10-Q 1 sm-20220630.htm 10-Q sm-20220630
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number 001-31539
sm-20220630_g1.jpg
SM ENERGY COMPANY
(Exact name of registrant as specified in its charter)
Delaware41-0518430
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1700 Lincoln Street, Suite 3200, Denver, Colorado
80203
(Address of principal executive offices)(Zip Code)
(303) 861-8140
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)Name of each exchange on which registered
Common stock, $0.01 par valueSMNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 20, 2022, the registrant had 122,593,857 shares of common stock outstanding.
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Cautionary Information about Forward-Looking Statements
This Report on Form 10-Q (“Form 10-Q” or “this report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements included in this report, other than statements of historical facts, that address activities, conditions, events, or developments with respect to our financial condition, results of operations, business prospects or economic performance that we expect, believe, or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “budget,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “pending,” “plan,” “potential,” “projected,” “will,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements appear throughout this report, and include statements about such matters as:
business strategies and other plans and objectives for future operations, including plans for expansion and growth of operations or to defer capital investment, plans with respect to future dividend payments, debt redemptions or equity repurchases, capital markets activities, environmental, social, and governance (“ESG”) goals and initiatives, and our outlook on our future financial condition or results of operations;
the amount and nature of future capital expenditures and the availability of liquidity and capital resources to fund capital expenditures;
our outlook on prices for future crude oil, natural gas, and natural gas liquids (also referred to throughout this report as “oil,” “gas,” and “NGLs,” respectively), well costs, service costs, production costs, and general and administrative costs;
armed conflict, political instability, or civil unrest in crude oil and natural gas producing regions, including the ongoing conflict between Russia and Ukraine, and related potential effects on laws and regulations, or the imposition of economic or trade sanctions;
any changes to the borrowing base or aggregate lender commitments under our Sixth Amended and Restated Credit Agreement, as amended (“Credit Agreement”), or our Seventh Amended and Restated Credit Agreement (“New Credit Agreement”);
cash flows, liquidity, interest and related debt service expenses, changes in our effective tax rate, and our ability to repay debt in the future;
the effects of the global COVID-19 pandemic (“Pandemic”) on us, our industry, our financial condition, and our results of operations;
our drilling and completion activities and other exploration and development activities, our ability to obtain permits and governmental approvals, and plans by us, our joint development partners, and/or other third-party operators;
possible acquisitions and divestitures, including the possible divestiture or farm-out of, or farm-in or joint development of, certain properties;
oil, gas, and NGL reserve estimates and estimates of both future net revenues and the present value of future net revenues associated with those reserve estimates, as well as the conversion of proved undeveloped reserves to proved developed reserves;
our expected future production volumes, identified drilling locations, as well as drilling prospects, inventories, projects and programs; and
other similar matters, such as those discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this report.
Our forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments, and other factors we believe are appropriate under the circumstances. We caution you that forward-looking statements are not guarantees of future performance and these statements are subject to known and unknown risks and uncertainties, which may cause our actual results or performance to be materially different from any future results or performance expressed or implied by the forward-looking statements. Factors that may cause our financial condition, results of operations, business prospects or economic performance to differ from expectations include the factors discussed in the Risk Factors section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”).
The forward-looking statements in this report speak only as of the filing of this report. Although we may from time to time voluntarily update our prior forward-looking statements, we disclaim any commitment to do so except as required by applicable securities laws.
3


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
June 30,
2022
December 31,
2021
ASSETS
Current assets:
Cash and cash equivalents$267,089 $332,716 
Accounts receivable333,944 247,201 
Derivative assets18,308 24,095 
Prepaid expenses and other13,792 9,175 
Total current assets633,133 613,187 
Property and equipment (successful efforts method):
Proved oil and gas properties9,694,929 9,397,407 
Accumulated depletion, depreciation, and amortization(5,944,409)(5,634,961)
Unproved oil and gas properties577,854 629,098 
Wells in progress290,407 148,394 
Other property and equipment, net of accumulated depreciation of $62,203 and $62,359, respectively
33,199 36,060 
Total property and equipment, net4,651,980 4,575,998 
Noncurrent assets:
Derivative assets8,236 239 
Other noncurrent assets45,775 44,553 
Total noncurrent assets54,011 44,792 
Total assets$5,339,124 $5,233,977 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses$583,236 $563,306 
Derivative liabilities425,041 319,506 
Other current liabilities5,476 6,515 
Total current liabilities1,013,753 889,327 
Noncurrent liabilities:
Revolving credit facility  
Senior Notes, net1,570,648 2,081,164 
Asset retirement obligations100,296 97,324 
Deferred income taxes102,371 9,769 
Derivative liabilities36,347 25,696 
Other noncurrent liabilities70,809 67,566 
Total noncurrent liabilities1,880,471 2,281,519 
Commitments and contingencies (note 6)
Stockholders’ equity:
Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 121,959,282 and 121,862,248 shares, respectively
1,220 1,219 
Additional paid-in capital1,850,601 1,840,228 
Retained earnings605,564 234,533 
Accumulated other comprehensive loss(12,485)(12,849)
Total stockholders’ equity2,444,900 2,063,131 
Total liabilities and stockholders’ equity$5,339,124 $5,233,977 
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
June 30,
For the Six Months Ended
June 30,
2022202120222021
Operating revenues and other income:
Oil, gas, and NGL production revenue$990,377 $562,569 $1,849,098 $985,734 
Other operating income1,725 1,280 2,780 21,961 
Total operating revenues and other income992,102 563,849 1,851,878 1,007,695 
Operating expenses:
Oil, gas, and NGL production expense165,593 125,456 310,284 226,386 
Depletion, depreciation, amortization, and asset retirement obligation liability accretion154,823 204,714 314,304 371,674 
Exploration20,868 8,714 29,914 18,037 
Impairment4,389 8,750 5,389 17,500 
General and administrative28,291 24,639 53,287 49,353 
Net derivative loss104,236 370,348 522,757 715,037 
Other operating expense, net1,096 1,852 1,401 1,253 
Total operating expenses479,296 744,473 1,237,336 1,399,240 
Income (loss) from operations512,806 (180,624)614,542 (391,545)
Interest expense(35,496)(39,536)(74,883)(79,407)
Loss on extinguishment of debt(67,226)(2,144)(67,605)(2,144)
Other non-operating income (expense), net112 (853)(233)(1,224)
Income (loss) before income taxes410,196 (223,157)471,821 (474,320)
Income tax (expense) benefit(86,711)162 (99,572)56 
Net income (loss)$323,485 $(222,995)$372,249 $(474,264)
Basic weighted-average common shares outstanding121,910 118,357 121,909 116,568 
Diluted weighted-average common shares outstanding124,343 118,357 124,267 116,568 
Basic net income (loss) per common share$2.65 $(1.88)$3.05 $(4.07)
Diluted net income (loss) per common share$2.60 $(1.88)$3.00 $(4.07)
Dividends per common share$ $ $0.01 $0.01 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5


SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2022202120222021
Net income (loss)$323,485 $(222,995)$372,249 $(474,264)
Other comprehensive income, net of tax:
Pension liability adjustment182 592 364 783 
Total other comprehensive income, net of tax182 592 364 783 
Total comprehensive income (loss)$323,667 $(222,403)$372,613 $(473,481)
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 CapitalAccumulated Other Comprehensive LossTotal Stockholders’ Equity
Common StockRetained Earnings
SharesAmount
Balances, December 31, 2021121,862,248 $1,219 $1,840,228 $234,533 $(12,849)$2,063,131 
Net income— — — 48,764 — 48,764 
Other comprehensive income— — — — 182 182 
Cash dividends declared, $0.01 per share
— — — (1,218)— (1,218)
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings1,929  (24)— — (24)
Stock-based compensation expense  4,274 — — 4,274 
Balances, March 31, 2022121,864,177 $1,219 $1,844,478 $282,079 $(12,667)$2,115,109 
Net income— — — 323,485 — 323,485 
Other comprehensive income— — — — 182 182 
Issuance of common stock under Employee Stock Purchase Plan65,634 1 1,644 — — 1,645 
Stock-based compensation expense29,471  4,479 — — 4,479 
Balances, June 30, 2022121,959,282 $1,220 $1,850,601 $605,564 $(12,485)$2,444,900 
Additional Paid-in CapitalAccumulated Other Comprehensive LossTotal Stockholders’ Equity
Common StockRetained Earnings (Deficit)
SharesAmount
Balances, December 31, 2020114,742,304 $1,147 $1,827,914 $200,697 $(13,598)$2,016,160 
Net loss— — — (251,269)— (251,269)
Other comprehensive income— — — — 191 191 
Cash dividends declared, $0.01 per share
— — — (1,147)— (1,147)
Stock-based compensation expense— — 5,737 — — 5,737 
Balances, March 31, 2021114,742,304 $1,147 $1,833,651 $(51,719)$(13,407)$1,769,672 
Net loss— — — (222,995)— (222,995)
Other comprehensive income— — — — 592 592 
Cash dividends, $0.01 per share
— — — (31)— (31)
Issuance of common stock under Employee Stock Purchase Plan252,665 3 1,312 — — 1,315 
Stock-based compensation expense57,795 1 3,955 — — 3,956 
Issuance of common stock through cashless exercise of Warrants5,918,089 59 (59)— —  
Balances, June 30, 2021120,970,853 $1,210 $1,838,859 $(274,745)$(12,815)$1,552,509 
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 Six Months Ended June 30,
20222021
Cash flows from operating activities:
Net income (loss)$372,249 $(474,264)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation, amortization, and asset retirement obligation liability accretion314,304 371,674 
Impairment5,389 17,500 
Stock-based compensation expense8,753 9,693 
Net derivative loss522,757 715,037 
Derivative settlement loss(408,781)(266,707)
Amortization of debt discount and deferred financing costs7,607 9,445 
Loss on extinguishment of debt67,605 2,144 
Deferred income taxes92,948 (214)
Other, net11,578 (13,377)
Net change in working capital(109,748)31,092 
Net cash provided by operating activities884,661 402,023 
Cash flows from investing activities:
Capital expenditures(365,745)(370,177)
Other, net 221 
Net cash used in investing activities(365,745)(369,956)
Cash flows from financing activities:
Proceeds from revolving credit facility 944,000 
Repayment of revolving credit facility (984,500)
Net proceeds from Senior Notes 393,583 
Cash paid to repurchase Senior Notes(584,946)(385,296)
Net proceeds from sale of common stock1,645 1,315 
Dividends paid(1,218)(1,178)
Other, net(24)(1)
Net cash used in financing activities(584,543)(32,077)
Net change in cash, cash equivalents, and restricted cash(65,627)(10)
Cash, cash equivalents, and restricted cash at beginning of period332,716 10 
Cash, cash equivalents, and restricted cash at end of period$267,089 $ 
Supplemental schedule of additional cash flow information:
Operating activities:
Cash paid for interest, net of capitalized interest$(90,875)$(74,864)
Investing activities:
Increase in capital expenditure accruals and other$37,780 $28,987 
Non-cash financing activities (1)
____________________________________________
(1)    Please refer to Note 5 - Long-Term Debt for discussion of the debt transactions executed during the six months ended June 30, 2022, and 2021.
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 2021 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 June 30, 2022, 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 2021 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 2021 Form 10-K.
Recently Issued Accounting Standards
As of June 30, 2022, and through the filing of this report, no Accounting Standards Updates have been issued and not yet adopted that are applicable to the Company and that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures.
Note 2 - Revenue from Contracts with Customers
The Company recognizes its share of revenue from the sale of produced oil, gas, and NGLs from its Midland Basin and South Texas assets. Oil, gas, and NGL production revenue presented within the accompanying unaudited condensed consolidated statements of operations (“accompanying statements of operations”) is reflective of the revenue generated from contracts with customers.
The tables below present oil, gas, and NGL production revenue by product type for each of the Company’s operating areas for the three and six months ended June 30, 2022, and 2021:
Midland BasinSouth TexasTotal
Three Months Ended
June 30,
Three Months Ended
June 30,
Three Months Ended
June 30,
202220212022202120222021
(in thousands)
Oil production revenue$534,927$404,492$132,092$31,876$667,019$436,368
Gas production revenue137,54351,435103,78436,900241,32788,335
NGL production revenue13011281,90137,75482,03137,866
Total$672,600$456,039$317,777$106,530$990,377$562,569
Relative percentage68 %81 %32 %19 %100 %100 %
9


Midland BasinSouth TexasTotal
Six Months Ended
June 30,
Six Months Ended
June 30,
Six Months Ended
June 30,
202220212022202120222021
(in thousands)
Oil production revenue$1,028,822$690,597$245,499$51,548$1,274,321$742,145
Gas production revenue239,816109,241171,56068,752411,376177,993
NGL production revenue282212163,11965,384163,40165,596
Total$1,268,920$800,050$580,178$185,684$1,849,098$985,734
Relative percentage69 %81 %31 %19 %100 %100 %
The Company recognizes oil, gas, and NGL production revenue at the point in time when custody and title (“control”) of the product transfers to the purchaser, which differs depending on the applicable contractual terms. Transfer of control drives the presentation of transportation, gathering, processing, and other post-production expenses (“fees and other deductions”) within the accompanying statements of operations. Fees and other deductions incurred by the Company prior to control transfer are recorded within the oil, gas, and NGL production expense line item on the accompanying statements of operations. When control is transferred at or near the wellhead, sales are based on a wellhead market price that is impacted by fees and other deductions incurred by the purchaser subsequent to the transfer of control. Please refer to Note 2 - Revenue from Contracts with Customers in the 2021 Form 10-K for more information regarding the types of contracts under which oil, gas, and NGL production revenue is generated.
Significant judgments made in applying the guidance in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, relate to the point in time when control transfers to purchasers in gas processing arrangements with midstream processors. The Company does not believe that significant judgments are required with respect to the determination of the transaction price, including amounts that represent variable consideration, as volume and price carry a low level of estimation uncertainty given the precision of volumetric measurements and the use of index pricing with generally predictable differentials. Accordingly, the Company does not consider estimates of variable consideration to be constrained.
The Company’s performance obligations arise upon the production of hydrocarbons from wells in which the Company has an ownership interest. The performance obligations are considered satisfied upon control transferring to a purchaser at the wellhead, inlet, or tailgate of the midstream processor’s processing facility, or other contractually specified delivery point. 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.
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 June 30, 2022, and December 31, 2021, were $303.9 million and $215.6 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.
Note 3 - Equity
On June 17, 2020, the Company issued warrants to purchase up to an aggregate of approximately 5.9 million shares, or approximately five percent of its then outstanding common stock, at an exercise price of $0.01 per share (“Warrants”). The Warrants became exercisable at the election of the holders on January 15, 2021, pursuant to the terms of the Warrant Agreement, dated June 17, 2020 (“Warrant Agreement”). The Warrants are indexed to the Company’s common stock and are required to be settled through physical settlement or net share settlement, if exercised.
Upon issuance, the $21.5 million fair value of the Warrants was recorded in additional paid-in capital on the accompanying balance sheets, and was determined using a stochastic Monte Carlo simulation using geometric Brownian motion (“GBM Model”). The Company evaluated the Warrants under authoritative accounting guidance and determined that they should be classified as equity instruments, with no recurring fair value measurement required. There have been no changes to the initial carrying amount of the Warrants since issuance.
During the second quarter of 2021, the Company issued 5,918,089 shares of common stock as a result of the cashless exercise of 5,922,260 Warrants at a weighted-average share price of $15.45 per share, as determined under the terms of the Warrant
10


Agreement. At the request of stockholders and pursuant to the Company’s obligations under the Warrant Agreement, a registration statement covering the resale of a majority of these shares was filed with the U.S. Securities and Exchange Commission (“SEC”) on June 11, 2021.
No Warrants were exercised during the six months ended June 30, 2022. As of June 30, 2022, 19,044 Warrants remain unexercised and such Warrants will remain exercisable in full or from time to time in part at the election of the holders until their expiration on June 30, 2023.
Note 4 - Income Taxes
The provision for income taxes for the three and six months ended June 30, 2022, and 2021, consists of the following:
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2022202120222021
(in thousands)
Current portion of income tax expense:
Federal$(3,664)$ $(4,273)$
State(2,047) (2,351)(158)
Deferred portion of income tax (expense) benefit(81,000)162 (92,948)214
Income tax (expense) benefit$(86,711)$162 $(99,572)$56
Effective tax rate21.1 %0.1 %21.1 % %
Recorded income tax expense or benefit differs from the amount that would be provided by applying the statutory United States federal income tax rate to income or loss before income taxes. These differences primarily relate to the effect of state income taxes, excess tax benefits and deficiencies from stock-based compensation awards, tax deduction limitations on the compensation of covered individuals, changes in valuation allowances, the cumulative effect of other smaller permanent differences, and can also reflect 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 rate and the resulting income tax (expense) 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 period presented, as reflected in the table above. Forecast net income had a larger impact on the effective tax rate for the three and six months ended June 30, 2022, compared with the same periods in 2021, and valuation allowance adjustments had a larger impact on the effective tax rate for the three and six months ended June 30, 2021, compared with the same periods in 2022.
For all years before 2018, the Company is generally no longer subject to United States federal or state income tax examinations by tax authorities.
Note 5 - Long-Term Debt
The following table summarizes the total outstanding balance of the Company’s Senior Secured Notes net of unamortized discount and deferred financing costs, and Senior Unsecured Notes net of unamortized deferred financing costs, as of June 30, 2022, and December 31, 2021:
As of June 30, 2022As of December 31, 2021
(in thousands)
Senior Secured Notes (1)
$ $407,712 
Senior Unsecured Notes (1)
1,570,648 1,673,452 
Total$1,570,648 $2,081,164 
____________________________________________
(1)    Senior Secured Notes and Senior Unsecured Notes are defined below.
Credit Agreement
The Credit Agreement was scheduled to mature on September 28, 2023, but was amended and restated by the New Credit Agreement on August 2, 2022, as discussed below. Prior to the effective date of the New Credit Agreement, the Credit Agreement
11


provided for a senior secured revolving credit facility with a maximum loan amount of $2.5 billion. As of June 30, 2022, the borrowing base and aggregate lender commitments under the Credit Agreement were $1.1 billion.
Under the Credit Agreement, interest and commitment fees associated with the revolving credit facility were accrued based on a borrowing base utilization grid as presented in Note 5 - Long-Term Debt in the 2021 Form 10-K. At the Company’s election, borrowings under the Credit Agreement could be in the form of Eurodollar, Alternate Base Rate (“ABR”), or Swingline loans. Eurodollar loans accrued interest at the London Interbank Offered Rate (“LIBOR”), plus the applicable margin from the utilization grid, and ABR and Swingline loans accrued interest at a market-based floating rate, plus the applicable margin from the utilization grid. Commitment fees were accrued on the unused portion of the aggregate lender commitment amount at rates from the utilization grid and are included in the interest expense line item on the accompanying statements of operations.
The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Agreement as of July 20, 2022, June 30, 2022, and December 31, 2021:
As of July 20, 2022As of June 30, 2022As of December 31, 2021
(in thousands)
Revolving credit facility (1)
$ $ $ 
Letters of credit (2)
6,000 6,000 2,500 
Available borrowing capacity1,094,000 1,094,000 1,097,500 
Total aggregate lender commitment amount$1,100,000 $1,100,000 $1,100,000 
____________________________________________
(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 $2.0 million and $2.7 million as of June 30, 2022, and December 31, 2021, 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.
New Credit Agreement
On August 2, 2022, the Company entered into a Seventh Amended and Restated Credit Agreement by and among the Company, Wells Fargo Bank, National Association, as Administrative Agent and Swingline Lender (“Agent”), and the institutions named therein as lenders. The New Credit Agreement amends and restates the Credit Agreement, and provides for a senior secured revolving credit facility with a maximum loan amount of $3.0 billion, an initial borrowing base of $2.5 billion, and initial aggregate lender commitments totaling $1.25 billion. The revolving credit facility is secured by substantially all of the Company’s proved oil and gas properties. The borrowing base is subject to regular, semi-annual redetermination, and considers the value of both the Company’s (a) proved oil and gas properties reflected in the Company’s most recent reserve report; and (b) commodity derivative contracts, each as determined by the Company’s lender group. The New 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, 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.
In addition to other negotiated terms, conditions, agreements, and provisions, the New Credit Agreement establishes the Secured Overnight Financing Rate as the new benchmark for determining interest rates in replacement of LIBOR. LIBOR was discontinued as a global reference rate for new loans and contracts after December 31, 2021. The financial covenants under the New Credit Agreement require, among other customary covenants, that the Company’s (a) total funded debt, as defined by the New Credit Agreement, to 12-month trailing adjusted EBITDAX ratio cannot be greater than 3.50 to 1.00 on the last day of each fiscal quarter ended after June 30, 2022; and (b) adjusted current ratio, as defined in the New Credit Agreement, cannot be less than 1.00 to 1.00 as of the last day of any fiscal quarter.
Senior Secured Notes
On June 17, 2022, the Company redeemed all of the $446.7 million of aggregate principal amount outstanding of its 10.0% Senior Secured Notes due 2025 (“2025 Senior Secured Notes” or “Senior Secured Notes”). The 2025 Senior Secured Notes were redeemed with cash on hand, at a redemption price equal to 107.5 percent of the principal amount outstanding on the date of the redemption, plus accrued and unpaid interest. Upon redemption, the Company recorded a net loss on extinguishment of debt of $67.2 million which included $33.5 million of premium paid, $26.3 million of accelerated unamortized debt discount, and $7.4 million of accelerated unamortized deferred financing costs. The Company canceled all redeemed 2025 Senior Secured Notes upon settlement.
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Senior Secured Notes, net of unamortized discount and deferred financing costs, included within the Senior Notes, net line item on the accompanying balance sheets, as of December 31, 2021, consist of the following:
As of December 31, 2021
(in thousands)
Principal amount of 10.0% Senior Secured Notes due 2025
$446,675 
Unamortized debt discount30,236 
Unamortized deferred financing costs8,727 
10.0% Senior Secured Notes due 2025, net of unamortized debt discount and deferred financing costs
$407,712 
Senior Unsecured Notes
Senior Unsecured Notes, net of unamortized deferred financing costs, included within the Senior Notes, net line item on the accompanying balance sheets as of June 30, 2022, and December 31, 2021, consist of the following (collectively referred to as “Senior Unsecured Notes,” and together with the 2025 Senior Secured Notes, “Senior Notes”):
As of June 30, 2022As of December 31, 2021
Principal AmountUnamortized Deferred Financing CostsPrincipal Amount, NetPrincipal AmountUnamortized Deferred Financing CostsPrincipal Amount, Net
(in thousands)
5.0% Senior Notes due 2024
$ $ $ $104,769 $403 $104,366 
5.625% Senior Notes due 2025
349,118 1,844 347,274 349,118 2,160346,958 
6.75% Senior Notes due 2026
419,235 2,919 416,316 419,235 3,270415,965 
6.625% Senior Notes due 2027
416,791 3,560 413,231 416,791 3,949412,842 
6.5% Senior Notes due 2028
400,000 6,173 393,827 400,000 6,679 393,321 
Total$1,585,144 $14,496 $1,570,648 $1,689,913 $16,461 $1,673,452 
The Senior Unsecured 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 Unsecured Notes prior to their maturity at redemption prices based on a premium, plus accrued and unpaid interest as described in the indentures governing the Senior Unsecured Notes.
On February 14, 2022, the Company redeemed all of the $104.8 million of aggregate principal amount outstanding of its 5.0% Senior Notes due 2024 (“2024 Senior Notes”), with cash on hand, pursuant to the terms of the indenture governing the 2024 Senior Notes which provided for a redemption price equal to 100 percent of the principal amount of the 2024 Senior Notes on the date of redemption, plus accrued and unpaid interest. Upon redemption, the Company recorded a net loss on extinguishment of debt of $0.4 million related to the acceleration of unamortized deferred financing costs. The Company canceled all redeemed 2024 Senior Notes upon settlement.
On June 23, 2021, the Company issued $400.0 million in aggregate principal amount of its 6.5% Senior Notes at par with a maturity date of July 15, 2028 (“2028 Senior Notes”). The Company received net proceeds of $392.8 million after deducting fees of $7.2 million, which are being amortized as deferred financing costs over the life of the 2028 Senior Notes. The net proceeds were used to repurchase $193.1 million and $172.3 million of outstanding principal amount of the Company’s 6.125% Senior Notes due 2022 (“2022 Senior Notes”) and 2024 Senior Notes, respectively, through a cash tender offer (“Tender Offer”), and to redeem the remaining $19.3 million of 2022 Senior Notes not repurchased as part of the Tender Offer (“2022 Senior Notes Redemption”). The Company paid total consideration, excluding accrued interest, of $385.3 million, and recorded a net loss on extinguishment of debt of $2.1 million for the three months ended June 30, 2021, which included $1.5 million of accelerated unamortized deferred financing costs and $0.6 million of net premiums. The Company canceled all repurchased and redeemed 2022 Senior Notes and 2024 Senior Notes upon settlement.
Please refer to Note 5 - Long-Term Debt in the 2021 Form 10-K for additional detail on the Company’s Senior Notes.
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Covenants
The Company was subject under the Credit Agreement, and is subject under the New Credit Agreement and under the indentures governing the Senior Notes, to certain financial and non-financial covenants, as discussed above, 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, merge or consolidate with other entities, and with respect to the Company’s restricted subsidiaries, permit the consensual restriction on the ability of such restricted subsidiaries to pay dividends or indebtedness owing to the Company or to any other restricted subsidiaries. The Company was in compliance with all financial and non-financial covenants as of June 30, 2022, and through the filing of this report. Please refer to Note 5 - Long-Term Debt in the 2021 Form 10-K for additional detail on the Company’s covenants under the Credit Agreement and the indentures governing the Senior Notes.
Capitalized Interest
Capitalized interest costs for the three months ended June 30, 2022, and 2021, totaled $4.2 million and $4.7 million, respectively, and totaled $7.2 million and $9.0 million for the six months ended June 30, 2022, and 2021, 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 2021 Form 10-K. Please refer to Note 6 - Commitments and Contingencies in the 2021 Form 10-K for additional discussion of the Company’s commitments.
Drilling Rig Service Contracts. During the six months ended June 30, 2022, and through the filing of this report, the Company amended certain of its drilling rig contracts resulting in the increase of day rates and potential early termination fees, and the extension of contract terms. As of the filing of this report, the Company’s drilling rig commitments totaled $24.9 million under contract terms extending through the third quarter of 2023. If all of these contracts were terminated as of the filing of this report, the Company would avoid a portion of the contractual service commitments; however, the Company would be required to pay $17.4 million in early termination fees. No early termination penalties or standby fees were incurred by the Company during the six months ended June 30, 2022, and the Company does not expect to incur material penalties with regard to its drilling rig contracts during the remainder of 2022.
Drilling and Completion Commitments. During the six months ended June 30, 2022, 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, 2024, 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 June 30, 2022, the liquidated damages could range from zero to a maximum of $92.3 million, with the maximum exposure assuming no additional development activity occurred prior to March 31, 2024. 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. 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 - Compensation Plans
As of June 30, 2022, 4.9 million shares of common stock were available for grant under the Company’s Equity Incentive Compensation Plan (“Equity Plan”). The Company may also grant other types of long-term incentive-based awards, such as cash awards and performance-based cash awards, to eligible employees.
Performance Share Units
The Company has granted performance share units (“PSU” or “PSUs”) to eligible employees as part of its Equity Plan. The number of shares of the Company’s common stock issued to settle PSUs ranges from zero to two times the number of PSUs awarded and is determined based on certain criteria over a three-year performance period. PSUs generally vest on the third anniversary of the date of the grant or upon other triggering events as set forth in the Equity Plan.
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For PSUs granted in 2019, which the Company determined to be equity awards, the settlement criteria include a combination of the Company’s Total Shareholder Return (“TSR”) relative to the TSR of certain peer companies and the Company’s cash return on total capital invested (“CRTCI”) relative to the CRTCI of certain peer companies over the associated three-year performance period. In addition to these performance criteria, the award agreements for these grants also stipulate that if the Company’s absolute TSR is negative over the three-year performance period, the maximum number of shares of common stock that can be issued to settle outstanding PSUs is capped at one times the number of PSUs granted on the award date, regardless of the Company’s TSR and CRTCI performance relative to its peer group. The fair value of the PSUs granted in 2019 was measured on the grant date using the GBM Model, with the assumption that the associated CRTCI performance condition will be met at the target amount at the end of the performance period. Compensation expense for PSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards. As these awards depend on a combination of performance-based settlement criteria and market-based settlement criteria, compensation expense may be adjusted in future periods as the number of units expected to vest increases or decreases based on the Company’s expected CRTCI performance relative to the applicable peer companies.
The Company records compensation expense associated with the issuance of PSUs based on the fair value of the awards as of the date of grant. Total compensation expense recorded for PSUs was $0.7 million and $1.3 million for the three months ended June 30, 2022, and 2021, respectively, and $1.4 million and $4.5 million for the six months ended June 30, 2022, and 2021, respectively. As of June 30, 2022, there was no material remaining unrecognized compensation expense related to non-vested PSUs. There were no material changes to the outstanding and non-vested PSUs during the six months ended June 30, 2022. PSUs granted in 2019 fully vested on July 1, 2022, and will be settled upon evaluation of the final settlement criteria.
Subsequent to June 30, 2022, the Company granted a total of 276,010 PSUs with a grant date fair value of $7.4 million, and these PSUs were determined by the Company to be equity awards. The settlement of these awards will be determined based on a combination of the following criteria measured over the three-year performance period: the Company’s TSR relative to the TSR of certain peer companies, the Company’s absolute TSR, free cash flow (“FCF”) generation, as defined by the award agreement, and the achievement of certain ESG targets. A portion of the fair value of the PSUs granted in 2022 was measured on the grant date using the GBM Model. The portion of the awards associated with FCF generation and ESG performance conditions assumes that target amounts will be met at the end of the performance period. Compensation expense for PSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards. As these awards depend on a combination of performance-based settlement criteria and market-based settlement criteria, compensation expense may be adjusted in future periods as the number of units expected to vest increases or decreases based on the Company’s expected FCF generation and achievement of certain ESG targets.
Employee Restricted Stock Units
The Company has granted restricted stock units (“RSU” or “RSUs”) to eligible employees as part of its Equity Plan. Each RSU granted represents a right to receive one share of the Company’s common stock upon settlement of the award at the end of the specified vesting period. RSUs generally vest in one-third increments on each anniversary date of the grant over the applicable vesting period or upon other triggering events as set forth in the Equity Plan.
The Company records compensation expense associated with the issuance of RSUs based on the fair value of the awards as of the date of grant. The fair value of an RSU is equal to the closing price of the Company’s common stock on the date of the grant. Compensation expense for RSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards. Total compensation expense recorded for RSUs was $3.2 million and $2.1 million for the three months ended June 30, 2022, and 2021, respectively, and $6.5 million and $4.3 million for the six months ended June 30, 2022, and 2021, respectively. As of June 30, 2022, there was $13.7 million of total unrecognized compensation expense related to non-vested RSUs, which is being amortized through mid-2024. There were no material changes to the outstanding and non-vested RSUs during the six months ended June 30, 2022.
Subsequent to June 30, 2022, the Company settled RSUs upon the vesting of awards granted in previous years. The Company and all eligible recipients mutually agreed to net share settle a portion of the awards to cover income and payroll tax withholdings, as provided for in the Equity Plan and applicable award agreements. After withholding 283,800 shares to satisfy income and payroll tax withholding obligations, 634,575 shares of the Company’s common stock were issued in accordance with the terms of the applicable award agreements.
Subsequent to June 30, 2022, the Company granted to employees a total of 526,776 RSUs with a grant date fair value of $18.0 million. These RSUs generally vest in one-third increments on each anniversary date of the grant over a three-year vesting period or upon other triggering events as set forth in the Equity Plan.
Director Shares
During the second quarters of 2022, and 2021, the Company issued a total of 29,471 and 57,795 shares, respectively, of its common stock as compensation to its non-employee directors under the Equity Plan. Shares issued during the second quarter of 2022 will fully vest on December 31, 2022. Shares issued during the second quarter of 2021 fully vested on December 31, 2021.
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Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation, subject to a maximum of 2,500 shares per offering period and a maximum of $25,000 in value related to purchases for each calendar year. The purchase price of the common stock is 85 percent of the lower of the trading price of the common stock on either the first or last day of the six-month offering period. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. There were a total of 65,634 and 252,665 shares issued under the ESPP during the second quarters of 2022, and 2021, respectively. Total proceeds to the Company for the issuance of these shares was $1.6 million and $1.3 million for the six months ended June 30, 2022, and 2021, respectively. The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model.
Please refer to Note 7 - Compensation Plans in the 2021 Form 10-K for additional detail on the Company’s Equity Plan.
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 June 30, 2022:
Level 1Level 2Level 3
(in thousands)
Assets:
Derivatives (1)
$ $26,544 $