CHORD ENERGY CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 Annual Report"), as well as the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, regarding our strategic tactics, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words "could," "believe," "anticipate," "intend," "estimate," "expect," "may," "continue," "predict," "potential," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. In particular, the factors discussed below and detailed under "Part II, Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q could affect our actual results and cause our actual results to differ materially from expectations, estimates, or assumptions expressed in, forecasted in, or implied in such forward-looking statements.
Forward-looking statements may include statements about:
•crude oil, natural gas liquid ("NGL") and natural gas realized prices;
•developments in the global economy as well as the public health crisis related to the COVID-19 pandemic and resulting demand and supply for crude oil and natural gas;
•uncertainty regarding the future actions of foreign oil producers and the related impacts such actions have on the balance between the supply of and demand for crude oil and natural gas;
•war and political instability in
•general economic conditions;
•inflation rates;
•logistical challenges and supply chain disruptions;
•our business strategy;
•the geographic concentration of our operations;
•estimated future net reserves and present value thereof;
•timing and amount of future production of crude oil and natural gas;
•drilling and completion of wells;
•estimated inventory of wells remaining to be drilled and completed;
•costs of exploiting and developing our properties and conducting other operations;
•availability of drilling, completion and production equipment and materials;
•availability of qualified personnel;
•infrastructure for produced and flowback water gathering and disposal;
•gathering, transportation and marketing of crude oil and natural gas in the
•the possible shutdown of the Dakota Access Pipeline ("DAPL");
•property acquisitions and divestitures;
•integration and benefits of property acquisitions or the effects of such acquisitions on our cash position and levels of indebtedness;
•incurring significant transaction and other costs in connection with the Merger (as defined in the "Recent Developments" section below) in excess of those anticipated;
•failing to realize the anticipated benefits or synergies from the Merger in the timeframe expected or at all;
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•the ultimate timing, outcome and results of integrating the operations of Oasis and Whiting;
•any litigation relating to the Merger;
•the amount, nature and timing of capital expenditures;
•availability and terms of capital;
•our financial strategic tactics, budget, projections, execution of business plan and operating results;
•cash flows and liquidity;
•our ability to return capital to shareholders;
•our ability to utilize net operating loss carryforwards or other tax attributes in future periods;
•our ability to comply with the covenants under our credit agreements and other indebtedness;
•operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;
•interruptions in service and fluctuations in tariff provisions of third-party connecting pipelines;
•potential effects arising from cyber threats, terrorist attacks and any consequential or other hostilities;
•compliance with and changes in environmental, safety and other laws and regulations;
•execution of our environmental, social and governance ("ESG") initiatives;
•effectiveness of risk management activities;
•competition in the oil and gas industry;
•counterparty credit risk;
•incurring environmental liabilities;
•governmental regulation and the taxation of the oil and gas industry;
•developments in crude oil-producing and natural gas-producing countries;
•technology;
•the effects of accounting pronouncements issued periodically during the periods covered by forward-looking statements;
•uncertainty regarding future operating results;
•our ability to successfully forecast future operating results and manage activity levels with ongoing macroeconomic uncertainty;
•plans, objectives, expectations and intentions contained in this report that are not historical; and
•certain factors discussed elsewhere in this Quarterly Report on Form 10-Q, in our 2021 Annual Report and in our other filings with theU.S. Securities and Exchange Commission (the "SEC"). All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to update or revise these statements unless required by securities law, and you should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. Some of the key factors which could cause actual results to vary from our expectations include changes in crude oil, NGL and natural gas prices, climatic and environmental conditions, the timing of planned capital expenditures, availability of acquisitions, uncertainties in estimating proved reserves and forecasting production results, operational factors affecting the commencement or maintenance of producing wells, the condition of the capital markets generally, as well as our ability to access them, inflation, the proximity to and capacity of transportation facilities, and uncertainties regarding environmental regulations or litigation and other legal or regulatory developments affecting our business, as well as those factors discussed below and elsewhere in this Quarterly Report on Form 10-Q, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. 34
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Overview
Chord Energy Corporation (together with its consolidated subsidiaries, the "Company" or "Chord Energy" or "Chord") is an independent exploration and production ("E&P") company with quality and sustainable long-lived assets in theWilliston Basin . Our purpose is to improve lives by safely and responsibly providing affordable, reliable and abundant energy. We are uniquely positioned with a best-in-class balance sheet and are focused on rigorous capital discipline and generating free cash flow by operating efficiently, safely and responsibly to develop our unconventional onshore oil-rich resources in the continentalUnited States . Recent Developments Return of Capital Plan
On
We expect to return a certain percentage of free cash flow ("FCF") each quarter, with the targeted percentage based on free cash flow generated during the quarter and leverage under the following framework:
•Below 0.5x leverage: 75%+ of FCF •Below 1.0x leverage: 50%+ of FCF •>1.0x leverage: Base dividend+ The Merger OnMarch 7, 2022 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Whiting Petroleum Corporation ("Whiting") to combine in a merger of equals transaction (the "Merger"). Whiting was an independent oil and gas company engaged in the development, production and acquisition of crude oil, NGLs and natural gas primarily in theRocky Mountains region ofthe United States . The Merger was unanimously approved by the respective Boards of Directors of both companies, and the proposals relating to the Merger were approved by the shareholders of both companies onJune 28, 2022 . The Merger was completed onJuly 1, 2022 . In connection with the completion of the Merger, we changed our name fromOasis Petroleum Inc. ("Oasis") toChord Energy . Upon completion of the Merger onJuly 1, 2022 , we issued 22,671,871 shares of common stock and paid$245.4 million in cash to Whiting shareholders. Under the terms of the Merger Agreement, each holder of Whiting common stock, par value$0.001 per share, received 0.5774 shares of Chord common stock, par value$0.01 per share, and$6.25 per share in cash in exchange for each share of Whiting common stock. In connection with the Merger, onJune 16, 2022 , the Board of Directors of Oasis declared a special dividend of$15.00 per share of common stock (the "Special Dividend") that was paid onJuly 8, 2022 to shareholders of record as ofJune 29, 2022 . OMP Merger OnFebruary 1, 2022 , we completed the merger ofOasis Midstream Partners LP ("OMP") andOMP GP LLC , OMP's general partner ("OMP GP") with and into a subsidiary of Crestwood Equity Partners LP ("Crestwood") and, in exchange, received$160.0 million in cash and 20,985,668 common units representing limited partner interests of Crestwood (the "OMP Merger"). In connection with the closing of the OMP Merger, the Company and Crestwood executed a director nomination agreement pursuant to which we designated two directors to the Board of Directors ofCrestwood GP Equity LLC , aDelaware limited liability company and the general partner of Crestwood ("Crestwood GP"). OnSeptember 12, 2022 , we sold an aggregate 16,000,000 common units of Crestwood in separate transactions and received pre-tax net proceeds of$428.2 million . OnSeptember 15, 2022 , in connection with such transactions and pursuant to the terms of the previously executed director nomination agreement, both directors resigned from the Board of Directors of Crestwood GP. 35
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Market Conditions and Commodity Prices
Our revenue, profitability and ability to return cash to shareholders depend substantially on factors beyond our control, such as economic, political and regulatory developments as well as competition from other sources of energy. Prices for crude oil, NGLs and natural gas have experienced significant fluctuations in recent years and may continue to fluctuate widely in the future. Commodity prices increased significantly during the first half of 2022 due, in part, to disruptions to global commodity markets resulting from the Russian invasion ofUkraine , coupled with increased global economic activity as a result of fewer restrictions associated with the COVID-19 pandemic. During the third quarter of 2022, crude oil and NGL prices decoupled from natural gas prices. Crude oil and NGL prices decreased in the third quarter of 2022 to levels consistent with early 2022 prior to the Russian invasion ofUkraine due to decreased consumer demand associated with slowing economic activity levels in major developed and emerging economies. Natural gas prices increased during the third quarter of 2022 due to increased liquified natural gas demand around the globe, particularly inEurope , stemming from lower Russian natural gas supply as a result of economic sanctions and other self-sanctioning of Russian commodities due to the ongoing conflict inUkraine . We have experienced an increase in the costs of labor, materials and services, which may continue, primarily due to continued supply chain disruptions, higher demand for services and a tight labor market. Central banks have raised interest rates in an effort to reduce inflationary pressure; however, such actions to lower inflation have slowed economic activity levels and increased the risk of a possible future economic recession. In an effort to improve price realizations from the sale of our crude oil, NGLs and natural gas, we manage our commodities marketing activities in-house, which enables us to market and sell our crude oil, NGLs and natural gas to a broader array of potential purchasers. We enter into crude oil, NGL and natural gas sales contracts with purchasers who have access to transportation capacity, utilize derivative financial instruments to manage our commodity price risk and enter into physical delivery contracts to manage our price differentials. During the third quarter of 2022, our crude oil price differentials averaged a$1.63 per barrel premium to NYMEX West Texas Intermediate crude oil price index ("NYMEX WTI"). Due to the availability of other markets and pipeline connections, we do not believe that the loss of any single customer would have a material adverse effect on our results of operations or cash flows. Additionally, we sell a significant amount of our crude oil production through gathering systems connected to multiple pipeline and rail facilities. These gathering systems, which originate at the wellhead, reduce the need to transport barrels by truck from the wellhead, helping remove trucks from local highways and reduce greenhouse gas emissions. As ofSeptember 30, 2022 , substantially all of our gross operated crude oil and natural gas production were connected to gathering systems. Results of Operations
Comparability of Financial Statements
The results of operations presented below relate to the period endedSeptember 30, 2022 . Certain financial and operational information set forth herein does not include the activity of Whiting for periods prior to the closing of the Merger onJuly 1, 2022 . As of the completion of the Merger onJuly 1, 2022 , we elected to report crude oil, NGLs and natural gas separately on a three-stream basis. For the periods prior toJuly 1, 2022 , we reported crude oil and natural gas, which included NGLs, on a two-stream basis. This change impacts the comparability with prior periods. In addition, the OMP Merger qualified for reporting as a discontinued operation. Accordingly, the results of operations of OMP have been classified as discontinued operations in the Condensed Consolidated Statement of Operations for the period fromJanuary 1, 2022 to the closing of the OMP Merger onFebruary 1, 2022 . Prior periods have been recast so that the basis of presentation is consistent with that of the 2022 condensed consolidated financial statements.
Operational Highlights
•Production volumes averaged 172,481 barrels of oil equivalent per day ("Boepd"), including crude oil volumes of 96,201 barrels of oil per day ("Bopd") in the third quarter of 2022.
•E&P capital expenditures were
•Lease operating expense ("LOE") was
•Turned-in-line 32 gross (22.5 net) operated wells in the third quarter of 2022.
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Revenues
Our crude oil, NGL and natural gas revenues are derived from the sale of crude oil, NGL and natural gas production. These revenues do not include the effects of derivative instruments and may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. Our revenues for the three and nine months endedSeptember 30, 2022 increased due to the Merger, which significantly expanded our operations in theWilliston Basin . Our purchased oil and gas sales are derived from the sale of crude oil and natural gas purchased through our marketing activities primarily to optimize transportation costs, for blending to meet pipeline specifications or to cover production shortfalls. Revenues and expenses from crude oil and natural gas sales and purchases are generally recorded on a gross basis, as we act as a principal in these transactions by assuming control of the purchased crude oil or natural gas before it is transferred to the counterparty. In certain cases, we enter into sales and purchases with the same counterparty in contemplation of one another, and these transactions are recorded on a net basis.
The following table summarizes our revenues, production and average realized prices for the periods presented:
Three Months Three Months Nine Months Ended Nine Months Ended
Ended September Ended June 30, September 30, September 30,
30, 2022 2022 2022 2021
Revenues (in thousands)
Crude oil revenues $ 824,265 $ 418,860 $ 1,629,033 $ 598,278
NGL revenues(1) 106,151 - 106,151 -
Natural gas revenues(1) 125,730 119,707 353,031 183,181
Purchased oil and gas sales 132,697 250,489 542,653 276,349
Other services revenues - 324 324 542
Total revenues $ 1,188,843 $ 789,380 $ 2,631,192 $ 1,058,350
Production data
Crude oil (MBbls) 8,850 3,747 16,645 9,402
NGLs (MBbls)(1) 3,560 - 3,560 -
Natural gas (MMcf)(1) 20,748 12,506 46,555 32,707
Oil equivalents (MBoe) 15,868 5,831 27,964 14,853
Average daily production (Boepd) 172,481 64,079 102,432 54,407
Average daily crude oil production (Bopd) 96,201 41,174 60,971 34,440
Average sales prices
Crude oil (per Bbl)
Average sales price $ 93.13
(19.79) (33.08) (22.76) (16.62)
Average realized price after the effect of $ 73.34 $ 78.71 $ 75.11 $ 47.01
derivative settlements(2)
NGLs (per Bbl)(1)
Average sales price $ 29.82 $ - $ 29.82 $ -
Effect of derivative settlements(2) (0.11) - (0.11) -
Average realized price after the effect of $ 29.71 $ - $ 29.71 $ -
derivative settlements(2)
Natural gas (per Mcf)(1)
Average sales price $ 6.06
(1.67) (0.95) (1.12) (0.12)
Average realized price after the effect of $ 4.39 $ 8.62 $ 6.46 $ 5.48
derivative settlements(2)
____________________
(1)For periods prior to July 1, 2022 , we reported crude oil and natural gas on a
two-stream basis, and NGLs were combined with the natural gas stream when
reporting revenues, production data and average sales prices. As of July 1,
2022 , NGLs were reported separately from the natural gas stream on a
three-stream basis. This prospective change impacts the comparability of the
periods presented.
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(2)Our commodity derivatives do not qualify for or were not designated as
hedging instruments for accounting purposes. The effect of derivative
settlements includes the gains or losses on commodity derivatives for contracts
ending in the periods presented.
Three months ended
Crude oil revenues. Our crude oil revenues increased$405.4 million to$824.3 million for the three months endedSeptember 30, 2022 . This increase was primarily driven by a$443.7 million increase due to our expanded operations after the Merger. Excluding the impacts attributable to the Merger, our crude oil revenues decreased$38.3 million due to a decrease of$66.1 million due to lower crude oil realized prices, partially offset by an increase of$27.8 million due to higher crude oil production volumes sold quarter over quarter. Average crude oil sales prices, without derivative settlements, decreased by$18.66 per barrel quarter over quarter to an average of$93.13 per barrel for the three months endedSeptember 30, 2022 . NGL revenues. As ofJuly 1, 2022 , we began reporting NGL revenues separately from natural gas revenues. This prospective change impacts the comparability of the periods presented. Our NGL revenues were$106.2 million for the three months endedSeptember 30, 2022 , including$53.5 million attributable to our expanded operations after the Merger and$52.7 million attributable to our legacy operations. Natural gas revenues. As ofJuly 1, 2022 , we began reporting NGL revenues separately from natural gas revenues. This prospective change impacts the comparability of the periods presented. Our natural gas revenues increased$6.0 million to$125.7 million for the three months endedSeptember 30, 2022 primarily driven by a$58.3 million increase due to our expanded operations after the Merger. Excluding the effects of the Merger, our natural gas revenues decreased$52.3 million , including$52.7 million due to the conversion to three-stream reporting. Stripping out the NGL component from our liquids-rich natural gas resulted in a lower price reported for residue gas during the three months endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 in which we reported revenues that included liquids-rich natural gas. Average natural gas sales prices, without derivative settlements, decreased by$3.51 per one thousand cubic feet ("Mcf") quarter over quarter to an average of$6.06 per Mcf for the three months endedSeptember 30, 2022 . Purchased oil and gas sales. Purchased oil and gas sales decreased$117.8 million to$132.7 million for the three months endedSeptember 30, 2022 . This decrease was primarily due to lower crude oil prices quarter over quarter and a decrease in the volume of crude oil purchased and subsequently sold relative to the three months endedJune 30, 2022 , when additional volumes were purchased to mitigate the impacts of production downtime associated with winter storms. 38
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Nine months ended
Crude oil revenues. Our crude oil revenues increased$1,030.8 million to$1,629.0 million for the nine months endedSeptember 30, 2022 . This increase was primarily driven by a$443.7 million increase due to our expanded operations after the Merger. Excluding the impacts attributable to the Merger, our crude oil revenues increased$587.1 million due to an increase of$343.3 million due to higher crude oil realized prices and$243.8 million due to higher crude oil production volumes sold period over period. Average crude oil sales prices, without derivative settlements, increased by$34.24 per barrel period over period to an average of$97.87 per barrel for the nine months endedSeptember 30, 2022 . NGL revenues. As ofJuly 1, 2022 , we began reporting NGL revenues separately from natural gas revenues. This prospective change impacts the comparability of the periods presented. Our NGL revenues were$106.2 million for the nine months endedSeptember 30, 2022 , including$53.5 million due to our expanded operations after the Merger and$52.7 million attributable to our legacy operations. Natural gas revenues. As ofJuly 1, 2022 , we began reporting NGL revenues separately from natural gas revenues. This prospective change impacts the comparability of the periods presented. Our natural gas revenues increased$169.9 million to$353.0 million for the nine months endedSeptember 30, 2022 . Excluding the effects from the Merger, our natural gas revenues increased$111.6 million primarily due to$83.1 million attributable to higher natural gas realized prices and$28.5 million attributable to higher natural gas production volumes sold period over period, partially offset by a decrease due to the conversion to three-stream reporting as ofJuly 1, 2022 . Additionally, our natural gas revenues increased period over period by$58.3 million due to our expanded operations after the Merger. Average natural gas sales prices, without derivative settlements, increased by$1.98 per Mcf period over period to an average of$7.58 per Mcf for the nine months endedSeptember 30, 2022 . Purchased oil and gas sales. Purchased oil and gas sales increased$266.3 million to$542.7 million for the nine months endedSeptember 30, 2022 . This increase was primarily due to higher crude oil prices period over period, coupled with an increase in crude oil volumes purchased and then subsequently sold to mitigate the impacts of production downtime associated with winter storms in the second quarter of 2022. 39
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Expenses and other income (expense)
The following table summarizes our operating expenses and other income (expense)
for the periods presented:
Three Months Three Months Nine Months Ended Nine Months
Ended September Ended June 30, September 30, Ended September
30, 2022 2022 2022 30, 2021
(In thousands, except per Boe of production)
Operating expenses
Lease operating expenses $ 156,397 $ 67,722 $ 287,195 $ 146,373
Other services expenses - 12 123 47
Gathering, processing and transportation expenses 35,549 31,813 99,759 90,920
Purchased oil and gas expenses 132,625 252,058 546,310 275,789
Production taxes 83,535 40,081 159,473 50,933
Depreciation, depletion and amortization 141,047 42,136 227,856 83,976
Exploration and impairment 910 278 1,698 1,941
General and administrative expenses 102,226 24,822 151,415 61,500
Total operating expenses 652,289 458,922 1,473,829 711,479
Gain on sale of assets 755 319 2,595 228,473
Operating income 537,309 330,777 1,159,958 575,344
Other income (expense)
Net gain (loss) on derivative instruments 337,409 (98,253) (128,766) (550,342)
Net gain (loss) from investment in unconsolidated 75,093 (96,253) 38,977 -
affiliate
Interest expense, net of capitalized interest (8,645) (6,949) (22,810) (23,444) Other income (expense) (864) 1,298 2,186 (793) Total other income (expense), net 402,993 (200,157) (110,413) (574,579) Income from continuing operations before income 940,302 130,620 1,049,545 765
taxes
Income tax benefit 1,307 219 3,352 - Net income from continuing operations 941,609 130,839 1,052,897 765 Income (loss) from discontinued operations (59,858) - 425,696 100,957 attributable to Chord, net of income tax Net income attributable to Chord$ 881,751
$ 9.86
2.24 5.46 3.57 6.12
Production taxes 5.26 6.87 5.70 3.43
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Three months ended
Lease operating expenses. LOE increased$88.7 million to$156.4 million for the three months endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 primarily due to an$85.3 million increase from our expanded operations after the Merger. Excluding the effects of the Merger, LOE increased$3.3 million primarily due to higher fixed costs of$4.0 million , partially offset by lower workover costs of$1.1 million due to fewer workover projects. LOE per Boe decreased$1.75 per Boe to$9.86 per Boe for the three months endedSeptember 30, 2022 due to higher production volumes. Gathering, processing and transportation expenses. Gathering, processing and transportation ("GPT") expenses increased$3.7 million to$35.5 million for the three months endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 primarily due to a$2.1 million increase from our expanded operations after the Merger, which included$9.1 million of GPT expenses partially offset by a$6.9 million non-cash gain attributable to the change in fair value of certain transportation derivative contracts acquired in the Merger for which we did not elect the "normal purchase normal sale" exclusion. See Note 7-Derivative Instruments for additional information on the transportation derivative contracts. Excluding the effects of the Merger, GPT expenses increased$1.6 million primarily due to the impact of the change in our pipeline imbalance volumes quarter over quarter. GPT expenses per Boe decreased$3.22 per Boe to$2.24 per Boe for the three months endedSeptember 30, 2022 due to higher production. Purchased oil and gas expenses. Purchased oil and gas expenses decreased$119.4 million to$132.6 million for the three months endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 . This decrease was primarily due to a decrease in the volume of crude oil purchased quarter over quarter where additional volumes were purchased during the three months endedJune 30, 2022 to mitigate the impacts of production downtime associated with winter storms. Production taxes. Production taxes increased$43.5 million to$83.5 million for the three months endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 . This increase was primarily due to a$44.5 million increase from our expanded operations after the Merger. The production tax rate as a percentage of crude oil, NGL and natural gas sales was 7.9% for the three months endedSeptember 30, 2022 , compared to 7.4% for the three months endedJune 30, 2022 . This increase quarter over quarter was primarily due to an escalation of theNorth Dakota crude oil extraction tax of 1% effectiveJune 1, 2022 as a result of the average price of crude oil exceeding the crude oil trigger price of$94.69 per barrel for three consecutive months. The crude oil extraction tax will be reduced by 1% if the average price of crude oil is less than the crude oil price trigger of$94.69 per barrel for three consecutive months, which we expect to occur during the fourth quarter of 2022. Depreciation, depletion and amortization. Depreciation, depletion and amortization ("DD&A") expenses increased$98.9 million to$141.0 million for the three months endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 . This increase was primarily due to a$74.9 million increase due to DD&A expense attributable to our expanded operations after the Merger. Excluding the effects of the Merger, depletion expense increased$24.0 million due to higher production volumes quarter over quarter and an increase in the depletion rate. The depletion rate increased$1.76 per Boe to$8.58 per Boe for the three months endedSeptember 30, 2022 due to higher costs attributable to the oil and gas properties acquired in the Merger. General and administrative expenses. General and administrative ("G&A") expenses increased$77.4 million to$102.2 million for the three months endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 . This increase was primarily due to merger-related costs of$73.4 million incurred during the three months endedSeptember 30, 2022 . We incurred$34.9 million related to employee severance benefits,$19.1 million related to advisory, legal and other transaction-related costs and$17.8 million attributable to the acceleration of equity-based compensation expenses due to terminations of certain officers upon closing of the Merger. Derivative instruments. We recorded a$337.4 million gain on derivative instruments for the three months endedSeptember 30, 2022 , which was comprised of an unrealized gain of$554.6 million on commodity derivative contracts primarily due to a decrease in the NYMEX price curve, partially offset by a realized commodity derivative contract loss of$210.2 million and a$7.0 million loss on an embedded derivative contract that includes contingent consideration. During the three months endedJune 30, 2022 , we recorded a$98.3 million net loss on derivative instruments, which was comprised of a loss of$95.6 million on commodity derivative contracts and a$2.7 million loss on an embedded derivative contract that includes contingent consideration. Investment in unconsolidated affiliate. We recorded a$75.1 million gain related to our investment in Crestwood for the three months endedSeptember 30, 2022 , including a gain of$43.0 million attributable to our sale of 16,000,000 common units during the third quarter of 2022, a non-cash gain of$18.4 million due to an increase in the fair value of the investment and a realized gain of$13.7 million due to a cash distribution from Crestwood in the third quarter of 2022. During the three months endedJune 30, 2022 , we recorded a$96.3 million net loss related to our investment in Crestwood, which was comprised of an unrealized loss of$110.0 million due to a decrease in the fair value of the investment, partially offset by a realized gain of$13.7 million due to a cash distribution from Crestwood in the second quarter of 2022. We own less than 5% of Crestwood's issued and outstanding common units. 41
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Interest expense, net of capitalized interest. Interest expense increased$1.7 million to$8.6 million for the three months endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 . The increase was primarily due to borrowings on our revolving credit facility during the three months endedSeptember 30, 2022 that were subsequently repaid. There were no borrowings on our revolving credit facility during the three months endedJune 30, 2022 . Interest capitalized during the three months endedSeptember 30, 2022 andJune 30, 2022 was$1.3 million and$0.9 million , respectively. Income tax benefit. Our income tax benefit was recorded at (0.1)% of pre-tax income from continuing operations for the three months endedSeptember 30, 2022 and (0.2)% of pre-tax income from continuing operations for the three months endedJune 30, 2022 . Our effective tax rate for the three months endedSeptember 30, 2022 was higher than the effective tax rate for the three months endedJune 30, 2022 primarily due to the impact of releasing a portion of the valuation allowance on our net deferred tax assets in the third quarter of 2022, coupled with the impacts of equity-based compensation windfalls. Income (loss) from discontinued operations attributable to Chord, net of income tax. We recorded a loss from discontinued operations, net of income tax of$59.9 million for the three months endedSeptember 30, 2022 . During the three months endedSeptember 30, 2022 , we recorded incremental income tax expense to discontinued operations as a result of applying the intraperiod tax allocation rules in accordance with FASB ASC 740-20, Income Taxes - Intraperiod Tax Allocation. See Note 11-Discontinued Operations and Note 15-Income Taxes for additional information.
Nine months ended
Lease operating expenses. LOE increased$140.8 million to$287.2 million for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This increase was primarily due to an$85.3 million increase from our expanded operations after the Merger. Excluding the effects of the Merger, LOE increased$55.5 million due to a$67.2 million increase in theWilliston Basin due primarily to higher fixed costs of$37.7 million and higher workover costs of$21.6 million , partially offset by$11.7 million of LOE costs incurred during the nine months endedSeptember 30, 2021 in thePermian Basin on properties that were divested inJune 2021 . LOE per Boe increased$0.42 per Boe to$10.27 per Boe for the nine months endedSeptember 30, 2022 primarily due to higher costs. Gathering, processing and transportation expenses. GPT expenses increased$8.8 million to$99.8 million for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . Excluding the effects of the Merger, GPT expenses increased$6.7 million primarily due to an increase of$9.3 million in theWilliston Basin due primarily to higher crude oil gathering and transportation expenses of$12.3 million driven by an increase in volumes transported on DAPL, partially offset by lower natural gas gathering and processing expenses of$4.8 million . These increases were offset by$2.5 million of GPT expenses incurred during the nine months endedSeptember 30, 2021 in thePermian Basin on properties that were divested inJune 2021 . Additionally, GPT expenses increased$2.1 million from our expanded operations after the Merger, which included$9.1 million of GPT expenses offset by a$6.9 million non-cash gain attributable to the change in fair value of certain transportation derivative contracts acquired in the Merger for which we did not elect the "normal purchase normal sale" exclusion. See Note 7-Derivative Instruments for additional information on the transportation derivative contracts. GPT expenses per Boe decreased$2.55 per Boe to$3.57 per Boe for the nine months endedSeptember 30, 2022 due to higher production. Purchased oil and gas expenses. Purchased oil and gas expenses increased$270.5 million to$546.3 million for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 primarily due to higher crude oil prices period over period and an increase in the volume of crude oil purchased to mitigate the impacts of production downtime associated with winter storms in the second quarter of 2022. Production taxes. Production taxes increased$108.5 million to$159.5 million for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This increase was primarily due to a$44.5 million increase from our expanded operations after the Merger. Excluding the effects of the Merger, production taxes increased$64.1 million due to increased crude oil sales period over period coupled with an increase in theNorth Dakota crude oil extraction tax of 1% effectiveJune 1, 2022 . The production tax rate as a percentage of crude oil, NGL and natural gas sales was 7.6% for the nine months endedSeptember 30, 2022 , compared to 6.5% for the nine months endedSeptember 30, 2021 . The production tax rate as a percentage of crude oil, NGL and natural gas sales increased period over period primarily due to the impact of lower production tax rates in thePermian Basin on properties that were divested inJune 2021 , coupled with the increase in theNorth Dakota crude oil extraction tax rate as described above. 42
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Depreciation, depletion and amortization. DD&A expenses increased$143.9 million to$227.9 million for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The increase was primarily due to a$74.9 million increase in DD&A expense attributable to our expanded operations after the Merger. Excluding the effects of the Merger, depletion expense increased$77.5 million driven by a$86.0 million increase in theWilliston Basin , partially offset by$8.5 million of depletion expense incurred during the nine months endedSeptember 30, 2021 in thePermian Basin on properties that were divested inJune 2021 . The depletion rate in theWilliston Basin increased$3.19 per Boe to$7.82 per Boe for the nine months endedSeptember 30, 2022 due to higher costs attributable to the oil and gas properties acquired in the Merger. Fixed DD&A expense decreased$8.5 million primarily due to well service equipment that has been fully depreciated. General and administrative expenses. G&A expenses increased$89.9 million to$151.4 million for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This increase was primarily due to$82.8 million of merger-related costs, including$34.9 million of costs related to employee severance benefits,$28.2 million of advisory, legal and other transaction-related costs and$17.8 million attributable to the acceleration of equity-based compensation expenses due to terminations of certain officers upon closing of the Merger. Gain on sale of assets. For the nine months endedSeptember 30, 2022 , we recognized a$2.6 million gain on the sale of oil and gas properties related to the sale of certain non-core assets. For the nine months endedSeptember 30, 2021 , we recognized a$228.5 million gain on sale of assets primarily related to the Permian Basin Sale. Derivative instruments. We recorded a$128.8 million net loss on derivative instruments for the nine months endedSeptember 30, 2022 , which was comprised of a realized commodity derivative contract loss of$431.3 million , partially offset by an unrealized gain of$295.3 million on commodity derivative contracts and a$7.3 million gain on an embedded derivative contract that includes contingent consideration. During the nine months endedSeptember 30, 2021 , we recorded a$550.3 million net loss on derivative instruments which was comprised of a loss of$557.2 million on commodity derivative contracts and a$6.9 million gain on an embedded derivative contract that includes contingent consideration. Investment in unconsolidated affiliate. We recorded a$39.0 million net gain related to our investment in Crestwood for the nine months endedSeptember 30, 2022 , including a gain of$43.0 million attributable to our sale of 16,000,000 common units during the third quarter of 2022 and a realized gain of$40.6 million due to cash distributions received from Crestwood during the period, offset by an unrealized loss of$44.6 million due to a decrease in the fair value of the investment. We own less than 5% of Crestwood's issued and outstanding common units. Interest expense, net of capitalized interest. Interest expense was$22.8 million for the nine months endedSeptember 30, 2022 , which was consistent with the nine months endedSeptember 30, 2021 . Interest capitalized during the nine months endedSeptember 30, 2022 and 2021 was$2.8 million and$1.5 million , respectively. Income tax benefit. Our income tax benefit was recorded at (0.3)% of pre-tax income from continuing operations for the nine months endedSeptember 30, 2022 and 0.0% of pre-tax income from continuing operations for the nine months endedSeptember 30, 2021 . Our effective tax rate for the nine months endedSeptember 30, 2022 was lower than the effective tax rate for the nine months endedSeptember 30, 2021 primarily due to the impact of releasing a portion of the valuation allowance on our net deferred tax assets in the third quarter of 2022, coupled with the impacts of equity-based compensation windfalls. Income (loss) from discontinued operations attributable to Chord, net of income tax. Income from discontinued operations attributable to Chord, net of income tax for the nine months endedSeptember 30, 2022 represents income from OMP for the period prior to the completion of the OMP Merger onFebruary 1, 2022 . We recorded income from discontinued operations attributable to Chord, net of income tax of$425.7 million for the nine months endedSeptember 30, 2022 . This was primarily comprised of a gain on sale of$518.9 million and midstream revenues of$23.3 million , offset by income tax expense of$101.1 million , midstream expenses of$13.2 million and interest expense of$3.7 million . Income from discontinued operations attributable to Chord, net of income tax was$101.0 million for the nine months endedSeptember 30, 2021 , which included midstream revenues of$183.8 million , offset by midstream expenses of$83.8 million . 43
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Liquidity and Capital Resources
Our primary sources of liquidity during the period covered by this report have been cash flows from operations, proceeds received in connection with the completion of the merger of OMP and Crestwood, proceeds received in connection with the sale of a portion of our ownership of Crestwood common units, distributions from Crestwood for our ownership of Crestwood common units and proceeds from the exercise of outstanding warrants. Our primary uses of cash have been for cash paid to Whiting shareholders in connection with the Merger, transaction costs associated with the Merger, severance benefits paid to employees following the Merger, payment of income tax withholding obligations on vested equity awards, settlement of outstanding commodity derivative contracts, payments of dividends to shareholders, repurchases of outstanding common stock, capital expenditures for the development of oil and gas properties and interest payments on our long-term debt.
In connection with the consummation of the Merger on
We have incurred certain costs directly attributable to the Merger for advisory, legal, severance and other third-party fees that have been recorded to general and administrative expenses on the Condensed Consolidated Statements of Operations. For the three months endedSeptember 30, 2022 , we recognized total merger-related costs of$73.4 million , including$34.9 million related to employee severance benefits, transaction costs of$19.1 million and$17.8 million related to the acceleration of unamortized stock compensation expense as a result of certain officer terminations upon completion of the Merger. For the nine months endedSeptember 30, 2022 , we recognized total merger-related costs of$82.8 million , including$34.9 million related to employee severance benefits, transaction costs of$28.2 million and$17.8 million related to the acceleration of unamortized stock compensation expense as a result of certain officer terminations upon completion of the Merger. As ofSeptember 30, 2022 , we had a remaining liability of$23.3 million for the payment of employee severance benefits which was included in accrued liabilities on the Condensed Consolidated Balance Sheet. In addition, we recognized an assumed liability in connection with the Merger of$55.0 million related to outstanding claims in the Point Arguello litigation. Subsequent toSeptember 30, 2022 , we paid$55.0 million in cash as full and final satisfaction, discharge and release of all claims related to the Point Arguello litigation. See Note 19-Commitments and Contingencies for additional information. Our material cash requirements from known obligations include repayment of outstanding borrowings and interest payment obligations related to our long-term debt, obligations to plug, abandon and remediate our oil and gas properties at the end of their productive lives, payment of income taxes, severance benefits payable to terminated employees and obligations associated with our operating and finance leases. In addition, we have announced a return of capital plan pursuant to which we intend to return capital to shareholders through a base dividend, variable dividend and/or share repurchases. See Recent Developments-Return of Capital Plan for additional information. We also have contracts which include provisions for the delivery, transport or purchase of a minimum volume of crude oil, NGLs, natural gas and water within specified time frames, the majority of which are ten years or less. Under the terms of these contracts, if we fail to deliver, transport or purchase the committed volumes we will be required to pay a deficiency payment for the volumes not tendered over the duration of the contract.
As of
Revolving credit facility. OnJuly 1, 2022 , we entered into the Amended and Restated Credit Agreement to, among other things; (i) increase the aggregate maximum credit amount to$3.0 billion , (ii) increase the borrowing base to$2.0 billion , (iii) increase the aggregate amount of elected commitments to$800.0 million , (iv) extend the maturity date toJuly 1, 2027 , (v) reduce the margin on outstanding borrowings by 125 basis points and (vi) increase the consolidated total leverage ratio financial covenant to 3.50x.
As of
OnOctober 31, 2022 , we completed the semi-annual borrowing base redetermination and entered into our Second Amendment to Amended and Restated Credit Agreement to increase the aggregate amount of elected commitments to$1.0 billion and increase the borrowing base to$2.75 billion . Senior unsecured notes. As ofSeptember 30, 2022 , we have$400.0 million of 6.375% senior unsecured notes outstanding that mature onJune 1, 2026 . Interest on the senior unsecured notes is payable semi-annually onJune 1 andDecember 1 of each year. 44
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Cash Flows
The Condensed Consolidated Statements of Cash Flows have not been recast for discontinued operations, therefore the discussion below concerning cash flows from operating activities, investing activities and financing activities includes the results of both continuing operations and discontinued operations.
Our cash flows for the nine months ended
Nine
Months Ended
2022 2021
(In thousands)
Net cash provided by operating activities $ 1,445,634 $ 644,746
Net cash used in investing activities (325,699) (89,031)
Net cash provided by (used in) financing activities (635,861) 272,667
Increase in cash and cash equivalents $
484,074
Cash flows provided by operating activities
Net cash provided by operating activities was$1,445.6 million for the nine months endedSeptember 30, 2022 . The increase in net cash provided by operating activities of$800.9 million from the nine months endedSeptember 30, 2021 was due primarily to higher revenues from crude oil, NGL and natural gas sales due to higher commodity prices and our expanded operations following the Merger. See "Results of Operations" above for additional information on the impact of volumes and prices on revenues and for additional information on increases and decreases in certain expenses between periods. Working capital. Our working capital fluctuates primarily as a result of changes in commodity prices and production volumes, capital spending to fund development of our oil and gas properties and the settlement of outstanding commodity derivative contracts. AtSeptember 30, 2022 , we had a working capital deficit of$34.8 million , compared to a working capital surplus of$60.6 million atDecember 31, 2021 (excluding current assets/liabilities held-for-sale). Our working capital deficit atSeptember 30, 2022 was primarily the result of the liability position of outstanding commodity derivative contracts. We believe we have adequate liquidity to meet our working capital requirements.
Cash flows used in investing activities
Net cash used in investing activities was$325.7 million for the nine months endedSeptember 30, 2022 . The increase in net cash used in investing activities of$236.7 million from the nine months endedSeptember 30, 2021 was primarily due to an increase of$245.0 million for cash payments to settle commodity derivative contracts,$159.9 million of capital expenditures related to the development of our oil and gas properties and a net$73.9 million related to acquisitions, which includes$245.4 million of cash paid inJuly 2022 to Whiting shareholders in connection with the closing of the Merger. In addition, there was a decrease of$218.2 million in proceeds from divested assets whereby we received$160.0 million in connection with the completion of the merger of OMP into Crestwood during the nine months endedSeptember 30, 2022 , while we received net proceeds from divestitures of$373.9 million during the nine months endedSeptember 30, 2021 primarily related to the sale of our upstream assets in thePermian Basin . Additionally, we received distributions of$40.6 million during the nine months endedSeptember 30, 2022 for our ownership of Crestwood common units.
Cash flows provided by (used in) financing activities
Net cash used in financing activities of$635.9 million for the nine months endedSeptember 30, 2022 was primarily attributable to dividends paid to shareholders of$500.1 million , payments of$124.8 million to repurchase common stock and payments of$36.8 million for income tax withholdings on vested equity-based compensation awards. These uses of cash were partially offset by proceeds of$17.5 million from the exercise of outstanding warrants. Net cash provided by financing activities for the nine months endedSeptember 30, 2021 of$272.7 million was primarily attributable to OMP's issuance of$450.0 million in aggregate principal amount of senior notes, coupled with our issuance of$400.0 million in aggregate principal amount of senior notes. This was partially offset by the net principal repayments of outstanding borrowings under our revolving credit facility and OMP's revolving credit facility. 45
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Capital Expenditures
Our capital expenditures ("CapEx") from continuing operations are summarized in
the following table:
Three Months Ended Nine Months Ended
September 30, September 30,
March 31, 2022 June 30, 2022 2022 2022
(In thousands)
Capital expenditures
E&P $ 62,889 $ 46,005 $ 224,821 $ 333,715
Other capital expenditures(1) 626 888 6,571 8,085
Total E&P and other capital expenditures 63,515 46,893 231,392 341,800
Acquisitions(2,3) - (4,779) 2,364 (2,415)
Total capital expenditures(4) $ 63,515 $ 42,114 $ 233,756 $ 339,385 ___________________
(1)Other capital expenditures includes items such as infrastructure capital, administrative capital and capitalized interest. Capitalized interest totaled$1.3 million and$2.8 million for the three and nine months endedSeptember 30, 2022 , respectively. (2)During the three months endedJune 30, 2022 , the Company executed the final settlement statement with Diamondback Energy Inc. pursuant to the Company's acquisition of approximately 95,000 net acres in theWilliston Basin that was completed onOctober 21, 2021 . Pursuant to the final settlement statement, the purchase price was reduced by$4.8 million . (3)Excludes amounts attributable to the Merger. (4)Total capital expenditures reflected in the table above differs from the amounts shown in the statements of cash flows in our unaudited condensed consolidated financial statements because amounts reflected in the table include changes in accrued liabilities from the previous reporting period for capital expenditures, while the amounts presented in the statements of cash flows are presented on a cash basis. Dividends Base dividends. During the nine months endedSeptember 30, 2022 and 2021, we paid base dividends of$2.42 per share of common stock and$1.125 per share of common stock, respectively.
On
Variable dividends. During the nine months endedSeptember 30, 2022 , we paid variable dividends of$5.94 per share of common stock. No variable dividends were paid during the nine months endedSeptember 30, 2021 .
On
Special dividends. In connection with the Merger, our Board of Directors
declared a special dividend of
During the nine months ended
See "Recent Developments-Return of Capital Plan" for additional information regarding our strategy on future dividend payments. Future dividend payments will depend on the Company's earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that the Board of Directors deems relevant.
Share Repurchase Program
InFebruary 2022 , the Board of Directors authorized a share-repurchase program covering up to$150.0 million of our common stock. During the three and nine months endedSeptember 30, 2022 , we repurchased 1,174,756 shares of common stock at a weighted average price of$106.25 per common share for a total cost of$124.8 million .
In
See "Recent Developments-Return of Capital Plan" for additional information on our strategy for future share repurchases.
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Fair Value of Financial Instruments
See "Item 1. Financial Statements (Unaudited)-Note 6-Fair Value Measurements" for additional information on our derivative instruments and their related fair value measurements. See also "Item 3. Quantitative and Qualitative Disclosures about Market Risk" below.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates from those disclosed in our 2021 Annual Report, except as follows.
Business combinations. We account for business combinations under the acquisition method of accounting. Accordingly, we recognize amounts for identifiable assets acquired and liabilities assumed equal to their estimated acquisition date fair values. Transaction and integration costs associated with business combinations are expensed as incurred. We make various assumptions in estimating the fair values of assets acquired and liabilities assumed. As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. The most significant assumptions in the Merger relate to the estimated fair values of proved and unproved oil and natural gas properties. The fair values of these properties are measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of reserves, future operating and development costs, future commodity prices and a market-based weighted average cost of capital rate. The market-based weighted average cost of capital rate is subjected to additional project-specific risking factors. In addition, when appropriate, we review comparable purchases and sales of crude oil, NGL and natural gas properties within the same regions, and use that data as a proxy for fair market value; for example, the amount a willing buyer and seller would enter into in exchange for such properties. Different techniques may be used to determine fair values, including market prices (where available), comparisons to transactions for similar assets and liabilities and present values of estimated future cash flows, among others. Since these estimates involve the use of significant judgment, they can change as new information becomes available. Any excess of the acquisition price over the estimated fair value of net assets acquired is recorded as goodwill. Any excess of the estimated fair value of net assets acquired over the acquisition price is recorded in current earnings as a gain on bargain purchase. Deferred taxes are recorded for any differences between the assigned values and the tax basis of assets and liabilities. Estimated deferred taxes are based on available information concerning the tax basis of assets acquired and liabilities assumed and loss carryforwards at the acquisition date, although such estimates may change in the future as additional information becomes known.
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