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, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 506,252 $ 616,164 Accounts receivable 241,731 231,165 Derivative assets 33,913 56,442 Prepaid expenses and other 11,149 12,668 Total current assets 793,045 916,439 Property and equipment (successful efforts method): Proved oil and gas properties 11,756,523 11,477,358 Accumulated depletion, depreciation, and amortization ( 6,994,005 ) ( 6,830,253 ) Unproved oil and gas properties, net of valuation allowance of $ 34,934 and $ 35,362 , respectively 335,755 335,620 Wells in progress 380,419 358,080 Other property and equipment, net of accumulated depreciation of $ 60,606 and $ 59,669 , respectively 34,905 35,615 Total property and equipment, net 5,513,597 5,376,420 Noncurrent assets: Derivative assets 7,198 8,672 Other noncurrent assets 84,618 78,454 Total noncurrent assets 91,816 87,126 Total assets $ 6,398,458 $ 6,379,985 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 496,361 $ 611,598 Derivative liabilities 24,108 6,789 Other current liabilities 15,615 15,425 Total current liabilities 536,084 633,812 Noncurrent liabilities: Revolving credit facility — — Senior Notes, net 1,576,115 1,575,334 Asset retirement obligations 124,085 118,774 Net deferred tax liabilities 397,296 369,903 Derivative liabilities 1,369 1,273 Other noncurrent liabilities 65,258 65,039 Total noncurrent liabilities 2,164,123 2,130,323 Commitments and contingencies (note 6) Stockholders’ equity: Common stock, $ 0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 115,036,144 and 115,745,393 shares, respectively 1,150 1,157 Additional paid-in capital 1,536,929 1,565,021 Retained earnings 2,162,771 2,052,279 Accumulated other comprehensive loss ( 2,599 ) ( 2,607 ) Total stockholders’ equity 3,698,251 3,615,850 Total liabilities and stockholders’ equity $ 6,398,458 $ 6,379,985 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, 2024 2023 Operating revenues and other income: Oil, gas, and NGL production revenue $ 559,596 $ 570,778 Other operating income 274 2,727 Total operating revenues and other income 559,870 573,505 Operating expenses: Oil, gas, and NGL production expense 137,375 142,348 Depletion, depreciation, amortization, and asset retirement obligation liability accretion 166,188 154,189 Exploration 18,581 18,428 General and administrative 30,178 27,669 Net derivative (gain) loss 28,145 ( 51,329 ) Other operating expense, net 1,008 10,153 Total operating expenses 381,475 301,458 Income from operations 178,395 272,047 Interest expense ( 21,873 ) ( 22,459 ) Interest income 6,770 4,702 Other non-operating expense ( 24 ) ( 232 ) Income before income taxes 163,268 254,058 Income tax expense ( 32,069 ) ( 55,506 ) Net income $ 131,199 $ 198,552 Basic weighted-average common shares outstanding 115,642 121,671 Diluted weighted-average common shares outstanding 116,456 122,294 Basic net income per common share $ 1.13 $ 1.63 Diluted net income per common share $ 1.13 $ 1.62 Net dividends declared per common share $ 0.18 $ 0.15 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, 2024 2023 Net income $ 131,199 $ 198,552 Other comprehensive income, net of tax: Pension liability adjustment 8 13 Total other comprehensive income, net of tax 8 13 Total comprehensive income $ 131,207 $ 198,565 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, 2023 115,745,393 $ 1,157 $ 1,565,021 $ 2,052,279 $ ( 2,607 ) $ 3,615,850 Net income — — — 131,199 — 131,199 Other comprehensive income — — — — 8 8 Net cash dividends declared, $ 0.18 per share — — — ( 20,707 ) — ( 20,707 ) Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings 1,147 — ( 22 ) — — ( 22 ) Stock-based compensation expense 1,839 — 5,018 — — 5,018 Purchase of shares under Stock Repurchase Program ( 712,235 ) ( 7 ) ( 33,088 ) — — ( 33,095 ) Balances, March 31, 2024 115,036,144 $ 1,150 $ 1,536,929 $ 2,162,771 $ ( 2,599 ) $ 3,698,251 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 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, 2024 2023 Cash flows from operating activities: Net income $ 131,199 $ 198,552 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation, amortization, and asset retirement obligation liability accretion 166,188 154,189 Stock-based compensation expense 5,018 4,318 Net derivative (gain) loss 28,145 ( 51,329 ) Net derivative settlement gain 13,274 5,076 Amortization of deferred financing costs 1,371 1,371 Deferred income taxes 27,391 49,968 Other, net 1,102 ( 4,295 ) Net change in working capital ( 97,688 ) ( 26,216 ) Net cash provided by operating activities 276,000 331,634 Cash flows from investing activities: Capital expenditures ( 332,365 ) ( 240,712 ) Other, net 77 307 Net cash used in investing activities ( 332,288 ) ( 240,405 ) Cash flows from financing activities: Repurchase of common stock ( 32,768 ) ( 40,068 ) Dividends paid ( 20,834 ) ( 18,290 ) Net share settlement from issuance of stock awards ( 22 ) — Net cash used in financing activities ( 53,624 ) ( 58,358 ) Net change in cash, cash equivalents, and restricted cash ( 109,912 ) 32,871 Cash, cash equivalents, and restricted cash at beginning of period 616,164 444,998 Cash, cash equivalents, and restricted cash at end of period $ 506,252 $ 477,869 Supplemental schedule of additional cash flow information: Operating activities: Cash paid for interest, net of capitalized interest $ ( 32,986 ) $ ( 33,882 ) Net cash refunded (paid) for income taxes $ 3,292 $ ( 50 ) Investing activities: Changes in capital expenditure accruals $ ( 26,569 ) $ 66,873 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 2023 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, 2024, 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 2023 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 2023 Form 10-K . Recently Issued Accounting Guidance Accounting Standards Updates. In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”) . ASU 2023-07 was issued to improve the disclosures about a public entity’s reportable segments and to provide additional, more detailed information about a reportable segment’s expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The guidance is to be applied on a retrospective basis to all prior periods presented in the financial statements. The Company is within the scope of this ASU and expects to adopt ASU 2023-07 and related guidance on December 31, 2024. Adoption of ASU 2023-07 is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”) . ASU 2023-09 was issued to improve the disclosures related to rate reconciliations and income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The guidance is to be applied on a prospective basis, however, retrospective application is permitted. The Company is within the scope of this ASU and expects to adopt ASU 2023-09 on January 1, 2025, on a prospective basis. Adoption of ASU 2023-09 is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures. SEC Final Rule to Enhance and Standardize Climate-Related Disclosures. On March 6, 2024, the Securities and Exchange Commission (“SEC”) adopted final rules to require registrants to disclose certain climate-related information in registration statements and annual reports. On April 4, 2024, the SEC issued an order staying the final rules pending completion of judicial review of the petitions challenging the final rules. The order does not amend the compliance dates contemplated by the final rules, which are applicable to the Company for fiscal years beginning with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2025. The Company is currently evaluating the potential impact of the final rules on its financial statements and related disclosures. As of March 31, 2024, and through the filing of this report, no other accounting guidance has been issued and not yet adopted that is applicable to the Company and that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures. 9 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. The table below presents oil, gas, and NGL production revenue by product type for each of the Company’s operating areas: Midland Basin South Texas Total Three Months Ended March 31, Three Months Ended March 31, Three Months Ended March 31, 2024 2023 2024 2023 2024 2023 (in thousands) Oil production revenue $ 332,191 $ 320,135 $ 108,703 $ 100,703 $ 440,894 $ 420,838 Gas production revenue 40,538 49,789 27,306 43,942 67,844 93,731 NGL production revenue 84 177 50,774 56,032 50,858 56,209 Total $ 372,813 $ 370,101 $ 186,783 $ 200,677 $ 559,596 $ 570,778 Relative percentage 67 % 65 % 33 % 35 % 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 may differ depending on the applicable contractual terms. Transfer of control determines 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 March 31, 2024, and December 31, 2023, were $ 184.2 million and $ 175.3 million, respectively. To estimate accounts receivable from contracts with customers, the Company uses knowledge of its properties, historical performance, contractual arrangements, index pricing, quality and transportation differentials, and other factors as the basis for these estimates. 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. Note 3 - Equity Stock Repurchase Program The Company’s current stock repurchase program authorizes 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 2023 Form 10-K for additional information regarding the Company’s Stock Repurchase Program. 10 The following table presents activity under the Company’s Stock Repurchase Program during the three months ended March 31, 2024, and 2023: For the Three Months Ended March 31, 2024 2023 (in thousands, except per share data) Shares of common stock repurchased (1) 712 1,414 Weighted-average price per share (2) $ 45.99 $ 28.32 Cost of shares of common stock repurchased (2) (3) $ 32,753 $ 40,040 ____________________________________________ (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. Since the inception of the Stock Repurchase Program in 2022, the Company has repurchased and subsequently retired approximately 9.0 million shares of the Company’s outstanding common stock at a cost of $ 317.9 million, excluding excise taxes, commissions, and fees. As of March 31, 2024, $ 182.1 million remained available for repurchases of the Company’s outstanding common stock through December 31, 2024 , under the Stock Repurchase Program. Note 4 - Income Taxes The provision for income taxes consisted of the following: For the Three Months Ended March 31, 2024 2023 (in thousands) Current portion of income tax expense: Federal $ ( 4,254 ) $ ( 4,998 ) State ( 424 ) ( 540 ) Deferred portion of income tax expense ( 27,391 ) ( 49,968 ) Income tax expense $ ( 32,069 ) $ ( 55,506 ) Effective tax rate 19.6 % 21.8 % 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 federal tax credits, state income taxes, changes in valuation allowances, excess tax benefits and deficiencies from stock-based compensation awards, tax deduction limitations on compensation of covered individuals, 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 completed a multi-year research and development (“R&D”) credit study in 2023, which resulted in a favorable adjustment to the Company’s effective tax rate in both the third and fourth quarters of 2023 and a reduction of the Company’s tax obligation. Favorable adjustments to the Company’s effective tax rate are expected to continue in 2024 resulting from qualifying R&D activity and anticipated credit claims. The Company complies with authoritative accounting guidance regarding uncertain tax positions. The entire amount of unrecognized tax benefit reported by the Company would affect its effective tax rate if recognized. The Company does not expect a significant change to the recorded unrecognized tax benefits in 2024, except for any potential changes related to the Company’s 2024 R&D credit claims. For all years before 2020, the Company is generally no longer subject to United States federal or state income tax examinations by tax authorities. 11 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, 2024, the borrowing base and aggregate lender commitments under the Credit Agreement were $ 2.5 billion and $ 1.25 billion, respectively. Subsequent to March 31, 2024, 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, 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 2023 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 25, 2024, March 31, 2024, and December 31, 2023: As of April 25, 2024 As of March 31, 2024 As of December 31, 2023 (in thousands) Revolving credit facility (1) $ — $ — $ — Letters of credit (2) 2,500 2,500 2,500 Available borrowing capacity 1,247,500 1,247,500 1,247,500 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 $ 7.9 million and $ 8.5 million as of March 31, 2024, and December 31, 2023, 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 March 31, 2024, and December 31, 2023, consisted of the following (collectively referred to as “Senior Notes”): As of March 31, 2024 As of December 31, 2023 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 $ 738 $ 348,380 $ 349,118 $ 896 $ 348,222 6.75 % Senior Notes due 2026 419,235 1,693 417,542 419,235 1,868 417,367 6.625 % Senior Notes due 2027 416,791 2,201 414,590 416,791 2,395 414,396 6.5 % Senior Notes due 2028 400,000 4,397 395,603 400,000 4,651 395,349 Total $ 1,585,144 $ 9,029 $ 1,576,115 $ 1,585,144 $ 9,810 $ 1,575,334 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. 12 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, make certain investments, or merge or consolidate with other entities. The Company was in compliance with all financial and non-financial covenants as of March 31, 2024, and through the filing of this report. Capitalized Interest Capitalized interest costs for the three months ended March 31, 2024, and 2023, totaled $ 6.1 million and $ 5.5 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 2023 Form 10-K . Drilling Rig Service Contracts . During the three months ended March 31, 2024, the Company entered into new drilling rig contracts. As of March 31, 2024, the Company’s drilling rig commitments totaled $ 31.3 million under contract terms extending through the first quarter of 2025. If all of the drilling rig contracts were terminated as of March 31, 2024, the Company would avoid a portion of the contractual service commitments; however, the Company would be required to pay $ 19.6 million in early termination fees. No early termination penalties or standby fees were incurred by the Company during the three months ended March 31, 2024, and the Company does not expect to incur material penalties with regard to its drilling rig contracts during the remainder of 2024. Drilling and Completion Commitments . During the three months ended March 31, 2024, the Company entered into an agreement that includes minimum drilling and completion footage requirements on certain existing leases. If these minimum requirements are not satisfied by March 31, 2026, the Company will be required to pay liquidated damages based on the difference between the actual footage drilled and completed and the minimum requirements. As of March 31, 2024, the liquidated damages could range from zero to a maximum of $ 96.0 million, with the maximum exposure assuming no additional development activity occurs prior to March 31, 2026. As of the filing of this report, the Company expects to meet its obligations under this agreement. 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. As of the filing of this report, 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 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 March 31, 2024, 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; 13 • 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. 14 As of March 31, 2024, the Company had commodity derivative contracts outstanding through the fourth quarter of 2026 as summarized in the table below: Contract Period Second Quarter 2024 Third Quarter 2024 Fourth Quarter 2024 2025 2026 Oil Derivatives (volumes in MBbl and prices in $ per Bbl): Swaps NYMEX WTI Volumes — — 780 323 — Weighted-Average Contract Price $ — $ — $ 73.24 $ 75.00 $ — Collars NYMEX WTI Volumes 1,846 2,003 900 323 — Weighted-Average Floor Price $ 67.46 $ 68.27 $ 69.85 $ 68.00 $ — Weighted-Average Ceiling Price $ 85.53 $ 83.10 $ 78.53 $ 79.93 $ — Basis Swaps WTI Midland-NYMEX WTI Volumes 1,193 1,235 1,230 2,748 — Weighted-Average Contract Price $ 1.21 $ 1.21 $ 1.21 $ 1.15 $ — WTI Houston MEH-NYMEX WTI Volumes 293 332 309 1,413 816 Weighted-Average Contract Price $ 1.82 $ 1.82 $ 1.82 $ 1.90 $ 2.10 Roll Differential Swaps NYMEX WTI Volumes 1,792 1,964 1,877 — — Weighted-Average Contract Price $ 0.57 $ 0.57 $ 0.57 $ — $ — Gas Derivatives (volumes in BBtu and prices in $ per MMBtu): Swaps NYMEX HH Volumes 4,186 2,923 1,569 5,891 — Weighted-Average Contract Price $ 3.17 $ 3.18 $ 3.03 $ 4.20 $ — Collars NYMEX HH Volumes 4,432 4,612 7,328 25,434 — Weighted-Average Floor Price $ 3.69 $ 3.68 $ 3.38 $ 3.23 $ — Weighted-Average Ceiling Price $ 4.00 $ 4.21 $ 4.97 $ 4.67 $ — Basis Swaps IF Waha-NYMEX HH Volumes 5,285 5,344 5,240 20,501 — Weighted-Average Contract Price $ ( 1.09 ) $ ( 0.99 ) $ ( 0.73 ) $ ( 0.66 ) $ — IF HSC-NYMEX HH Volumes 3,310 3,426 5,750 946 — Weighted-Average Contract Price $ ( 0.34 ) $ ( 0.30 ) $ ( 0.38 ) $ 0.0025 $ — NGL Derivatives (volumes in MBbl and prices in $ per Bbl): Swaps OPIS Propane Mont Belvieu Non-TET Volumes 387 404 434 396 — Weighted-Average Contract Price $ 31.90 $ 31.87 $ 31.85 $ 32.86 $ — OPIS Normal Butane Mont Belvieu Non-TET Volumes 44 46 49 45 — Weighted-Average Contract Price $ 39.48 $ 39.48 $ 39.48 $ 39.48 $ — OPIS Isobutane Mont Belvieu Non-TET Volumes 24 25 28 25 — Weighted-Average Contract Price $ 41.58 $ 41.58 $ 41.58 $ 41.58 $ — 15 Commodity Derivative Contracts Entered Into Subsequent to March 31, 2024 Subsequent to March 31, 2024, and through the filing of this report, the Company entered into the following commodity derivative contracts: • NYMEX WTI collar contracts for the fourth quarter of 2024 through the second quarter of 2025 for a total of 1.0 MMBbl of oil production at a weighted-average floor price of $ 71.77 per Bbl and a weighted-average ceiling price of $ 82.74 per Bbl; • NYMEX WTI Roll Differential swap contract for the second through fourth quarters of 2024 for a total of 1.8 MMBbl of oil production at a weighted-average contract price of $ 1.02 per Bbl; • NYMEX HH collar contracts for 2026 for a total of 13,438 BBtu of gas production at a weighted-average floor price of $ 3.25 per MMBtu and a weighted-average ceiling price of $ 4.90 per MMBtu; and • IF Waha swap contracts for the first, third, and fourth quarters of 2026 for a total of 1,548 BBtu of gas production at a weighted-average contract price of $ 3.26 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 commodity derivative contracts at March 31, 2024, and December 31, 2023, was a net asset of $ 15.6 million and $ 57.1 million, respectively. The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets, by category: As of March 31, 2024 As of December 31, 2023 (in thousands) Derivative assets: Current assets $ 33,913 $ 56,442 Noncurrent assets 7,198 8,672 Total derivative assets $ 41,111 $ 65,114 Derivative liabilities: Current liabilities $ 24,108 $ 6,789 Noncurrent liabilities 1,369 1,273 Total derivative liabilities $ 25,477 $ 8,062 Offsetting of Derivative Assets and Liabilities As of March 31, 2024, and December 31, 2023, 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, 2024 December 31, 2023 March 31, 2024 December 31, 2023 (in thousands) Gross amounts presented in the accompanying balance sheets $ 41,111 $ 65,114 $ ( 25,477 ) $ ( 8,062 ) Amounts not offset in the accompanying balance sheets ( 21,519 ) ( 7,362 ) 21,519 7,362 Net amounts $ 19,592 $ 57,752 $ ( 3,958 ) $ ( 700 ) 16 The following table summarizes the commodity components of the net derivative settlement gain, 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, 2024 2023 (in thousands) Net derivative settlement (gain) loss: Oil contracts $ ( 2,525 ) $ 6,226 Gas contracts ( 12,220 ) ( 11,302 ) NGL contracts 1,471 — Total net derivative settlement gain $ ( 13,274 ) $ ( 5,076 ) Net derivative (gain) loss: Oil contracts $ 37,099 $ ( 29,167 ) Gas contracts ( 14,828 ) ( 20,778 ) NGL contracts 5,874 ( 1,384 ) Total net derivative (gain) loss $ 28,145 $ ( 51,329 ) Credit Related Contingent Features As of March 31, 2024, all of the Company’s derivative counterparties were members of the Company’s 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, 2024 As of December 31, 2023 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 (in thousands) Assets: Derivatives (1) $ — $ 41,111 $ — $ — $ 65,114 $ — Liabilities: Derivatives (1) $ — $ 25,477 $ — $ — $ 8,062 $ — __________________________________________ (1) This represents a financial asset or liability that is measured at fair value on a recurring basis. 17 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 derivative instruments. 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 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, 2024, or December 31, 2023, as they were recorded at carrying value, net of any unamortized deferred financing costs. Please refer to Note 5 - Long-Term Debt for additional information. As of March 31, 2024 As of December 31, 2023 Principal Amount Fair Value Principal Amount Fair Value (in thousands) 5.625 % Senior Notes due 2025 $ 349,118 $ 348,025 $ 349,118 $ 348,189 6.75 % Senior Notes due 2026 $ 419,235 $ 419,491 $ 419,235 $ 420,660 6.625 % Senior Notes due 2027 $ 416,791 $ 417,458 $ 416,791 $ 416,549 6.5 % Senior Notes due 2028 $ 400,000 $ 402,644 $ 400,000 $ 401,372 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 9 - Earnings Per Share and Note 10 - Compensation Plans in the 2023 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, 2024 2023 (in thousands, except per share data) Net income $ 131,199 $ 198,552 Basic weighted-average common shares outstanding 115,642 121,671 Dilutive effect of non-vested RSUs, contingent PSUs, and other 814 623 Diluted weighted-average common shares outstanding 116,456 122,294 Basic net income per common share $ 1.13 $ 1.63 Diluted net income per common share $ 1.13 $ 1.62 18