NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations
When we use the terms “Civitas,” the “Company,” “we,” “us,” or “our,” we are referring to Civitas Resources, Inc. and its consolidated subsidiaries unless the context otherwise requires. Civitas is an independent exploration and production company focused on the acquisition, development, and production of oil and associated liquids-rich natural gas in the Rocky Mountain region, primarily in the Denver-Julesburg Basin of Colorado (the “DJ Basin”). Our operations are focused on developing the horizontal Niobrara and Codell formations that have a low-cost structure, mature infrastructure, strong production efficiencies, multiple producing horizons, multiple service providers, established reserves, and prospective drilling opportunities, which help facilitate predictable production and achieve our business strategies.
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. Accordingly, pursuant to such rules and regulations, certain notes and other financial information included in audited financial statements have been condensed or omitted. 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. All significant intercompany balances and transactions have been eliminated in consolidation.
The December 31, 2022 unaudited condensed consolidated balance sheet data has been derived from the audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”), but does not include all disclosures, including notes required by GAAP. As such, this quarterly report should be read in conjunction with the audited consolidated financial statements and related notes included in our 2022 Form 10-K. In connection with the preparation of the unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of March 31, 2023, through the filing date of this report. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the full year or any other future period. 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. Recently Issued and Adopted Accounting Standards
There are no accounting standards applicable to the Company that would have a material effect on the Company’s financial statements and disclosures that have been issued but not yet adopted by the Company as of March 31, 2023, and through the filing date of this report.
NOTE 2 - ACQUISITIONS AND DIVESTITURES
Bison Acquisition
On March 1, 2022, the Company completed the acquisition of privately held DJ Basin operator Bison Oil & Gas II, LLC (“Bison”) for merger consideration of approximately $280.4 million (the “Bison Acquisition”). The Bison Acquisition was accounted for under the acquisition method of accounting for business combinations. Accordingly, we conducted assessments of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisition were expensed as incurred. The fair value measurements of assets acquired and liabilities assumed were based on inputs that are not observable in the market, and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties include estimates of reserves, future operating and development costs, future commodity prices, estimated future cash flows, and a market-based weighted-average cost of capital. These inputs required significant judgments and estimates by management at the time of the valuation. Net assets acquired under the purchase price allocation were $294.0 million and consequently resulted in a bargain purchase gain of $13.6 million. Because of the immateriality of the Bison Acquisition, the related revenue and earnings, supplemental pro forma financial information, and detailed purchase price allocation are not disclosed.
Merger transaction costs
Merger transaction costs related to the Bison Acquisition and other mergers completed in the fourth quarter of 2021 were accounted for separately from the assets acquired and liabilities assumed and are included in merger transaction costs in the accompanying unaudited condensed consolidated statements of operations (“statements of operations”). The Company incurred merger transaction costs of $0.5 million and $20.5 million during the three months ended March 31, 2023 and 2022, respectively.
Acquisition of additional working interests in Company-operated wells
On July 5, 2022, the Company acquired additional working interests in certain Company-operated wells for cash consideration of $80.7 million, after customary purchase price adjustments.
NOTE 3 - REVENUE RECOGNITION
Oil and natural gas sales revenue presented within the accompanying statements of operations is reflective of the revenue generated from contracts with customers. Revenue attributable to each identified revenue stream is disaggregated below (in thousands): | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Operating net revenues: | | | | | | | |
| Oil sales | $ | 460,374 | | | $ | 549,502 | | | | | |
| Natural gas sales | 103,555 | | | 113,161 | | | | | |
| Natural gas liquid (“NGL”) sales | 92,093 | | | 155,147 | | | | | |
| Oil and natural gas sales | $ | 656,022 | | | $ | 817,810 | | | | | |
The Company recognizes revenue from the sale of produced oil, natural gas, and NGL at the point in time when control of produced oil, natural gas, or NGL volumes transfer to the purchaser, which may differ depending on the applicable contractual terms. The Company considers the transfer of control to have occurred when the purchaser has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the oil, natural gas, or NGL production. Transfer of control dictates the presentation of gathering, transportation, and processing expenses within the accompanying statements of operations. Gathering, transportation, and processing expenses incurred by the Company prior to the transfer of control are recorded gross within the gathering, transportation, and processing line item on the accompanying statements of operations. Conversely, gathering, transportation, and processing expenses incurred by the Company subsequent to the transfer of control are recorded net within the oil, natural gas, and NGL sales line item on the accompanying statements of operations. Please refer to Note 1 - Summary of Significant Accounting Policies in the 2022 Form 10-K for more information regarding the types of contracts under which oil, natural gas, and NGL sales revenue is generated.
The Company records revenue in the month production is delivered and control is transferred to the purchaser. However, settlement statements and payment may not be received for 30 to 60 days after the date production is delivered and control is transferred. Until such time settlement statements and payment are received, the Company records a revenue accrual based on, amongst other factors, an estimate of the volumes delivered at estimated prices as determined by the applicable contractual terms. The Company records the differences between its estimates and the actual amounts received for product sales in the month in which payment is received from the purchaser. For the three months ended March 31, 2023 and 2022, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was insignificant. As of March 31, 2023 and December 31, 2022, the Company’s receivables from contracts with customers were $222.4 million and $343.5 million, respectively.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses contain the following (in thousands): | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Accounts payable trade | $ | 23,449 | | | $ | 31,783 | |
| Accrued drilling and completion costs | 123,072 | | | 137,171 | |
| Accrued lease operating expense | 14,097 | | | 18,109 | |
| Accrued gathering, transportation, and processing | 55,407 | | | 59,398 | |
| Accrued general and administrative expense | 16,785 | | | 20,054 | |
| | | |
| Accrued commodity derivative settlements | 1,079 | | | 12,514 | |
| Accrued interest expense | 10,480 | | | 5,509 | |
| Accrued settlement | 4,814 | | | 1,497 | |
| Other accrued expenses | 14,246 | | | 9,262 | |
| Total accounts payable and accrued expenses | $ | 263,429 | | | $ | 295,297 | |
NOTE 5 - LONG-TERM DEBT
5.0% Senior Notes
On October 13, 2021, the Company issued $400.0 million aggregate principal amount of 5.0% Senior Notes due 2026 (the “5.0% Senior Notes”) pursuant to an indenture (the “5.0% Indenture”), among Civitas Resources, Wells Fargo Bank, National Association, as trustee, and the guarantors party thereto. Interest accrues at the rate of 5.0% per annum and is payable semiannually in arrears on April 15 and October 15 of each year. Payments commenced on April 15, 2022.
The 5.0% Indenture contains covenants that limit, among other things, the Company’s ability to: (i) incur or guarantee additional indebtedness; (ii) create liens securing indebtedness; (iii) pay dividends on or redeem or repurchase stock or subordinated debt; (iv) make specified types of investments and acquisitions; (v) enter into or permit to exist contractual limits on the ability of the Company’s subsidiaries to pay dividends to Civitas Resources; (vi) enter into transactions with affiliates; and (vii) sell assets or merge with other companies. These covenants are subject to a number of important limitations and exceptions. The Company was in compliance with all covenants under the 5.0% Indenture as of March 31, 2023, and through the filing of this report. In addition, certain of these covenants will be terminated before the 5.0% Senior Notes mature if at any time no default or event of default exists under the 5.0% Indenture and the 5.0% Senior Notes receive an investment-grade rating from at least two ratings agencies. The 5.0% Indenture also contains customary events of default.
At any time prior to October 15, 2023, the Company may redeem the 5.0% Senior Notes, in whole or in part, at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) the “make-whole” premium at the redemption date, plus (iii) accrued and unpaid interest, if any. On or after October 15, 2023, the Company may redeem all or part of the 5.0% Senior Notes at redemption prices (expressed as percentages of the principal amount redeemed) equal to (i) 102.5% for the twelve-month period beginning on October 15, 2023; (ii) 101.25% for the twelve-month period beginning on October 15, 2024; and (iii) 100.0% for the twelve-month period beginning October 15, 2025 and at any time thereafter, plus accrued and unpaid interest, if any.
The Company may redeem up to 35% of the aggregate principal amount of the 5.0% Senior Notes at any time prior to October 15, 2023 with an amount not to exceed the net cash proceeds from certain equity offerings at a redemption price equal to 105.0% of the principal amount of the 5.0% Senior Notes redeemed, plus accrued and unpaid interest, if any, provided, however, that (i) at least 65.0% of the aggregate principal amount of the 5.0% Senior Notes originally issued on the issue date (but excluding 5.0% Senior Notes held by the Company) remains outstanding immediately after the occurrence of such redemption (unless all such 5.0% Senior Notes are redeemed substantially concurrently) and (ii) the redemption occurs within 180 days after the date of the closing of such equity offering.
The 5.0% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by all of Civitas’ existing subsidiaries.
The 5.0% Senior Notes are recorded net of unamortized deferred financing costs within senior notes on the accompanying balance sheets, with no associated discounts or premiums. The table below presents the related carrying value as of March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Principal amount | $ | 400,000 | | | $ | 400,000 | |
| Unamortized deferred financing costs | 6,307 | | | 6,707 | |
| Net amount | $ | 393,693 | | | $ | 393,293 | |
7.5% Senior Notes
In April 2021, the Company issued $100.0 million aggregate principal amount of 7.5% Senior Notes due 2026 (the “7.5% Senior Notes”) pursuant to an indenture by and among Civitas Resources, U.S. Bank National Association, as trustee, and the guarantors party thereto. Interest accrued at the rate of 7.5% per annum and was payable semiannually in arrears on April 30 and October 31 of each year. On May 1, 2022, the Company redeemed all of the issued and outstanding 7.5% Senior Notes at 100.0% of their aggregate principal amount, plus accrued and unpaid interest thereon to the redemption date.
Credit Facility
The Company is party to a reserve-based revolving facility, as the borrower, with JPMorgan Chase Bank, N.A. (“JPMorgan”), as the administrative agent, and a syndicate of financial institutions, as lenders, that has an aggregate maximum commitment amount of $2.0 billion and matures on November 1, 2025 (with all subsequent amendments, the “Credit Facility” or the “Credit Agreement”).
The Credit Facility is guaranteed by all restricted domestic subsidiaries of the Company, and is secured by first priority security interests on substantially all assets, including a mortgage on at least 90% of the total value of the proved properties evaluated in the most recently delivered reserve reports prior to the amendment effective date, including any engineering reports relating to the oil and natural gas properties of the restricted domestic subsidiaries of the Company, subject to customary exceptions.
The Credit Facility contains customary representations and affirmative covenants. The Credit Facility also contains customary negative covenants, which, among other things, and subject to certain exceptions, include restrictions on (i) liens, (ii) indebtedness, guarantees and other obligations, (iii) restrictions in agreements on liens and distributions, (iv) mergers or consolidations, (v) asset sales, (vi) restricted payments, (vii) investments, (viii) affiliate transactions, (ix) change of business, (x) foreign operations or subsidiaries, (xi) name changes, (xii) use of proceeds, letters of credit, (xiii) gas imbalances, (xiv) hedging transactions, (xv) additional subsidiaries, (xvi) changes in fiscal year or fiscal quarter, (xvii) operating leases, (xviii) prepayments of certain debt and other obligations, (xix) sales or discounts of receivables, (xx) dividend payment thresholds, and (xxi) cash balances.
In addition, the Company is subject to certain financial covenants under the Credit Facility, as tested on the last day of each fiscal quarter, including, without limitation, (a) permitted net leverage ratio of 3.00 to 1 and (b) a current ratio, inclusive of the unused commitments then available to be borrowed, to not be less than 1.00 to 1. The Company was in compliance with all covenants under the Credit Facility as of March 31, 2023 and through the filing of this report.
On April 20, 2022, the Company entered into an amendment to the Credit Agreement that increased the Company’s borrowing base from $1.0 billion to $1.7 billion and increased the aggregate elected commitments from $800.0 million to $1.0 billion.
In addition, this amendment resulted in the removal and replacement of LIBOR with the Secured Overnight Financing Rate (“SOFR”) as a mechanism to determine interest for borrowings made under the Credit Facility using a term-specific SOFR. As a result, borrowings under the Credit Facility bear interest at a per annum rate equal to, at the option of the Company, either (i) the Alternate Base Rate (“ABR”, for ABR Revolving Credit Loans) plus the applicable margin, or (ii) the term-specific SOFR plus the applicable margin. ABR is established as a rate per annum equal to the greatest of (a) the rate of interest publicly announced by JPMorgan as its prime rate, (b) the applicable rate of interest published by the Federal Reserve Bank of New York plus 0.5%, or (c) the term-specific SOFR plus 1.0%, subject to a 1.5% floor plus the applicable margin of 1.0% to 2.0%, based on the utilization of the Credit Facility. Term-specific SOFR is based on one-, three-, or six-month terms as selected by the Company and is subject to a 0.5% floor plus the applicable margin of 2.0% to 3.0%, based on the utilization of the Credit Facility. Interest on borrowings that bear interest at the SOFR are payable on the last day of the applicable interest period selected by the Company, and interest on borrowings that bear interest at the ABR are payable quarterly in arrears.
As part of the regularly scheduled, semi-annual borrowing base redeterminations under the Credit Facility, on October 27, 2022, the Company’s aggregate elected commitments of $1.0 billion were reaffirmed and borrowing base was increased from $1.7 billion to $1.85 billion, and on April 28, 2023, the Company’s aggregate elected commitments of $1.0 billion and borrowing base of $1.85 billion were reaffirmed. The next scheduled borrowing base redetermination date is set to occur in October 2023.
The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Facility as of May 3, 2023, March 31, 2023, and December 31, 2022 (in thousands):
| | | | | | | | | |
| | | | | |
Revolving credit facility | | | $ | — | | | |
| Letters of credit | | | 12,100 | | | |
| Available borrowing capacity | | | 987,900 | | | |
Total aggregate elected commitments | | | $ | 1,000,000 | | | |
In connection with the amendments to the Credit Facility, the Company capitalized a total of approximately $11.9 million in deferred financing costs. Of the total post-amortization net capitalized amounts, (i) $4.8 million and $5.5 million are presented within other noncurrent assets on the accompanying balance sheets as of March 31, 2023 and December 31, 2022, respectively, and (ii) $3.0 million is presented within prepaid expenses and other on the accompanying balance sheets as of both March 31, 2023 and December 31, 2022.
Interest Expense
For the three months ended March 31, 2023 and 2022, the Company incurred interest expense of $7.4 million and $9.1 million, respectively. No interest was capitalized during the three months ended March 31, 2023 and 2022.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company is involved in various commercial and regulatory claims, litigation, and other legal proceedings that arise in the ordinary course of its business. The Company assesses these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in its consolidated financial statements. In accordance with authoritative accounting guidance, an accrual is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the most likely anticipated outcome or the minimum amount within a range of possible outcomes. Because legal proceedings are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about uncertain future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures.
As of the filing date of this report, there were no probable, material pending, or overtly threatened legal actions against the Company of which it was aware, other than the following:
Boulder County. In prior periods, there was ongoing litigation between Boulder County and Extraction which has been previously disclosed as having the potential to prevent oil and gas operations for the development of minerals contained within Boulder County, Colorado. Boulder County had initiated suit in District Court for Boulder County that was primarily a contract case, where the relevant contracts were the conservation easement over the Blue Paintbrush location, Extraction’s Surface Use Agreement for the Blue Paintbrush location, and the leases that Boulder owns within the Blue Paintbrush drilling and spacing unit. Boulder sought invalidation of these leases in the litigation. This litigation has been resolved as to all substantive issues, and the Company is awaiting final dismissal of the matter by the trial court.
In May 2022, Boulder County alleged new legal theories and requested termination of the leases previously at issue in the Blue Paintbrush litigation. Boulder has raised these same claims in opposition to the Company’s pooling application before the Colorado Oil & Gas Conservation Commission (“COGCC”), which is set for hearing in May of 2023. The Company intends to vigorously defend against all claims alleged by Boulder County, both in the pooling hearing and in any subsequent action brought by Boulder County. If an action is brought by Boulder County, an adverse outcome in any such litigation could result in the Company failing to meet its development objectives in Blue Paintbrush.
Enforcement. Disclosure of certain environmental matters is required when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that the Company believes could exceed $0.3 million. The Company has received Notices of Alleged Violations (“NOAV”) from the COGCC alleging violations of various Colorado statutes and COGCC regulations governing oil and gas operations. The Company has further received notices from the Colorado Air Pollution Control Division. The Company continues to engage in discussions regarding resolution of the alleged violations. As of March 31, 2023 and December 31, 2022, the Company has accrued approximately $0.8 million and $0.7 million, respectively, associated with the NOAVs and Colorado Air Pollution Control Division notices.
Commitments
Firm Transportation Agreements. The Company is party to a firm pipeline transportation contract to provide a guaranteed outlet for production on an oil pipeline system. The contract requires the Company to pay minimum volume transportation charges on 12,500 barrels (“Bbl”) per day through April 2025, regardless of the amount of pipeline capacity utilized by the Company. The aggregate financial commitment fee over the remaining term was $30.4 million as of March 31, 2023. The Company expects to utilize most, if not all, of the firm capacity on the oil pipeline system.
Minimum Volume Agreement - Oil. The Company is party to a purchase agreement to deliver fixed and determinable quantities of crude oil. Under the terms of the agreement, the Company is required to make periodic deficiency payments for any shortfalls in delivering the minimum volume commitment of 20,000 gross Bbls per day over a term ending in December 2023. The aggregate financial commitment fee over the remaining term is $34.0 million as of March 31, 2023. The Company has not and does not expect to incur any deficiency payments.
Minimum Volume Agreement - Gas and Other. The Company is party to a gas gathering and processing agreement (the “Gathering Agreement”) with a third-party midstream provider over a term ending in 2029 with an annual minimum volume commitment of 13.0 billion cubic feet of natural gas. The Gathering Agreement also includes a commitment to sell take-in-kind NGLs from other processing agreements of 7,500 Bbls a day through 2026 with the ability to roll forward up to a 10% shortfall in a given month to the subsequent month. The aggregate financial commitment fee over the remaining term is $113.0 million as of March 31, 2023, which fluctuates with commodity prices as this is a value-based percentage of proceeds sales contract. Based on current projections, the Company may incur approximately $49.3 million of shortfall payments under the Gathering Agreement during the remaining term of approximately seven years; however, the Company is actively engaging alternative strategies to reduce any potential contract deficiencies incurred in future periods.
Additionally, the Company is also party to a gas gathering and processing agreement with several third-party producers and a third-party midstream provider to deliver to two different plants over terms that end in August 2025 and July 2026. The Company’s share of these commitments requires an incremental 51.5 and 20.6 million cubic feet of natural gas (“MMcf”) per day, respectively, over a baseline volume of 65 MMcf per day for a period of seven years following the in-service dates of the plants. The Company may be required to pay a shortfall fee for any incremental volume deficiencies under these commitments. These contractual obligations can be reduced by the Company’s proportionate share of the collective volumes delivered to the plants by other incremental third-party volumes available to the midstream provider that are in excess of the total commitments. Because of the third-party producer reduction provision, we believe that the aggregate financial commitment fee over the remaining term is zero as of March 31, 2023. The Company has not and does not expect to incur any deficiency payments.
The Company is also party to additional individually immaterial agreements that require the Company to pay a fee associated with the minimum volumes over various terms ending in April 2025, regardless of the amount delivered. The aggregate financial commitment fee over the remaining term for these contracts was $7.5 million as of March 31, 2023.
The minimum annual payments under these agreements for the next five years as of March 31, 2023 are presented below (in thousands): | | | | | | | | | | | | | | |
| | Firm Transportation | | Minimum Volume(1) |
Remainder of 2023 | | $ | 11,000 | | | $ | 48,050 | |
| 2024 | | 14,640 | | | 19,726 | |
| 2025 | | 4,800 | | | 18,639 | |
| 2026 | | — | | | 17,468 | |
| 2027 | | — | | | 17,030 | |
| 2028 and thereafter | | — | | | 33,540 | |
| Total | | $ | 30,440 | | | $ | 154,453 | |
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(1)The above calculation is based on the minimum volume commitment schedule (as defined in the relevant agreement) and applicable differential fees.
Other commitments. The Company is party to a drilling commitment agreement with a third-party midstream provider such that the Company is required to drill and complete a total of 106 qualifying wells, whereby a minimum number of wells out of the total must be drilled by a deadline occurring every two years over a period ending December 31, 2026. The drilling commitment agreement provides for, among other things, a number of specifications such as minimum consecutive days of production, well performance, and lateral length. Wells operated by others can satisfy this commitment, subject to limitations. If the Company were to fail to complete the wells by the applicable deadline, it would be in breach of the agreement and the third-party midstream provider could attempt to assert damages against Civitas and its affiliates. As of the date of filing, the Company cannot reasonably estimate how much, if any, damages will be paid.
Refer to Note 13 - Leases for lease commitments.
NOTE 7 - STOCK-BASED COMPENSATION
Long Term Incentive Plans
In April 2017, the Company adopted the 2017 Long Term Incentive Plan (“2017 LTIP”), which provides for the issuance of restricted stock units, performance stock units, and stock options, and reserved 2,467,430 shares of common stock. In June 2021, the Company adopted the 2021 Long Term Incentive Plan (“2021 LTIP”), which reserved an incremental 700,000 shares of common stock to those previously reserved under the 2017 LTIP. Finally, in conjunction with the Company’s merger with Extraction Oil & Gas, Inc. (“Extraction”) in November 2021, Civitas assumed Extraction’s 2021 Long Term Incentive Plan (the “Extraction Equity Plan”), which reserved 3,305,080 shares of common stock now issuable by Civitas. The 2017 LTIP, 2021 LTIP, and Extraction Equity Plan are collectively referred to herein as the “LTIP”.
The Company records compensation expense associated with the issuance of awards under the LTIP on a straight-line basis over the vesting period based on the fair value of the awards as of the date of grant within general and administrative expense. The following table outlines the compensation expense recorded by type of award (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Restricted and deferred stock units | $ | 4,425 | | | $ | 5,265 | | | | | |
| Performance stock units | 2,955 | | | 2,825 | | | | | |
| | | | | | | |
| Total stock-based compensation | $ | 7,380 | | | $ | 8,090 | | | | | |
As of March 31, 2023, unrecognized compensation expense related to the awards granted under the LTIP will be amortized through the relevant periods as follows (in thousands): | | | | | | | | | | | |
| Unrecognized Compensation Expense | | Final Year of Recognition |
| Restricted and deferred stock units | $ | 28,642 | | | 2026 |
| Performance stock units | 32,683 | | | 2025 |
| Total unrecognized stock-based compensation | $ | 61,325 | | | |
Restricted Stock Units and Deferred Stock Units
The Company grants time-based Restricted Stock Units (“RSUs”) to its officers, executives, and employees and time-based Deferred Stock Units (“DSUs”) to its non-employee directors as part of its LTIP. Each RSU and DSU represents a right to receive one share of the Company’s common stock at the end of the specified vesting period. RSUs generally vest and settle either over a (i) one-year vesting period, with the entire grant vesting and settling on the anniversary date or (ii) three-year vesting period, with one-third of the total grant vesting and settling on each anniversary date. Each RSU is entitled to a dividend equivalent right to receive, upon settlement, a cash payment based on the regular cash dividends that would have been paid on a share of the Company’s common stock during the period between the grant date and the date the RSUs vest and are settled. Accrued but unpaid dividend equivalents are recognized as a liability on the accompanying balance sheets, until the recipients receive the dividend equivalents upon vesting and settlement. DSUs generally vest in quarterly installments over a one-year period following the grant date. DSUs are settled in shares of the Company’s common stock upon the non-employee director’s separation of service from the Board of Directors (the “Board”). Each DSU is entitled to a dividend equivalent right to receive, on a current basis, a cash payment based on the regular cash dividends that would have been paid on a share of the Company’s common stock. The grant-date fair value of RSUs and DSUs is equal to the closing price of the Company’s common stock on the date of the grant.
A summary of the status and activity of non-vested RSUs and DSUs for the three months ended March 31, 2023 is presented below: | | | | | | | | | | | |
| | RSUs and DSUs | | Weighted-Average Grant-Date Fair Value |
| Non-vested, beginning of year | 675,898 | | | $ | 50.27 | |
| Granted | 230,111 | | | 71.72 | |
| Vested | (96,983) | | | 52.73 | |
| Forfeited | (3,310) | | | 45.84 | |
| Non-vested, end of period | 805,716 | | | $ | 56.12 | |
The aggregate grant-date fair value of the RSUs and DSUs granted under the LTIP during the three months ended March 31, 2023 was $16.5 million.
Performance Stock Units
The Company grants market-based performance stock units (“PSUs”) to its officers and certain executives as part of its LTIP. The number of shares of the Company’s common stock issued to settle PSUs ranges from zero to 225% (or, for PSUs granted prior to fiscal year 2023, 200%) of the number of PSUs granted and is determined based on performance achievement against certain market-based criteria over a three-year performance period. PSUs generally vest and settle on December 31 of the year preceding the third anniversary of the date of grant. Each PSU is entitled to a dividend equivalent right to receive, upon settlement, a cash payment based on the regular cash dividends that would have been paid on a share of the Company’s common stock during the period between the grant date and the date the PSUs vest and are settled. Accrued but unpaid dividend equivalents are recognized as a liability on the accompanying balance sheets, until the recipients receive the dividend equivalents upon vesting and settlement.
Performance achievement is determined based on either, or a combination of, (1) the Company’s annualized absolute total shareholder return (“TSR”) or (2) for certain PSUs granted prior to fiscal year 2023, the Company’s absolute TSR relative to that of a defined peer group. Absolute TSR is determined based upon the performance of the Company's common stock over the performance period relative to the price of the Company’s common stock at the grant date. For awards with a relative TSR component, the Company’s absolute TSR is compared with the absolute TSRs of a group of peer companies over the performance period. The absolute TSR for the Company and each of the peer companies is determined by dividing (A) (i) the volume-weighted average share price for the last 30 trading days of the performance period, minus (ii) the volume-weighted average share price for the 30 trading days preceding the beginning of the performance period, plus (iii) dividends paid by (B) the volume-weighted average share price for the 30 trading days preceding the beginning of the performance period. The resultant amount is then annualized based on the length of the performance period.
The grant-date fair value of the PSUs was estimated using a Monte Carlo valuation model. The Monte Carlo valuation model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Significant assumptions used in this valuation include the Company’s expected volatility as well as the volatilities for each of the Company’s peers and an interpolated risk-free interest rate based on U.S. Treasury yields with maturities consistent with the performance period.
A summary of the status and activity of non-vested PSUs for the three months ended March 31, 2023 is presented below: | | | | | | | | | | | |
| | PSUs (1) | | Weighted-Average Grant-Date Fair Value |
| Non-vested, beginning of year | 345,999 | | | $ | 77.42 | |
| Granted | 190,843 | | | 106.39 | |
| Vested | (8,926) | | | 23.36 | |
| | | |
| Expired | (242) | | | 18.26 | |
| Non-vested, end of period | 527,674 | | | $ | 88.84 | |
___________________________
(1)The number of awards assumes that the associated performance condition is met at the target amount (multiplier of one). The final number of shares of the Company’s common stock issued may vary depending on the performance multiplier, which ranges from zero to 225% (or, for PSUs granted prior to fiscal year 2023, 200%), depending on the level of satisfaction of the performance condition.
The aggregate grant-date fair value of the PSUs granted under the LTIP during the three months ended March 31, 2023 was $20.3 million.
Stock Options
The LTIP allows for the issuance of stock options to the Company’s employees at the sole discretion of the Board. Options expire ten years from the grant date unless otherwise determined by the Board.
Stock options are valued using a Black-Scholes Model where expected volatility is based on an average historical volatility of a peer group selected by management over a period consistent with the expected life assumption on the grant date, the risk-free rate of return is based on the U.S. Treasury constant maturity yield on the grant date with a remaining term
equal to the expected term of the awards, and the Company’s expected life of stock option awards is derived from the midpoint of the average vesting time and contractual term of the awards.
A summary of the status and activity of non-vested stock options for the three months ended March 31, 2023 is presented below: | | | | | | | | | | | | | | | | | | | | | | | |
| | Stock Options | | Weighted-
Average
Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding, beginning of year | 15,170 | | | $ | 34.36 | | | | | |
| | | | | | | |
| Exercised | (13,352) | | | 34.36 | | | | | |
| | | | | | | |
| Outstanding, end of period | 1,818 | | | $ | 34.36 | | | 3.8 | | $ | 62 | |
| Options outstanding and exercisable | 1,818 | | | $ | 34.36 | | | 3.8 | | $ | 62 | |
The aggregate intrinsic value of options exercised during the three months ended March 31, 2023 was $0.5 million.
NOTE 8 - FAIR VALUE MEASUREMENTS
The Company follows authoritative accounting guidance for measuring the fair value of assets and liabilities in its financial statements. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Further, this guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
The fair value hierarchy is broken down into three levels based on the reliability of the inputs as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities
Level 2: Quoted prices in active markets for similar assets and 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
Financial and non-financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy.
Derivatives
The Company uses Level 2 inputs to measure the fair value of oil and natural gas commodity price derivatives. The fair value of the Company’s commodity price derivatives is estimated using industry-standard models that contemplate various inputs including, but not limited to, the contractual price of the underlying position, current market prices, forward commodity price curves, volatility factors, time value of money, and the credit risk of both the Company and its counterparties. We validate our fair value estimate by corroborating the original source of inputs, monitoring changes in valuation methods and assumptions, and reviewing counterparty mark-to-market statements and other supporting documentation. Refer to Note 9 - Derivatives for more information regarding the Company’s derivative instruments.
The following tables present the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 and their classification within the fair value hierarchy (in thousands): | | | | | | | | | | | | | | | | | |
| | As of March 31, 2023 |
| Level 1 | | Level 2 | | Level 3 |
| Derivative assets | $ | — | | | $ | 5,782 | | | $ | — | |
| Derivative liabilities | $ | — | | | $ | 30,320 | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| | As of December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 |
| Derivative assets | $ | — | | | $ | 3,284 | | | $ | — | |
| Derivative liabilities | $ | — | | | $ | 63,533 | | | $ | — | |
Long-Term Debt
The 5.0% Senior Notes are recorded at cost, net of any unamortized deferred financing costs. As of March 31, 2023, the fair value of the 5.0% Senior Notes was $380.6 million. This fair value is based on quoted market prices, and as such, is designated as Level 1 within the fair value hierarchy. The recorded value of the Credit Facility, if any, approximates its fair value as it bears interest at a floating rate that approximates a current market rate. Please refer to Note 5 - Long-Term Debt for additional information.
Warrants
Warrants issued are indexed to the Company’s common stock and required to be net share settled via a cashless exercise. Accordingly, they are classified as equity instruments. The Company’s share price traded below the exercise price of the warrants and therefore were not exercisable during the three months ended March 31, 2023 and 2022.
The fair value of the warrants on the issuance date was determined using Level 3 inputs including, but not limited to, volatility, risk-free rate, and dividend yield under the Cox-Ross-Rubinstein binomial option pricing model. The warrants are recorded within additional paid-in capital on the accompanying balance sheets at a fair value of $77.5 million, with no recurring fair value measurement required. There have been no changes to the initial carrying amount of the warrants since issuance.
Acquisitions and Impairments of Proved and Unproved Properties
We measure acquired assets or businesses at fair value on a nonrecurring basis and review our proved and unproved oil and natural gas properties for impairment using inputs that are not observable in the market, and are therefore designated as Level 3 within the valuation hierarchy. During the three months ended March 31, 2023 and 2022, the Company recorded no impairments of proved properties and incurred zero and $18.0 million, respectively, of abandonment and impairment of unproved properties. Please refer to Note 1 – Summary of Significant Accounting Policies for information on the Company’s policies for determining fair value of its proved and unproved properties and related impairment expense.
NOTE 9 - DERIVATIVES
The Company periodically enters into commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices for its expected future oil and natural gas production and the associated impact on cash flows. The Company’s commodity derivative contracts consist of swaps, collars, and basis protection swap arrangements. As of March 31, 2023, all derivative counterparties were members of the Credit Facility lender group and all commodity derivative contracts are entered into for other-than-trading purposes. The Company does not designate its commodity derivative contracts as hedging instruments.
A typical swap arrangement guarantees a fixed price on contracted volumes. If the agreed upon published third-party index price (“index price”) is lower than the fixed contract price at the time of settlement, the Company receives the difference between the index price and the fixed contract price. If the index price is higher than the fixed contact price at the time of settlement, the Company pays the difference between the index price and the fixed contract price.
A typical collar arrangement establishes a floor and ceiling price on contracted volumes through the use of a short call and a long put (“two-way collar”). When the index price is above the ceiling price at the time of settlement, the Company pays the difference between the index price and the ceiling price. When the index price is below the floor price at the time of settlement, the Company receives the difference between the index price and floor price. When the index price is between the floor price and ceiling price, no payment or receipt occurs. A minority of our collar arrangements combine a two-way collar with a short put that holds an exercise price below the floor price (“three-way collar”). In these arrangements, when the index price is below the floor price at the time of settlement, the Company receives the difference between the index price and the floor price, capped at the difference between the floor price and the exercise price of the short put.
Basis protection swaps are arrangements that guarantee a price differential for natural gas from a specified delivery point. For basis protection swaps, the Company receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract.
As of March 31, 2023, the Company had entered into the following commodity price derivative contracts: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Contract Period |
| | Q2 2023 | | Q3 2023 | | Q4 2023 | | Q1 2024 | | Q2 - Q4 2024 |
Oil Derivatives (volumes in Bbl/day and prices in $/Bbl) | | | | | | | | | | |
| Swaps | | | | | | | | | | |
| NYMEX WTI Volumes | | 1,205 | | 1,053 | | 984 | | 814 | | 1,087 |
| Weighted-Average Contract Price | | $ | 73.49 | | | $ | 70.92 | | | $ | 70.61 | | | $ | 73.27 | | | $ | 65.18 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Three-Way Collars | | | | | | | | | | |
| NYMEX WTI Volumes | | 1,436 | | 1,302 | | 1,172 | | 573 | | — |
| Weighted-Average Ceiling Price | | $ | 57.69 | | | $ | 57.48 | | | $ | 56.49 | | | $ | 56.25 | | | $ | — | |
| Weighted-Average Floor Price | | $ | 48.10 | | | $ | 47.91 | | | $ | 49.04 | | | $ | 45.00 | | | $ | — | |
| Weighted-Average Sold Put Price | | $ | 37.70 | | | $ | 37.41 | | | $ | 39.04 | | | $ | 35.00 | | | $ | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Natural Gas Derivatives (volumes in MMBtu/day and prices in $/million British thermal units (“MMBtu”)) | | | | | | | | | | |
| Swaps | | | | | | | | | | |
| NYMEX HH Volumes | | 46,374 | | 46,120 | | 45,947 | | 31,790 | | 21,619 |
| Weighted-Average Contract Price | | $ | 2.64 | | | $ | 2.61 | | | $ | 2.60 | | | $ | 2.69 | | | $ | 2.71 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Two-Way Collars | | | | | | | | | | |
| NYMEX HH Volumes | | 1,563 | | 1,887 | | 1,756 | | 736 | | 1,131 |
| Weighted-Average Ceiling Price | | $ | 2.78 | | | $ | 2.96 | | | $ | 2.96 | | | $ | 3.16 | | | $ | 3.02 | |
| Weighted-Average Floor Price | | $ | 2.21 | | | $ | 2.34 | | | $ | 2.38 | | | $ | 2.50 | | | $ | 2.35 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Three-Way Collars | | | | | | | | | | |
| NYMEX HH Volumes | | 505 | | — | | — | | 1,166 | | 18 |
| Weighted-Average Ceiling Price | | $ | 3.33 | | | $ | — | | | $ | — | | | $ | 3.50 | | | $ | 3.42 | |
| Weighted-Average Floor Price | | $ | 2.50 | | | $ | — | | | $ | — | | | $ | 2.50 | | | $ | 2.50 | |
| Weighted-Average Sold Put Price | | $ | 2.00 | | | $ | — | | | $ | — | | | $ | 2.00 | | | $ | 2.00 | |
| Basis Protection Swaps | | | | | | | | | | |
| CIG-NYMEX HH Volumes | | 48,442 | | 48,007 | | 47,703 | | 33,692 | | 22,199 |
| Weighted-Average Contract Price | | $ | (0.46) | | | $ | (0.46) | | | $ | (0.46) | | | $ | (0.27) | | | $ | (0.27) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Derivative Assets and Liabilities Fair Value
The Company’s commodity price derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities. The following table contains a summary of all the Company’s derivative positions reported on the accompanying balance sheets as well as a reconciliation between the gross assets and liabilities and the potential effects of master netting arrangements on the fair value of the Company’s commodity derivative contracts as of March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Derivative Assets: | | | | |
| Commodity contracts - current | | $ | 3,319 | | | $ | 2,490 | |
| Commodity contracts - noncurrent | | 2,463 | | | 794 | |
| Total derivative assets | | 5,782 | | | 3,284 | |
| Amounts not offset in the accompanying balance sheets | | (3,203) | | | — | |
| Total derivative assets, net | | $ | 2,579 | | | $ | 3,284 | |
| | | | |
| Derivative Liabilities: | | | | |
| Commodity contracts - current | | $ | (22,878) | | | $ | (46,334) | |
| Commodity contracts - long-term | | (7,442) | | | (17,199) | |
| Total derivative liabilities | | (30,320) | | | (63,533) | |
| Amounts not offset in the accompanying balance sheets | | 3,203 | | | — | |
| Total derivative liabilities, net | | $ | (27,117) | | | $ | (63,533) | |
The following table summarizes the components of the derivative gain (loss) presented on the accompanying statements of operations for the periods below (in thousands): | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Derivative cash settlement loss: | | | | | | | |
| Oil contracts | $ | (3,449) | | | $ | (125,162) | | | | | |
| Natural gas contracts | (7,101) | | | (28,784) | | | | | |
| NGL contracts | — | | | (12,632) | | | | | |
| Total derivative cash settlement loss | (10,550) | | | (166,578) | | | | | |
| Change in fair value gain (loss) | 35,710 | | | (128,915) | | | | | |
| Total derivative gain (loss) | $ | 25,160 | | | $ | (295,493) | | | | | |
NOTE 10 - ASSET RETIREMENT OBLIGATIONS
The Company recognizes an estimated liability for future costs associated with the abandonment of its oil and gas properties, including facilities requiring decommissioning. A liability for the fair value of an asset retirement obligation and corresponding increase to the carrying value of the related long-lived asset are recorded at the time a well is drilled or acquired, or a facility is constructed. The increase in carrying value is included in proved properties in the accompanying balance sheets. The Company depletes the amount added to proved properties and recognizes expense in connection with the accretion of the discounted liability over the remaining estimated economic lives of the respective long-lived assets. Cash paid to settle asset retirement obligations is included in the cash flows from operating activities section of the accompanying unaudited condensed consolidated statements of cash flows.
The Company’s estimated asset retirement obligation liability is based on historical experience plugging and abandoning wells, estimated economic lives, estimated plugging and abandonment cost, and regulatory requirements. The liability is discounted using the credit-adjusted risk-free rate estimated at the time the liability is incurred or revised.
A roll-forward of the Company’s asset retirement obligation is as follows (in thousands): | | | | | |
| Amount |
Balance as of December 31, 2022 | $ | 291,026 | |
| Additional liabilities incurred | 828 | |
| Accretion expense | 3,836 | |
| Liabilities settled | (6,547) | |
| |
| |
Balance as of March 31, 2023 | $ | 289,143 | |
| Current portion | 25,557 | |
| Long-term portion | $ | 263,586 | |
NOTE 11 - EARNINGS PER SHARE
Earnings per basic and diluted share are calculated under the treasury stock method. Basic net income per common share is calculated by dividing net income by the basic weighted-average common shares outstanding for the respective period. Diluted net income per common share is calculated by dividing net income by the diluted weighted-average common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities consist of unvested RSUs, DSUs, PSUs as well as outstanding in-the-money stock options and warrants. When the Company recognizes a loss from continuing operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted earnings per share.
As discussed in Note 7 - Stock-Based Compensation, PSUs represent the right to receive a number of shares of the Company’s common stock ranging from zero to 225% (or, for PSUs granted prior to fiscal year 2023, 200%) of PSUs granted based on the performance achievement over the applicable performance period. The number of potentially dilutive shares related to PSUs is based on the number of shares, if any, that would be issuable at the end of the respective reporting period, assuming that date was the end of the performance period applicable to such awards.
The Company has also issued stock options and warrants, which both represent the right to purchase the Company’s common stock at a specified exercise price. The number of potentially dilutive shares related to the stock options and warrants is based on the number of shares, if any, that would be exercisable at the end of the respective reporting period, assuming that
date was the end of such stock options’ or warrants’ term. Stock options and warrants are only dilutive when the average price of the common stock during the period exceeds the exercise price.
The following table sets forth the calculations of basic and diluted net income per common share (in thousands, except per share amounts): | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Net income | $ | 202,461 | | | $ | 91,639 | | | | | |
| | | | | | | |
| Basic net income per common share | $ | 2.48 | | | $ | 1.08 | | | | | |
| Diluted net income per common share | $ | 2.46 | | | $ | 1.07 | | | | | |
| | | | | | | |
| Weighted-average shares outstanding - basic | 81,719 | | | 84,840 | | | | | |
| Add: dilutive effect of stock awards | 711 | | | 486 | | | | | |
| Weighted-average shares outstanding - diluted | 82,430 | | | 85,326 | | | | | |
There were 138,049 and 18,436 shares that were anti-dilutive for the three months ended March 31, 2023 and 2022, respectively.
The exercise price of the Company’s warrants was in excess of the Company’s stock price during the three months ended March 31, 2023 and 2022; therefore, they were excluded from the earnings per share calculation.
NOTE 12 - INCOME TAXES
Deferred tax assets and liabilities are measured by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years related to cumulative temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying balance sheets. The tax effect of the net change in the cumulative temporary differences during each period in the deferred tax assets and liabilities determines the periodic provision for deferred taxes.
The Company assesses the recoverability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will be realized. In making such determination, the Company considers all available (both positive and negative) evidence, including future reversals of temporary differences, tax-planning strategies, projected future taxable income, and results of operations. As a result of merger activity in 2021, the Company had a valuation allowance of $25.4 million as of both March 31, 2023 and December 31, 2022 against certain acquired net operating losses and other tax attributes due to the limitation on realizability caused by the change of ownership provisions of Section 382 of the Internal Revenue Code. The Company will continue to monitor facts and circumstances in the reassessment of the likelihood that the deferred tax assets will be realized.
The net deferred tax liability as of March 31, 2023 and December 31, 2022 was $365.6 million and $319.6 million, respectively. Additionally, prepaid income taxes under current assets as of March 31, 2023 and December 31, 2022 were $7.7 million and $29.6 million, respectively.
Federal income tax expense differs from the amount that would be provided by applying the statutory United States federal income tax rate of 21% to income before income taxes primarily due to the effect of state income taxes, excess tax benefits and deficiencies on stock-based compensation awards, tax limitations on compensation of covered individuals, changes in valuation allowances, and other permanent differences including bargain purchase gain. During the three months ended March 31, 2023 and 2022, the Company recorded income tax expense of $65.1 million and $23.4 million, respectively.
The Company had no unrecognized tax benefits as of March 31, 2023 and December 31, 2022. The Company’s management does not believe that there are any new items or changes in facts or judgments that would impact the Company’s tax position taken thus far in 2023.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law. Among other provisions, the IRA imposes a 15% corporate alternative minimum tax (“Corporate AMT”) for tax years beginning after December 31, 2022. The Company is evaluating the potential impact of the Corporate AMT on our current income tax expense and income taxes payable; however, we currently do not believe this will materially affect our income taxes paid for the 2023 tax year.
NOTE 13 - LEASES
The Company’s right-of-use assets and lease liabilities are recognized on the accompanying balance sheets based on the present value of the expected lease payments over the lease term. As of March 31, 2023 and December 31, 2022, the Company did not have any agreements in place that were classified as finance leases. The following table summarizes the asset classes of the Company’s operating leases (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Operating Leases | | | | |
Field equipment(1) | | $ | 22,809 | | | $ | 15,131 | |
| Corporate leases | | 6,804 | | | 8,235 | |
| Vehicles | | 1,976 | | | 759 | |
| Total right-of-use asset | | $ | 31,589 | | | $ | 24,125 | |
| | | | |
Field equipment(1) | | $ | 22,809 | | | $ | 15,131 | |
| Corporate leases | | 7,459 | | | 8,898 | |
| Vehicles | | 1,976 | | | 759 | |
| Total lease liability | | $ | 32,244 | | | $ | 24,788 | |
| | | | |
| | | | |
| | | | |
| | | | |
____________________________
(1)Includes compressors, certain natural gas processing equipment, and other field equipment.
Future commitments by year for the Company’s leases with a lease term of one year or more as of March 31, 2023 are presented in the table below. Such commitments are reflected at undiscounted values and are reconciled to the discounted present value recognized on the accompanying balance sheets as follows (in thousands): | | | | | | | | |
| | Operating Leases |
| Remainder of 2023 | | $ | 14,658 | |
| 2024 | | 12,485 | |
| 2025 | | 2,664 | |
| 2026 | | 1,943 | |
| 2027 | | 1,786 | |
| Thereafter | | 598 | |
| Total lease payments | | 34,134 | |
| Less: imputed interest | | (1,890) | |
| Total lease liability | | $ | 32,244 | |
NOTE 14 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental cash flow disclosures are presented below (in thousands):
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| Supplemental cash flow information: | | | |
| Cash (paid) refunded for income taxes | $ | 2,758 | | | $ | (6,300) | |
| Cash paid for interest | (1,328) | | | (774) | |
| Supplemental non-cash investing and financing activities: | | | |
| | | |
| | | |
| Changes in working capital related to capital expenditures | 14,099 | | | 28,015 | |
| | | |
| | | |
| | | |
NOTE 15 - STOCKHOLDERS’ EQUITY
Share Repurchases
On January 24, 2023, we entered into a privately-negotiated share purchase agreement with CPPIB Crestone Peak Resources Canada Inc. for the purchase of approximately 4.9 million shares of the Company’s common stock at a price of $61.00 per share for a total purchase price of approximately $300.0 million. The purchase closed on January 27, 2023 and was funded from the Company’s cash on hand. The shares repurchased were immediately retired. We record share repurchases at cost, which includes incremental direct transaction costs, as a reduction to stockholder’s equity. As part of the incremental direct transaction costs, we recorded a 1% excise tax, as imposed by the IRA, with the corresponding liability recorded within accounts payable and accrued expenses on the accompanying balance sheets. Any excess of cost over the par value is charged to additional paid-in-capital on a pro-rata basis, with any remaining cost charged to retained earnings.
Dividends
In May 2021, we announced the initiation of a quarterly base cash dividend on our common stock. In March 2022, the Board approved the initiation of a quarterly variable cash dividend in addition to the aforementioned base dividend, equal to 50% of free cash flow after the base cash dividend for the preceding twelve-month period and pro forma for all acquisition and divestiture activity, assuming pro forma compliance with certain leverage targets.
The decision to pay any future dividends is solely within the discretion of, and subject to approval by, the Board. The Board’s determination with respect to any such dividends, including the record date, the payment date, and the actual amount of the dividend, will depend upon our profitability and financial condition, contractual restrictions, restrictions imposed by applicable law, and other factors that the Board deems relevant at the time of such determination. The following table summarizes the dividends paid for the three months ended March 31, 2023 and 2022 (per share):
| | | | | | | | | | | | | | | | | |
| Base | | Variable | | Total |
| 2023: | | | | | |
| First quarter | $ | 0.50 | | | $ | 1.65 | | | $ | 2.15 | |
| 2022: | | | | | |
| First quarter | $ | 0.46 | | | $ | 0.75 | | | $ | 1.21 | |
