SM Energy Co 10-Q

ITEM 1. FINANCIAL STATEMENTS SM ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share data) September 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 401,980 $ 444,998 Accounts receivable 264,511 233,297 Derivative assets 25,524 48,677 Prepaid expenses and other 10,537 10,231 Total current assets 702,552 737,203 Property and equipment (successful efforts method): Proved oil and gas properties 11,169,443 10,258,368 Accumulated depletion, depreciation, and amortization ( 6,680,485 ) ( 6,188,147 ) Unproved oil and gas properties, net of valuation allowance of $ 36,286 and $ 38,008 , respectively 526,085 487,192 Wells in progress 236,234 287,267 Other property and equipment, net of accumulated depreciation of $ 59,133 and $ 56,512 , respectively 41,017 38,099 Total property and equipment, net 5,292,294 4,882,779 Noncurrent assets: Derivative assets 5,294 24,465 Other noncurrent assets 78,430 71,592 Total noncurrent assets 83,724 96,057 Total assets $ 6,078,570 $ 5,716,039 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 540,459 $ 532,289 Derivative liabilities 43,152 56,181 Other current liabilities 15,473 10,114 Total current liabilities 599,084 598,584 Noncurrent liabilities: Revolving credit facility — — Senior Notes, net 1,574,553 1,572,210 Asset retirement obligations 115,271 108,233 Deferred income taxes 324,440 280,811 Derivative liabilities 4,595 1,142 Other noncurrent liabilities 56,334 69,601 Total noncurrent liabilities 2,075,193 2,031,997 Commitments and contingencies (note 6) Stockholders’ equity: Common stock, $ 0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 116,313,887 and 121,931,676 shares, respectively 1,163 1,219 Additional paid-in capital 1,581,110 1,779,703 Retained earnings 1,826,002 1,308,558 Accumulated other comprehensive loss ( 3,982 ) ( 4,022 ) Total stockholders’ equity 3,404,293 3,085,458 Total liabilities and stockholders’ equity $ 6,078,570 $ 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 September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Operating revenues and other income: Oil, gas, and NGL production revenue $ 639,699 $ 827,558 $ 1,757,032 $ 2,676,656 Other operating income 1,202 7,893 8,128 10,673 Total operating revenues and other income 640,901 835,451 1,765,160 2,687,329 Operating expenses: Oil, gas, and NGL production expense 138,264 159,961 426,200 470,245 Depletion, depreciation, amortization, and asset retirement obligation liability accretion 189,353 145,865 501,374 460,169 Exploration 10,245 14,203 43,633 44,117 General and administrative 29,255 28,428 84,424 81,715 Net derivative (gain) loss 75,355 ( 137,577 ) 12,352 385,180 Other operating expense, net 2,832 2,290 20,182 9,080 Total operating expenses 445,304 213,170 1,088,165 1,450,506 Income from operations 195,597 622,281 676,995 1,236,823 Interest expense ( 23,106 ) ( 22,825 ) ( 67,713 ) ( 97,708 ) Interest income 4,106 1,546 13,802 2,080 Loss on extinguishment of debt — — — ( 67,605 ) Other non-operating expense, net ( 233 ) ( 383 ) ( 696 ) ( 1,150 ) Income before income taxes 176,364 600,619 622,388 1,072,440 Income tax (expense) benefit 45,979 ( 119,379 ) ( 51,619 ) ( 218,951 ) Net income $ 222,343 $ 481,240 $ 570,769 $ 853,489 Basic weighted-average common shares outstanding 117,823 123,195 119,589 122,318 Diluted weighted-average common shares outstanding 118,328 124,279 120,165 124,233 Basic net income per common share $ 1.89 $ 3.91 $ 4.77 $ 6.98 Diluted net income per common share $ 1.88 $ 3.87 $ 4.75 $ 6.87 Dividends declared per common share $ 0.15 $ 0.15 $ 0.45 $ 0.16 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 September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Net income $ 222,343 $ 481,240 $ 570,769 $ 853,489 Other comprehensive income, net of tax: Pension liability adjustment 14 182 40 546 Total other comprehensive income, net of tax 14 182 40 546 Total comprehensive income $ 222,357 $ 481,422 $ 570,809 $ 854,035 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 Net 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 Net income — — — 149,874 — 149,874 Other comprehensive income — — — — 13 13 Net cash dividends declared, $ 0.15 per share — — — ( 17,704 ) — ( 17,704 ) Issuance of common stock under Employee Stock Purchase Plan 68,210 1 1,815 — — 1,816 Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings 774 — ( 7 ) — — ( 7 ) Stock-based compensation expense 56,872 1 4,162 — — 4,163 Purchase of shares under Stock Repurchase Program ( 2,550,706 ) ( 26 ) ( 69,457 ) — — ( 69,483 ) Other 19,037 — — — — — Balances, June 30, 2023 118,112,105 $ 1,181 $ 1,680,080 $ 1,621,202 $ ( 3,996 ) $ 3,298,467 Net income — — — 222,343 — 222,343 Other comprehensive income — — — — 14 14 Net cash dividends declared, $ 0.15 per share — — — ( 17,543 ) — ( 17,543 ) Issuance of common stock under Employee Stock Purchase Plan ( 18 ) — — — — — Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings 553,442 6 ( 7,881 ) — — ( 7,875 ) Stock-based compensation expense — — 6,038 — — 6,038 Purchase of shares under Stock Repurchase Program ( 2,351,642 ) ( 24 ) ( 97,127 ) — — ( 97,151 ) Balances, September 30, 2023 116,313,887 $ 1,163 $ 1,581,110 $ 1,826,002 $ ( 3,982 ) $ 3,404,293 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 SM ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (Continued) (in thousands, except share data and dividends per share) Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Stockholders’ Equity 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 Net 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 Net income — — — 323,485 — 323,485 Other comprehensive income — — — — 182 182 Issuance of common stock under Employee Stock Purchase Plan 65,634 1 1,644 — — 1,645 Stock-based compensation expense 29,471 — 4,479 — — 4,479 Balances, June 30, 2022 121,959,282 $ 1,220 $ 1,850,601 $ 605,564 $ ( 12,485 ) $ 2,444,900 Net income — — — 481,240 — 481,240 Other comprehensive income — — — — 182 182 Net cash dividends declared, $ 0.15 per share — — — ( 18,419 ) — ( 18,419 ) Issuance of common stock upon vesting of RSUs and settlement of PSUs, net of shares used for tax withholdings 1,289,498 13 ( 25,118 ) — — ( 25,105 ) Stock-based compensation expense — — 5,105 — — 5,105 Purchase of shares under Stock Repurchase Program ( 452,734 ) ( 5 ) ( 20,236 ) — — ( 20,241 ) Balances, September 30, 2022 122,796,046 $ 1,228 $ 1,810,352 $ 1,068,385 $ ( 12,303 ) $ 2,867,662 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 SM ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) For the Nine Months Ended September 30, 2023 2022 Cash flows from operating activities: Net income $ 570,769 $ 853,489 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation, amortization, and asset retirement obligation liability accretion 501,374 460,169 Stock-based compensation expense 14,519 13,858 Net derivative loss 12,352 385,180 Derivative settlement gain (loss) 20,398 ( 595,080 ) Amortization of debt discount and deferred financing costs 4,114 8,910 Loss on extinguishment of debt — 67,605 Deferred income taxes 43,171 202,996 Other, net ( 11,489 ) 14,134 Net change in working capital ( 57,329 ) ( 13,230 ) Net cash provided by operating activities 1,097,879 1,398,031 Cash flows from investing activities: Capital expenditures ( 766,756 ) ( 591,846 ) Acquisition of proved and unproved oil and gas properties ( 109,318 ) ( 7 ) Other, net 657 ( 589 ) Net cash used in investing activities ( 875,417 ) ( 592,442 ) Cash flows from financing activities: Cash paid to repurchase Senior Notes — ( 584,946 ) Repurchase of common stock ( 205,246 ) ( 20,241 ) Net proceeds from sale of common stock 1,815 1,645 Dividends paid ( 54,167 ) ( 1,218 ) Other, net ( 7,882 ) ( 35,110 ) Net cash used in financing activities ( 265,480 ) ( 639,870 ) Net change in cash, cash equivalents, and restricted cash ( 43,018 ) 165,719 Cash, cash equivalents, and restricted cash at beginning of period 444,998 332,716 Cash, cash equivalents, and restricted cash at end of period $ 401,980 $ 498,435 Supplemental schedule of additional cash flow information and non-cash activities: Operating activities: Cash paid for interest, net of capitalized interest $ ( 77,514 ) $ ( 125,668 ) Net cash paid for income taxes $ ( 6,176 ) $ ( 10,506 ) Investing activities: Changes in capital expenditure accruals and other $ 35,683 $ 50,590 Non-cash financing activities (1) _______________________________________ (1) Please refer to Note 5 - Long-Term Debt for discussion of the debt transactions executed during the nine months ended September 30, 2022. The accompanying notes are an integral part of these condensed consolidated financial statements. 9 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 September 30, 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 In October 2023, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”) . ASU 2023-06 was issued to modify the disclosure or presentation requirements of a variety of topics in the codification. The effective date for each amendment will be the date on which the Securities and Exchange Commission’s (“SEC”) removal of the related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company is evaluating the impact of ASU 2023-06 on its consolidated financial statements and related disclosures but does not expect the impact to be material. As of September 30, 2023, and through the filing of this report, no other new accounting standards 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”) reflects revenue generated from contracts with customers. 10 The tables below present oil, gas, and NGL production revenue by product type for each of the Company’s operating areas for the three and nine months ended September 30, 2023, and 2022: Midland Basin South Texas Total Three Months Ended September 30, Three Months Ended September 30, Three Months Ended September 30, 2023 2022 2023 2022 2023 2022 (in thousands) Oil production revenue $ 369,858 $ 420,838 $ 129,376 $ 105,095 $ 499,234 $ 525,933 Gas production revenue 45,215 123,912 36,592 110,641 81,807 234,553 NGL production revenue 175 315 58,483 66,757 58,658 67,072 Total $ 415,248 $ 545,065 $ 224,451 $ 282,493 $ 639,699 $ 827,558 Relative percentage 65 % 66 % 35 % 34 % 100 % 100 % Midland Basin South Texas Total Nine Months Ended September 30, Nine Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 2023 2022 (in thousands) Oil production revenue $ 992,867 $ 1,449,660 $ 350,598 $ 350,594 $ 1,343,465 $ 1,800,254 Gas production revenue 131,804 363,728 113,461 282,201 245,265 645,929 NGL production revenue 563 597 167,739 229,876 168,302 230,473 Total $ 1,125,234 $ 1,813,985 $ 631,798 $ 862,671 $ 1,757,032 $ 2,676,656 Relative percentage 64 % 68 % 36 % 32 % 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 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 transfer of control 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 may be affected 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 September 30, 2023, and December 31, 2022, were $ 217.3 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 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, 11 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. The following table presents the Company’s common stock repurchase activity for the three and nine months ended September 30, 2023, and 2022: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands, except per share data) Shares of common stock repurchased (1) 2,352 453 6,316 453 Weighted-average price per share (2) $ 40.97 $ 44.69 $ 32.48 $ 44.69 Cost of shares of common stock repurchased (2) (3) $ 96,336 $ 20,232 $ 205,120 $ 20,232 ____________________________________________ (1) All repurchased shares of the Company’s common stock were retired upon repurchase. (2) Amounts exclude excise taxes, commissions, and fees. (3) Amounts may not calculate due to rounding. As of September 30, 2023, $ 237.7 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 and nine months ended September 30, 2023, and 2022, consisted of the following: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Current portion of income tax expense: Federal $ ( 3,923 ) $ ( 7,014 ) $ ( 6,732 ) $ ( 11,287 ) State ( 1,173 ) ( 2,317 ) ( 1,716 ) ( 4,668 ) Deferred portion of income tax (expense) benefit 51,075 ( 110,048 ) ( 43,171 ) ( 202,996 ) Income tax (expense) benefit $ 45,979 $ ( 119,379 ) $ ( 51,619 ) $ ( 218,951 ) Effective tax rate ( 26.1 ) % 19.9 % 8.3 % 20.4 % Income tax expense or benefit differs from the amount that would be calculated 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, benefits from qualifying credits, changes in valuation allowances, the cumulative effect of other smaller permanent differences, and can also reflect 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 quarterly effective tax rate and the resulting income tax expense or benefit can also be affected by the proportional effects of forecast net income or loss and the correlative effect on the valuation allowance for each of the periods presented in the table above. The Company commissioned a multi-year research and development (“R&D”) credit study in 2022, which was completed during the third quarter of 2023, and resulted in a favorable adjustment to the Company’s effective tax rate and a reduction of the Company’s 2022 and expected 2023 tax obligations. After utilizing a portion of the credits for the 2022 and 2023 tax years, the recorded net carryover R&D credit, as of September 30, 2023, expected to be utilized in future periods totaled $ 52.3 million. For all years before 2019, the Company is generally no longer subject to United States federal or state income tax examinations by tax authorities. 12 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 September 30, 2023, the borrowing base and aggregate lender commitments under the Credit Agreement were $ 2.5 billion and $ 1.25 billion, respectively. Subsequent to September 30, 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 April 1, 2024. 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 October 26, 2023, September 30, 2023, and December 31, 2022: As of October 26, 2023 As of September 30, 2023 As of December 31, 2022 (in thousands) Revolving credit facility (1) $ — $ — $ — Letters of credit (2) 2,500 2,500 6,000 Available borrowing capacity 1,247,500 1,247,500 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 $ 9.1 million and $ 10.8 million as of September 30, 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. Senior Notes The Company’s Senior Notes, net line item on the accompanying balance sheets as of September 30, 2023, and December 31, 2022, consisted of the following (collectively referred to as “Senior Notes”): As of September 30, 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 $ 1,054 $ 348,064 $ 349,118 $ 1,528 $ 347,590 6.75 % Senior Notes due 2026 419,235 2,044 417,191 419,235 2,569 416,666 6.625 % Senior Notes due 2027 416,791 2,589 414,202 416,791 3,172 413,619 6.5 % Senior Notes due 2028 400,000 4,904 395,096 400,000 5,665 394,335 Total $ 1,585,144 $ 10,591 $ 1,574,553 $ 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 that may include a premium, plus accrued and unpaid interest as described in the indentures governing the Senior Notes. 13 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. Senior Secured Notes On June 17, 2022, the Company redeemed all of the $ 446.7 million of aggregate principal amount outstanding of its 10.0 % Senior Secured Notes due 2025 (“2025 Senior Secured Notes”), with cash on hand, at a redemption price equal to 107.5 percent of the principal amount outstanding on the date of the redemption, plus accrued and unpaid interest. Upon redemption, the Company recorded a net loss on extinguishment of debt of $ 67.2 million, which included $ 33.5 million of premium paid, $ 26.3 million of accelerated expense recognition of the remaining unamortized debt discount, and $ 7.4 million of accelerated expense recognition of the remaining unamortized deferred financing costs. The Company canceled all redeemed 2025 Senior Secured Notes upon settlement. 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 September 30, 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 September 30, 2023, and 2022, totaled $ 4.9 million and $ 5.1 million, respectively, and totaled $ 16.3 million and $ 12.3 million for the nine months ended September 30, 2023, and 2022, 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 nine months ended September 30, 2023, the Company entered into a new drilling rig contract, and amended certain of its existing drilling rig contracts to extend contract terms resulting in changes to day rates and potential early termination fees. As of September 30, 2023, the Company’s drilling rig commitments totaled $ 34.9 million under contract terms extending through the third quarter of 2024. If all of these contracts were terminated as of September 30, 2023, the Company would avoid a portion of the contractual service commitments; however, the Company would be required to pay $ 22.0 million in early termination fees. No early termination penalties or standby fees were incurred by the Company during the nine months ended September 30, 2023, and the Company does not expect to incur material penalties with regard to its drilling rig contracts during the remainder of 2023. Electrical Power Purchase Contracts . During the nine months ended September 30, 2023, the Company amended certain of its fixed price contracts for the purchase of electrical power to extend contract terms through March of 2029, with a total remaining obligation of $ 43.9 million as of September 30, 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. 14 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 effect on cash flows. All commodity derivative contracts that the Company enters into are 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 September 30, 2023, the Company had basis swap contracts with fixed price differentials between: • NYMEX WTI and Argus WTI Midland (“WTI Midland”) for a portion of its Midland Basin oil production with sales contracts that settle at WTI Midland prices; • NYMEX WTI and Argus WTI Houston Magellan East Houston Terminal (“WTI Houston MEH”) for a portion of its South Texas oil production with sales contracts that settle at WTI Houston MEH prices; • NYMEX Henry Hub (“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. 15 As of September 30, 2023, the Company had commodity derivative contracts outstanding through the fourth quarter of 2025 as summarized in the table below: Contract Period Fourth Quarter 2023 2024 2025 Oil Derivatives (volumes in MBbl and prices in $ per Bbl): Swaps NYMEX WTI Volumes 837 — — Weighted-Average Contract Price $ 65.91 $ — $ — ICE Brent Volumes 920 910 — Weighted-Average Contract Price $ 86.50 $ 85.50 $ — Collars NYMEX WTI Volumes — 3,993 — Weighted-Average Floor Price $ — $ 70.01 $ — Weighted-Average Ceiling Price $ — $ 84.69 $ — Basis Swaps WTI Midland-NYMEX WTI Volumes 1,294 4,857 — Weighted-Average Contract Price $ 0.88 $ 1.21 $ — WTI Houston MEH-NYMEX WTI Volumes 296 1,190 — Weighted-Average Contract Price $ 1.53 $ 1.82 $ — Roll Differential Swaps NYMEX WTI Volumes 1,446 7,048 — Weighted-Average Contract Price $ 0.62 $ 0.57 $ — Gas Derivatives (volumes in BBtu and prices in $ per MMBtu): Swaps NYMEX HH Volumes — 4,185 5,891 Weighted-Average Contract Price $ — $ 3.20 $ 4.20 Collars NYMEX HH Volumes 8,362 22,342 11,723 Weighted-Average Floor Price $ 3.90 $ 3.61 $ 3.50 Weighted-Average Ceiling Price $ 5.70 $ 5.76 $ 5.04 IF HSC Volumes 1,451 — — Weighted-Average Floor Price $ 4.25 $ — $ — Weighted-Average Ceiling Price $ 5.55 $ — $ — Basis Swaps IF Waha-NYMEX HH Volumes 2,337 20,958 20,501 Weighted-Average Contract Price $ ( 1.01 ) $ ( 0.86 ) $ ( 0.66 ) IF HSC-NYMEX HH Volumes 2,008 15,898 — Weighted-Average Contract Price $ ( 0.25 ) $ ( 0.27 ) $ — NGL Derivatives (volumes in MBbl and prices in $ per Bbl): Swaps OPIS Propane Mont Belvieu Non-TET Volumes 187 — — Weighted-Average Contract Price $ 36.66 $ — $ — Commodity Derivative Contracts Entered Into Subsequent to September 30, 2023 Subsequent to September 30, 2023, the Company entered into a NYMEX WTI Roll Differential swap contract for the fourth quarter of 2023 for a total of 0.6 MMBbl of oil production at a contract price of $ 1.59 per Bbl. 16 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 commodity derivative contracts was a net liability of $ 16.9 million as of September 30, 2023, and a net asset of $ 15.8 million as of December 31, 2022. The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets, by category: As of September 30, 2023 As of December 31, 2022 (in thousands) Derivative assets: Current assets $ 25,524 $ 48,677 Noncurrent assets 5,294 24,465 Total derivative assets $ 30,818 $ 73,142 Derivative liabilities: Current liabilities $ 43,152 $ 56,181 Noncurrent liabilities 4,595 1,142 Total derivative liabilities $ 47,747 $ 57,323 Offsetting of Derivative Assets and Liabilities As of September 30, 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 September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022 (in thousands) Gross amounts presented in the accompanying balance sheets $ 30,818 $ 73,142 $ ( 47,747 ) $ ( 57,323 ) Amounts not offset in the accompanying balance sheets ( 26,940 ) ( 26,136 ) 26,940 26,136 Net amounts $ 3,878 $ 47,006 $ ( 20,807 ) $ ( 31,187 ) 17 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 September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Derivative settlement (gain) loss: Oil contracts $ 13,446 $ 120,430 $ 20,144 $ 428,811 Gas contracts ( 11,643 ) 61,981 ( 37,495 ) 142,369 NGL contracts ( 1,489 ) 3,888 ( 3,047 ) 23,900 Total derivative settlement (gain) loss $ 314 $ 186,299 $ ( 20,398 ) $ 595,080 Net derivative (gain) loss: Oil contracts $ 77,857 $ ( 180,300 ) $ 31,172 $ 235,023 Gas contracts ( 4,437 ) 47,973 ( 14,655 ) 142,695 NGL contracts 1,935 ( 5,250 ) ( 4,165 ) 7,462 Total net derivative (gain) loss $ 75,355 $ ( 137,577 ) $ 12,352 $ 385,180 Credit Related Contingent Features As of September 30, 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 September 30, 2023 As of December 31, 2022 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 (in thousands) Assets: Derivatives (1) $ — $ 30,818 $ — $ — $ 73,142 $ — Liabilities: Derivatives (1) $ — $ 47,747 $ — $ — $ 57,323 $ — __________________________________________ (1) This represents a financial asset or liability that is measured at fair value on a recurring basis. 18 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 September 30, 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 September 30, 2023 As of December 31, 2022 Principal Amount Fair Value Principal Amount Fair Value (in thousands) 5.625 % Senior Notes due 2025 $ 349,118 $ 341,671 $ 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 $ 408,168 $ 416,791 $ 402,120 6.5 % Senior Notes due 2028 $ 400,000 $ 383,128 $ 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 (“RSU” or “RSUs”) and contingent performance share units (“PSU” or “PSUs”), which were measured using the treasury stock method. Please refer to Note 10 - Compensation Plans in this report 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 September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands, except per share data) Net income $ 222,343 $ 481,240 $ 570,769 $ 853,489 Basic weighted-average common shares outstanding 117,823 123,195 119,589 122,318 Dilutive effect of non-vested RSUs, contingent PSUs, and other 505 1,084 576 1,915 Diluted weighted-average common shares outstanding 118,328 124,279 120,165 124,233 Basic net income per common share $ 1.89 $ 3.91 $ 4.77 $ 6.98 Diluted net income per common share $ 1.88 $ 3.87 $ 4.75 $ 6.87 19 Note 10 - Compensation Plans The Company may grant various types of both short-term and long-term incentive-based awards under its compensation plans, such as cash awards, performance-based cash awards, and equity awards to eligible employees. Additionally, the Company grants stock-based compensation to its Board of Directors and provides an employee stock purchase plan. As of September 30, 2023, approximately 2.8 million shares of common stock were available for grant under the Company’s Equity Incentive Compensation Plan (“Equity Plan”). Performance Share Units The Company has granted PSUs to eligible employees as part of its Equity Plan. The number of shares of the Company’s common stock issued to settle PSUs ranges from zero to two times the number of PSUs awarded and is determined based on certain criteria over a three -year performance period. PSUs generally vest on the third anniversary of the date of the grant or upon other triggering events as set forth in the Equity Plan. For PSUs granted in 2022 and 2023, which the Company determined to be equity awards, settlement will be determined based on a combination of the following criteria measured over the three -year performance period: the Company’s Total Shareholder Return (“TSR”) relative to the TSR of certain peer companies, the Company’s absolute TSR, free cash flow (“FCF”) generation, and the achievement of certain ESG targets, in each case as defined by the award agreement. The Company initially records compensation expense associated with the issuance of PSUs based on the fair value of the awards as of the grant date. As a portion of these awards depends on performance-based settlement criteria, compensation expense may be adjusted in future periods as the expected number of shares of the Company’s common stock issued to settle the units increases or decreases based on the Company’s expected FCF generation and achievement of certain ESG targets. During the nine months ended September 30, 2023, the Company granted a total of 256,633 PSUs with a grant date fair value of $ 7.7 million. Compensation expense for PSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards. Total compensation expense recorded for PSUs was $ 1.0 million and $ 0.6 million for the three months ended September 30, 2023, and 2022, respectively, and $ 1.8 million and $ 2.0 million for the nine months ended September 30, 2023, and 2022, respectively. As of September 30, 2023, there was $ 9.9 million of total unrecognized compensation expense related to non-vested PSUs, which is being amortized through mid-2026. A summary of activity during the nine months ended September 30, 2023, is presented in the following table: PSUs (1) Weighted-Average Grant-Date Fair Value (2) Non-vested at beginning of year 273,258 $ 26.67 Granted 256,633 $ 29.93 Vested — $ — Forfeited ( 31,918 ) $ 25.99 Non-vested at end of quarter 497,973 $ 27.75 ____________________________________________ (1) The number of shares of common stock assumes a multiplier of one . The actual final number of shares of common stock to be issued will range from zero to two times the number of PSUs awarded depending on the three -year performance multiplier. (2) Amounts represent price per unit. Restricted Stock Units The Company has granted RSUs to eligible employees as part of its Equity Plan. Each RSU represents a right to receive one share of the Company’s common stock upon settlement of the award at the end of the specified vesting period. RSUs generally vest in one-third increments on each anniversary date of the grant over the applicable vesting period or upon other triggering events as set forth in the Equity Plan. The Company records compensation expense associated with the issuance of RSUs based on the fair value of the awards as of the date of grant. The fair value of an RSU is equal to the closing price of the Company’s common stock on the date of the grant. Compensation expense for RSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards. During the nine months ended September 30, 2023, the Company granted to employees a total of 620,420 RSUs with a grant date fair value of $ 19.8 million, and the Company settled RSUs upon vesting of awards granted in previous years. The Company and a majority of eligible recipients mutually agreed to net share settle a portion of the awards to cover income and payroll tax withholdings, as provided for in the Equity Plan and applicable award agreements. After withholding 249,233 shares to satisfy income and payroll tax withholding obligations, the Company issued 554,216 shares of common stock in accordance with the terms of the applicable award agreements during the nine months ended September 30, 2023. 20 Total compensation expense recorded for RSUs was $ 4.1 million and $ 3.5 million for the three months ended September 30, 2023, and 2022, respectively, and $ 10.8 million and $ 10.0 million for the nine months ended September 30, 2023, and 2022, respectively. As of September 30, 2023, there was $ 30.0 million of total unrecognized compensation expense related to non-vested RSUs, which is being amortized through mid-2026. A summary of activity during the nine months ended September 30, 2023, is presented in the following table: RSUs Weighted-Average Grant-Date Fair Value (1) Non-vested at beginning of year 1,375,052 $ 22.42 Granted 620,420 $ 31.92 Vested ( 803,449 ) $ 16.72 Forfeited ( 98,766 ) $ 28.86 Non-vested at end of quarter 1,093,257 $ 31.42 ____________________________________________ (1) Amounts represent price per unit. Director Shares During the nine months ended September 30, 2023, and 2022, the Company issued a total of 56,872 and 29,471 shares, respectively, of its common stock as compensation to its non-employee directors under the Equity Plan. Shares issued during 2023 will fully vest on December 31, 2023, and shares issued during 2022 fully vested on December 31, 2022. Employee Stock Purchase Plan Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation, subject to a maximum of 2,500 shares per offering period and a maximum of $ 25,000 in value related to purchases for each calendar year. The purchase price of the common stock is 85 percent of the lower of the trading price of the common stock on either the first or last day of the six-month offering period. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. There were a total of 68,192 and 65,634 shares issued under the ESPP during the nine months ended September 30, 2023, and 2022, respectively. Total proceeds to the Company for the issuance of these shares was $ 1.8 million and $ 1.6 million for the nine months ended September 30, 2023, and 2022, respectively. The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model. Please refer to Note 7 - Compensation Plans in the 2022 Form 10-K for additional detail on the Company’s compensation plans. Note 11 - Acquisitions Acquisitions On June 30, 2023 , the Company acquired approximately 20,000 net acres of oil and gas properties located in Dawson and northern Martin Counties, Texas. Total consideration paid after purchase price adjustments was $ 88.9 million. Under authoritative accounting guidance, this transaction was considered to be an asset acquisition. Therefore, the properties were recorded based on the total consideration paid after purchase price adjustments and the transaction costs were capitalized as a component of the cost of the assets acquired. 21