March 31, 2023 As of December 31, 2022 (in thousands) Revolving credit facility (1) $ — $ — $ — Letters of credit (2) 6,000 6,000 6,000 Available borrowing capacity 1,244,000 1,244,000 1,244,000 Total aggregate lender commitment amount $ 1,250,000 $ 1,250,000 $ 1,250,000 ____________________________________________ (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 $ 10.2 million and $ 10.8 million as of March 31, 2023, and December 31, 2022, respectively. These costs are being amortized over the term of the revolving credit facility on a straight-line basis. (2) Letters of credit outstanding reduce the amount available under the revolving credit facility on a dollar-for-dollar basis. 11 Senior Notes The Company’s Senior Notes, net line item on the accompanying balance sheets as of March 31, 2023, and December 31, 2022, consists of the following (collectively referred to as “Senior Notes”): As of March 31, 2023 As of December 31, 2022 Principal Amount Unamortized Deferred Financing Costs Principal Amount, Net Principal Amount Unamortized Deferred Financing Costs Principal Amount, Net (in thousands) 5.625 % Senior Notes due 2025 $ 349,118 $ 1,369 $ 347,749 $ 349,118 $ 1,528 $ 347,590 6.75 % Senior Notes due 2026 419,235 2,394 416,841 419,235 2,569 416,666 6.625 % Senior Notes due 2027 416,791 2,978 413,813 416,791 3,172 413,619 6.5 % Senior Notes due 2028 400,000 5,412 394,588 400,000 5,665 394,335 Total $ 1,585,144 $ 12,153 $ 1,572,991 $ 1,585,144 $ 12,934 $ 1,572,210 The Senior Notes are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and any future unsecured senior debt and are senior in right of payment to any future subordinated debt. The Company may redeem some or all of its Senior Notes prior to their maturity at redemption prices based on a premium, plus accrued and unpaid interest as described in the indentures governing the Senior Notes. On February 14, 2022, the Company redeemed the remaining $ 104.8 million of aggregate principal amount outstanding of its 5.0 % Senior Notes due 2024 (“2024 Senior Notes”), with cash on hand, pursuant to the terms of the indenture governing the 2024 Senior Notes which provided for 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. The Company canceled all redeemed 2024 Senior Notes upon settlement. Please refer to Note 5 - Long-Term Debt in the 2022 Form 10-K for additional detail on the Company’s Senior Notes. Covenants The Company is subject to certain financial and non-financial 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, create liens that secure debt, enter into transactions with affiliates, and merge or consolidate with other entities. The Company was in compliance with all financial and non-financial covenants as of March 31, 2023, and through the filing of this report. Please refer to Note 5 - Long-Term Debt in the 2022 Form 10-K for additional detail on the Company’s covenants under the Credit Agreement and indentures governing the Senior Notes. Capitalized Interest Capitalized interest costs for the three months ended March 31, 2023, and 2022, totaled $ 5.5 million and $ 3.0 million, 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. Capitalized interest costs are included in total costs incurred. Note 6 - Commitments and Contingencies Commitments Other than those items discussed below, there have been no changes in commitments through the filing of this report that differ materially from those disclosed in the 2022 Form 10-K . Please refer to Note 6 - Commitments and Contingencies in the 2022 Form 10-K for additional discussion of the Company’s commitments. Drilling Rig Service Contracts . During the three months ended March 31, 2023, and through the filing of this report, the Company amended certain of its drilling rig contracts resulting in the increase 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 $ 30.3 million under contract terms extending through the second quarter of 2024. 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 $ 18.8 million in early termination fees. No early termination penalties or standby fees were incurred by the Company during the three months ended 12 March 31, 2023, and the Company does not expect to incur material penalties with regard to its drilling rig contracts during the remainder of 2023. Contingencies The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation and claims are not expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company. Note 7 - Derivative Financial Instruments Summary of Oil, Gas, and NGL Derivative Contracts in Place The Company regularly enters into commodity derivative contracts to mitigate a portion of its exposure to oil, gas, and NGL price volatility and location differentials, and the associated impact on cash flows. As of March 31, 2023, and through the filing of this report, all contracts were entered into for other-than-trading purposes. The Company’s commodity derivative contracts consist of price swap and collar arrangements for oil and gas production, and price swap arrangements for NGL production. In a typical commodity swap agreement, if the agreed upon published third-party index price (“index price”) is lower than the swap price, the Company receives the difference between the index price and the agreed upon swap price. If the index price is higher than the swap price, the Company pays the difference. For collar arrangements, the Company receives the difference between an agreed upon index price and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices. The Company has entered into fixed price oil and gas basis swaps in order to mitigate exposure to adverse pricing differentials between certain industry benchmark prices and the actual physical pricing points where the Company’s production is sold. As of March 31, 2023, the Company had basis swap contracts with fixed price differentials between: • NYMEX WTI and Argus WTI Midland for a portion of its Midland Basin oil production with sales contracts that settle at Argus WTI Midland prices; • NYMEX WTI and Argus WTI Houston Magellan East Houston Terminal (“MEH”) for a portion of its South Texas oil production with sales contracts that settle at Argus WTI Houston MEH (“WTI Houston MEH”) prices; • NYMEX HH and Inside FERC Houston Ship Channel (“IF HSC”) for a portion of its South Texas gas production with sales contracts that settle at IF HSC prices; and • NYMEX HH and Inside FERC West Texas (“IF Waha”) for a portion of its Midland Basin gas production with sales contracts that settle at IF Waha prices. The Company has also entered into oil swap contracts to fix the differential in pricing between the NYMEX calendar month average and the physical crude oil delivery month (“Roll Differential”) in which the Company pays the periodic variable Roll Differential and receives a weighted-average fixed price differential. 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. 13 As of March 31, 2023, the Company had commodity derivative contracts outstanding through the fourth quarter of 2025 as summarized in the table below: Contract Period Second Quarter 2023 Third Quarter 2023 Fourth Quarter 2023 2024 2025 Oil Derivatives (volumes in MBbl and prices in $ per Bbl): Swaps NYMEX WTI Volumes 333 607 546 — — Weighted-Average Contract Price $ 45.18 $ 59.77 $ 60.00 $ — $ — ICE Brent Volumes 910 920 920 910 — Weighted-Average Contract Price $ 86.50 $ 86.50 $ 86.50 $ 85.50 $ — Collars NYMEX WTI Volumes 464 291 — 919 — Weighted-Average Floor Price $ 67.85 $ 75.00 $ — $ 75.00 $ — Weighted-Average Ceiling Price $ 81.53 $ 93.05 $ — $ 81.47 $ — Basis Swaps WTI Midland-NYMEX WTI Volumes 1,357 1,414 1,294 2,961 — Weighted-Average Contract Price $ 0.99 $ 0.88 $ 0.88 $ 1.17 $ — WTI Houston MEH-NYMEX WTI Volumes 431 361 296 877 — Weighted-Average Contract Price $ 1.68 $ 1.59 $ 1.53 $ 1.85 $ — Roll Differential Swaps NYMEX WTI Volumes 1,243 1,304 1,201 2,188 — Weighted-Average Contract Price $ 0.62 $ 0.64 $ 0.62 $ 0.42 $ — Gas Derivatives (volumes in BBtu and prices in $ per MMBtu): Swaps NYMEX HH Volumes 1,420 1,470 — — — Weighted-Average Contract Price $ 5.05 $ 5.11 $ — $ — $ — Collars NYMEX HH Volumes 5,181 6,194 8,362 19,457 — Weighted-Average Floor Price $ 3.83 $ 3.75 $ 3.90 $ 3.71 $ — Weighted-Average Ceiling Price $ 4.68 $ 4.62 $ 5.70 $ 5.89 $ — IF HSC Volumes 1,345 1,389 1,451 — — Weighted-Average Floor Price $ 4.25 $ 4.25 $ 4.25 $ — $ — Weighted-Average Ceiling Price $ 5.00 $ 4.95 $ 5.55 $ — $ — Basis Swaps IF Waha-NYMEX HH Volumes 2,462 2,442 2,337 20,958 20,501 Weighted-Average Contract Price $ ( 1.93 ) $ ( 1.05 ) $ ( 1.01 ) $ ( 0.86 ) $ ( 0.66 ) IF HSC-NYMEX HH Volumes 1,774 1,813 2,008 10,208 — Weighted-Average Contract Price $ ( 0.25 ) $ ( 0.25 ) $ ( 0.25 ) $ ( 0.33 ) $ — NGL Derivatives (volumes in MBbl and prices in $ per Bbl): Swaps OPIS Propane Mont Belvieu Non-TET Volumes 182 181 187 — — Weighted-Average Contract Price $ 36.66 $ 36.67 $ 36.66 $ — $ — 14 Commodity Derivative Contracts Entered Into Subsequent to March 31, 2023 Subsequent to March 31, 2023, the Company entered into NYMEX WTI price swap contracts for the fourth quarter of 2023 for a total of 0.3 MMBbl of oil production at a contract price of $ 77.00 per Bbl and NYMEX HH price swap contracts for 2025 for a total of 5,891 BBtu of gas production at a weighted-average contract price of $ 4.20 per MMBtu. 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 commodity derivative contracts as hedging instruments. The fair value of the commodity derivative contracts was a net asset of $ 62.1 million and $ 15.8 million as of March 31, 2023, and December 31, 2022, respectively. The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets, by category: As of March 31, 2023 As of December 31, 2022 (in thousands) Derivative assets: Current assets $ 81,062 $ 48,677 Noncurrent assets 15,373 24,465 Total derivative assets $ 96,435 $ 73,142 Derivative liabilities: Current liabilities $ 30,723 $ 56,181 Noncurrent liabilities 3,639 1,142 Total derivative liabilities $ 34,362 $ 57,323 Offsetting of Derivative Assets and Liabilities As of March 31, 2023, and December 31, 2022, 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. The Company’s agreements also provide that in the event of an early termination, the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. The Company’s accounting policy is to not offset these positions in its accompanying balance sheets. The following table provides a reconciliation between the gross assets and liabilities reflected on the accompanying balance sheets and the potential effects of master netting arrangements on the fair value of the Company’s commodity derivative contracts: Derivative Assets as of Derivative Liabilities as of March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 (in thousands) Gross amounts presented in the accompanying balance sheets $ 96,435 $ 73,142 $ ( 34,362 ) $ ( 57,323 ) Amounts not offset in the accompanying balance sheets ( 25,293 ) ( 26,136 ) 25,293 26,136 Net amounts $ 71,142 $ 47,006 $ ( 9,069 ) $ ( 31,187 ) 15 The following table summarizes the commodity components of the derivative settlement (gain) loss, and the net derivative (gain) loss line items presented within the accompanying unaudited condensed consolidated statements of cash flows (“accompanying statements of cash flows”) and the accompanying statements of operations, respectively: For the Three Months Ended March 31, 2023 2022 (in thousands) Derivative settlement (gain) loss: Oil contracts $ 6,226 $ 129,168 Gas contracts ( 11,302 ) 27,051 NGL contracts — 11,964 Total derivative settlement (gain) loss $ ( 5,076 ) $ 168,183 Net derivative (gain) loss: Oil contracts $ ( 29,167 ) $ 315,050 Gas contracts ( 20,778 ) 86,175 NGL contracts ( 1,384 ) 17,296 Total net derivative (gain) loss $ ( 51,329 ) $ 418,521 Credit Related Contingent Features As of March 31, 2023, all of the Company’s derivative counterparties were members of the Credit Agreement lender group. The Company does not enter into derivative contracts with counterparties that are not part of the 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. Collateral securing indebtedness under the Credit Agreement also secures the Company’s derivative agreement obligations. Note 8 - Fair Value Measurements The Company follows fair value measurement accounting guidance for all assets and liabilities measured at fair value. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The fair value hierarchy for grouping these assets and liabilities is based on the significance level of the following inputs: • Level 1 – quoted prices in active markets for identical assets or liabilities • Level 2 – quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable • 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 March 31, 2023 As of December 31, 2022 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 (in thousands) Assets: Derivatives (1) $ — $ 96,435 $ — $ — $ 73,142 $ — Liabilities: Derivatives (1) $ — $ 34,362 $ — $ — $ 57,323 $ — __________________________________________ (1) This represents a financial asset or liability that is measured at fair value on a recurring basis. 16 Both financial and non-financial assets and liabilities are categorized within the above fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used by the Company as well as the general classification of such instruments pursuant to the above fair value hierarchy. Derivatives The Company uses Level 2 inputs to measure the fair value of oil, gas, and NGL commodity derivatives. Fair values are based upon interpolated data. The Company derives internal valuation estimates taking into consideration forward commodity price curves, counterparties’ credit ratings, the Company’s credit rating, and the time value of money. These valuations are then compared to the respective counterparties’ mark-to-market statements. The considered factors result in an estimated exit price that management believes provides a reasonable and consistent methodology for valuing derivative instruments. The commodity derivative instruments utilized by the Company are not considered by management to be complex, structured, or illiquid. The oil, gas, and NGL commodity derivative markets are highly active. Please refer to Note 7 - Derivative Financial Instruments in this report, and to Note 8 - Fair Value Measurements and Note 10 - Derivative Financial Instruments in the 2022 Form 10-K for more information regarding the Company’s derivative instruments. Long-Term Debt The following table reflects the fair value of the Company’s Senior Notes 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 March 31, 2023, or December 31, 2022, as they were recorded at carrying value, net of any unamortized deferred financing costs. Please refer to Note 5 - Long-Term Debt above for additional information. As of March 31, 2023 As of December 31, 2022 Principal Amount Fair Value Principal Amount Fair Value (in thousands) 5.625 % Senior Notes due 2025 $ 349,118 $ 339,207 $ 349,118 $ 337,821 6.75 % Senior Notes due 2026 $ 419,235 $ 411,898 $ 419,235 $ 409,484 6.625 % Senior Notes due 2027 $ 416,791 $ 404,466 $ 416,791 $ 402,120 6.5 % Senior Notes due 2028 $ 400,000 $ 386,660 $ 400,000 $ 384,520 Note 9 - Earnings Per Share Basic net income or loss per common share is calculated by dividing net income or loss available to common stockholders by the basic weighted-average number of common shares outstanding for the respective period. 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. Potentially dilutive securities for this calculation consist primarily of non-vested restricted stock units (“RSUs”) and contingent performance share units (“PSUs”), which were measured using the treasury stock method. Please refer to Note 7 - Compensation Plans and Note 9 - Earnings Per Share in the 2022 Form 10-K for additional detail on these potentially dilutive securities. The following table sets forth the calculations of basic and diluted net income per common share: For the Three Months Ended March 31, 2023 2022 (in thousands, except per share data) Net income $ 198,552 $ 48,764 Basic weighted-average common shares outstanding 121,671 121,907 Dilutive effect of non-vested RSUs, contingent PSUs, and other 623 2,272 Diluted weighted-average common shares outstanding 122,294 124,179 Basic net income per common share $ 1.63 $ 0.40 Diluted net income per common share $ 1.62 $ 0.39 17