COTERRA ENERGY INC. The following review of operations for the three and six month periods endedJune 30, 2021 and 2020 should be read in conjunction with our Condensed Consolidated Financial Statements and the Notes included in this Quarterly Report on Form 10-Q (Form 10-Q) and with the Consolidated Financial Statements, Notes and Management's Discussion and Analysis included in theCabot Oil & Gas Corporation Annual Report on Form 10-K for the year endedDecember 31, 2020 (Form 10-K). OVERVIEW Announced Merger Involving Cimarex OnMay 23, 2021 , we entered into an Agreement and Plan of Merger (Merger Agreement) with Cimarex Energy Co. (Cimarex) to combine via an all-stock merger transaction (Merger). Cimarex is an independent oil and gas exploration and production company with operations located primarily inTexas ,New Mexico andOklahoma . Under terms of the Merger Agreement, each share of Cimarex common stock will be converted automatically into the right to receive 4.0146 shares of our common stock at closing. No fractional shares of our common stock will be issued in the Merger, and holders of shares of Cimarex common stock will instead receive cash in lieu of fractional shares of our common stock, if any. The respective Boards of Directors of Cabot and Cimarex unanimously approved the Merger, which is still subject to the approval of the stockholders of each of Cabot and Cimarex. The Merger Agreement includes certain restrictions on the conduct of Cabot's business until the closing, such as a requirement to operate in the ordinary course of business and limitations on, among other things, dividends, stock repurchases and debt repurchases. If the Merger does not occur, and under certain circumstances, Cabot or Cimarex may be required to pay the other party a termination fee of$250.0 million or an expense reimbursement of$40.0 million . Until the approval by stockholders and subsequent closing, we must continue to operate as a stand-alone company. The Merger is expected to close in the fourth quarter of 2021, subject to stockholder approvals and other customary closing conditions. Merger-related Lawsuits In June andJuly 2021 , four putative stockholders of Cimarex filed separate lawsuits related to the Merger against Cimarex and its Board of Directors. Three of the lawsuits were filed in theUnited States District Court for the Southern District of New York and are captioned Wang v. Cimarex, et al., Case No. 1:21-cv-05672, Graff v. Cimarex, et al., Case No. 1:21-cv-05804, and Elliot v. Cimarex, et. al., Case No. 1:21-cv-06315. The other lawsuit was filed in theUnited States District Court for the District of Colorado and is captioned Woodyard v. Cimarex, et al., Case No. 1:21-cv-01850. Each of the actions is asserted only on behalf of the named plaintiff. All four actions allege violations of Section 14(a) and 20(a) of the Securities Exchange Act of 1934 (the Exchange Act) and Rule 14a-9 promulgated thereunder based on various alleged omissions of material information from the registration statement on Form S-4 filed in connection with the Merger. One of the actions (Elliot) also asserts claims that the members of the Cimarex Board of Directors breached fiduciary duties in connection with the Merger and that Cimarex aided and abetted those alleged breaches. Each action names as defendants Cimarex and each of its directors, and seeks, among other things, to enjoin the Merger (or, in the alternative, rescission or an award for rescissory damages in the event the Merger is completed), an award of costs and attorneys' and experts' fees, and such other and further relief as the court may deem just and proper. We believe that the actions are without merit. Financial and Operating Overview Financial and operating results for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 reflect the following: •Natural gas production decreased 11.4 Bcf from 417.8 Bcf, or 2,296 Mmcf per day, in the 2020 period to 406.4 Bcf, or 2,245 Mmcf per day, in the 2021 period. The decrease was driven by reduced capital spending during 2020 related to our maintenance capital program and the timing of our drilling and completion activities in theMarcellus Shale in 2021. •Average realized natural gas price was$2.18 per Mcf, 35 percent higher than the$1.62 per Mcf realized in the corresponding period of the prior year. •Total capital expenditures were$290.1 million compared to$335.6 million in the corresponding period of the prior year. 16 -------------------------------------------------------------------------------- Table of Contents •Drilled 56 gross wells (53.1 net) with a success rate of 100 percent compared to 41 gross wells (36.2 net) with a success rate of 100 percent for the corresponding period of the prior year. Wells drilled represents wells drilled to total depth during the period. •Completed 41 gross wells (37.1 net) in 2021 compared to 49 gross wells (44.2 net) in the corresponding period of 2020. Wells completed includes wells completed during the period, regardless of when they were drilled. •Average rig count during 2021 was approximately 3.1 rigs in theMarcellus Shale , compared to an average rig count of approximately 2.4 rigs during the corresponding period of 2020. •Repaid$88.0 million of our 5.58% weighted-average senior notes, which matured inJanuary 2021 . Impact of the COVID-19 Pandemic The ongoing coronavirus (COVID-19) outbreak, which theWorld Health Organization (WHO ) declared as a pandemic inMarch 2020 , has reached more than 200 countries and territories and there continues to be considerable uncertainty regarding the extent to which COVID-19 and its variants will continue to spread, the global availability and efficacy of treatments and recently deployed vaccines and the extent and duration of governmental and other measures implemented to try to slow the spread of the virus and alleviate strain on the healthcare system and the economic impacts of those actions. We have implemented preventative measures and developed response plans intended to minimize unnecessary risk of exposure and prevent infection among our employees and the communities in which we operate. Beginning inMarch 2020 , we modified certain business practices (including those related to nonoperational employee work locations and the cancellation of physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by theCenters for Disease Control and Prevention , theWHO and other governmental and regulatory authorities. In addition, we implemented and provided training on a COVID-19 Safety Policy containing personal safety protocols; provided additional personal protective equipment to our workforce; implemented rigorous COVID-19 self-assessment, contract tracing and quarantine protocols; increased cleaning protocols at all of our employee work locations; and provided additional paid leave to employees with actual or presumed COVID-19 cases. We also collaborated, and continue to collaborate, with customers, suppliers and service providers to minimize potential impacts to or disruptions of our operations and to implement longer-term emergency response protocols. Although we returned to full in-person working in ourHouston headquarters and other offices inJuly 2021 (due to the widespread availability of vaccines inthe United States ), we intend to continue to monitor developments affecting our workforce, our customers, our suppliers, our service providers and the communities in which we operate, including any significant resurgence in COVID-19 transmission and infection, and, should the need arise, we will take such precautions as we believe are warranted. Our efforts to respond to the challenges presented by the ongoing pandemic, as well as certain operational decisions we previously implemented such as our maintenance capital program, have helped to minimize the impact, and any resulting disruptions, of the pandemic to our business and operations. We have not required any loans under any COVID-19-related federal or other governmental programs to support our operations, and we do not expect to have to utilize any such funding. The eventual impact that the COVID-19 pandemic will have on our business, cash flows, liquidity, financial condition and results of operations will depend on future developments, including, among others, the duration, ultimate geographic spread and severity of the virus and its variants, any significant resurgence in virus transmission and infection in regions that have experienced improvements, the consequences of governmental and other measures designed to mitigate the spread of the virus and alleviate strain on the healthcare system, the distribution and effectiveness of therapeutic treatments and recently deployed vaccines and other actions by governmental authorities, customers, suppliers and other third parties. Market Conditions and Commodity Prices Our financial results depend on many factors, particularly commodity prices and our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by pipeline capacity constraints, inventory storage levels, basis differentials, weather conditions and other factors. Our realized prices are also further impacted by our hedging activities. Our revenues, operating results, financial condition and ability to borrow funds or obtain additional capital depend substantially on prevailing commodity prices, particularly natural gas prices. Since substantially all of our production and reserves are natural gas, significant declines in natural gas prices could have a material adverse effect on our operating results, financial condition, liquidity and ability to obtain financing. Lower natural gas prices also may reduce the amount of natural gas that we can produce economically. In addition, in periods of low natural gas prices, we may elect to curtail a portion of our production from time to time. Historically, natural gas prices have been volatile, with prices sometimes fluctuating widely, and 17 -------------------------------------------------------------------------------- Table of Contents they may remain volatile. As a result, we cannot accurately predict future commodity prices and, therefore, cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our capital program, production volumes or revenues. In addition to commodity prices and production volumes, finding and developing sufficient amounts of natural gas reserves at economical costs are critical to our long-term success. We account for our derivative instruments on a mark-to-market basis, with changes in fair value recognized in operating revenues in the Condensed Consolidated Statement of Operations. As a result of these mark-to-market adjustments associated with our derivative instruments, we will experience volatility in our earnings due to commodity price volatility. Refer to "Results of Operations - Impact of Derivative Instruments on Operating Revenues" below and Note 5 of the Notes to the Condensed Consolidated Financial Statements for more information. One of the impacts of the COVID-19 pandemic was a significant reduction in demand for crude oil, and to a lesser extent, natural gas. The supply/demand imbalance driven by the COVID-19 pandemic and production disagreements inMarch 2020 among members of theOrganization of Petroleum Exporting Countries and certain other oil exporting countries (OPEC+) led to a significant global economic contraction generally in 2020 and has continued to have disruptive impacts on the oil and gas industry. Although the members of OPEC+ agreed inApril 2020 to cut oil production and have subsequently taken actions that generally have supported commodity prices, andU.S. production has declined, oil prices and natural gas prices remained low, relative to pre-pandemic levels, through the first quarter of 2021, as the oversupply and lack of demand in the market persisted. Natural gas prices increased in the second quarter of 2021 compared to the second quarter of 2020 and have further strengthened after the end of the second quarter of 2021, in part due to greater demand during the early summer heating season and slightly decreasing production levels. Meanwhile, NYMEX natural gas futures prices have shown improvements since the reduction of pandemic-related restrictions and recent OPEC+ price disagreements. The improvements in natural gas futures prices are based on market expectations that declines in future natural gas supplies due to a substantial reduction of associated gas related to the curtailment of operations in oil basins throughoutthe United States will more than offset the lower demand recently experienced with the COVID-19 pandemic. While the current outlook on natural gas prices is generally favorable and our operations have not been significantly impacted in the short-term, in the event further disruptions occur and continue for an extended period of time, our operations could be adversely impacted, commodity prices could decline and our costs may increase. Although we are unable to predict future commodity prices, at current natural gas price levels, we do not believe that an impairment of our oil and gas properties is reasonably likely to occur in the near future; however, in the event that commodity prices significantly decline from current levels, our management would evaluate the recoverability of the carrying value of our oil and gas properties. We currently believe that we are well-positioned to manage the challenges presented by the ongoing low existing commodity pricing environment, and we believe we can endure continued volatility in current and future commodity prices by continuing to: •Exercise discipline in our capital program with the expectation of funding our capital expenditures with cash on hand, operating cash flows, and if required, borrowings under our revolving credit facility; •Manage our portfolio by strategically curtailing production in periods of weaker natural gas prices; •Optimize our drilling, completion and operational efficiencies; •Manage our balance sheet, which we believe provides sufficient availability under our revolving credit facility and existing cash balances to meet our capital requirements and maintain compliance with our debt covenants; and •Manage price risk by strategically hedging our production. For information about the impact of realized commodity prices on our revenues, refer to "Results of Operations" below. Outlook We expect our 2021 capital program to be approximately$530.0 million to$540.0 million , which contemplates a maintenance capital program as a result of the weak natural gas price environment experienced in recent periods. We expect to fund these capital expenditures with our operating cash flow and, if required, cash on hand. In 2020, we drilled 74 gross wells (64.3 net) and completed 86 gross wells (77.3 net), of which 26 gross wells (26.0 net) were drilled but uncompleted in prior years. For the full year of 2021, our capital program will focus on theMarcellus Shale , where we expect to drill and complete 80 net wells. We allocate our planned program for capital expenditures based on market conditions, return on capital and free cash flow expectations and availability of services and human resources. We will continue to assess the natural gas price environment and may adjust our capital expenditures accordingly. 18 -------------------------------------------------------------------------------- Table of Contents Financial Condition Capital Resources and Liquidity Our primary source of cash for the six months endedJune 30, 2021 was from net cash flows related to the sale of natural gas production. These cash flows were used to fund our capital expenditures, principal and interest payments on debt and payment of dividends. See below for additional discussion and analysis of our cash flows. The borrowing base under the terms of our revolving credit facility is redetermined annually in April. In addition, either we or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties. EffectiveApril 21, 2021 , the borrowing base and available commitments were reaffirmed at$3.2 billion and$1.5 billion , respectively. OnJune 17, 2021 , we entered into an amendment to the credit agreement relating to our revolving credit facility to, among other things, remove the requirement that certain of our restricted subsidiaries become guarantors under the credit agreement, expand the permissible indebtedness that may be held or incurred by a restricted subsidiary and make certain other changes to permit us to complete the Merger. The effectiveness of the credit agreement amendment is conditioned upon, among other things, the completion of the Merger. AtJune 30, 2021 and during the six months then ended, we had no borrowings outstanding under our revolving credit facility and our unused commitments were$1.5 billion . Refer to Note 4 of the Notes to the Condensed Consolidated Financial Statements for more information. A decline in commodity prices could result in the future reduction of our borrowing base and related commitments under our revolving credit facility. Unless commodity prices decline significantly from current levels, we do not believe that any such reductions would have a significant impact on our ability to service our debt and fund our drilling program and related operations. We strive to manage our debt at a level below the available credit line in order to maintain borrowing capacity. Our revolving credit facility includes a covenant limiting our total debt. We believe that, with operating cash flows, cash on hand and availability under our revolving credit facility, we have the capacity to fund our spending plans. AtJune 30, 2021 , we were in compliance with all financial and other covenants applicable to our revolving credit facility and senior notes. Refer to our Form 10-K for further discussion of our restrictive financial covenants. Cash Flows Our cash flows from operating activities, investing activities and financing activities are as follows: Six Months Ended June 30, (In thousands) 2021 2020 Cash flows provided by operating activities$ 469,469 $ 341,333 Cash flows used in investing activities (274,827) (340,367) Cash flows used in financing activities (177,419) (86,007)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
17,223
Operating Activities. Fluctuations in our operating cash flows are substantially driven by commodity prices, changes in our production volumes and operating expenses. Commodity prices have historically been volatile, primarily as a result of supply and demand for natural gas, pipeline infrastructure constraints, basis differentials, inventory storage levels, seasonal influences and other factors. In addition, fluctuations in cash flows may result in an increase or decrease in our capital expenditures. Our working capital is substantially influenced by the variables discussed above and fluctuates based on the timing and amount of borrowings and repayments under our revolving credit facility, repayments of debt, the timing of cash collections and payments on our trade accounts receivable and payable, respectively, payment of dividends, repurchases of our securities and changes in the fair value of our commodity derivative activity. From time to time, our working capital will reflect a deficit, while at other times it will reflect a surplus. This fluctuation is not unusual. AtJune 30, 2021 andDecember 31, 2020 , we had a working capital surplus of$17.4 million and a surplus of$25.5 million , respectively. We believe that we have adequate liquidity and availability under our revolving credit facility to meet our working capital requirements over the next 12 months. 19 -------------------------------------------------------------------------------- Table of Contents Net cash provided by operating activities in the first six months of 2021 increased by$128.1 million compared to the first six months of 2020. This increase was primarily due to higher natural gas revenues, partially offset by lower cash received from derivative settlements and net cash outflows related to certain other current asset and liability balances reflected in working capital compared to the corresponding period of the prior year. The increase in natural gas revenues was primarily due to higher realized prices, partially offset by slightly lower production. Average realized natural gas prices increased by 35 percent for the first six months of 2021 compared to the first six months of 2020. The slight decrease in natural gas production for the first six months of 2021 compared to the first six months of 2020 was driven by reduced capital spending during 2020 related to our maintenance capital program and the timing of our drilling and completion activities in theMarcellus Shale in 2021. Refer to "Results of Operations" below for additional information relative to commodity price, production and operating expense fluctuations. We are unable to predict future commodity prices and, as a result, cannot provide any assurance about future levels of net cash provided by operating activities. Investing Activities. Cash flows used in investing activities decreased by$65.5 million for the first six months of 2021 compared to the first six months of 2020. The decrease was primarily due to$56.2 million of lower capital expenditures as a result of the continuation of our maintenance capital program in 2021 and a decrease in net cash outflows of$9.4 million related to the sale of equity method investments in 2020. Financing Activities. Cash flows used in financing activities increased by$91.4 million for the first six months of 2021 compared to the first six months of 2020. This increase was primarily due to$88.0 million higher repayments of debt in 2021 compared to 2020 and$4.2 million higher dividends paid as a result of an increase in our dividend rate from$0.10 per share to$0.11 per share inApril 2021 . Capitalization Information about our capitalization is as follows: June 30, December 31, (In thousands) 2021 2020 Debt (1)$ 1,046,316 $ 1,133,924 Stockholders' equity 2,299,895 2,215,707 Total capitalization$ 3,346,211 $ 3,349,631 Debt to total capitalization 31 % 34 % Cash and cash equivalents$ 158,147 $ 140,113
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(1)Includes$100.0 million and$188.0 million of current portion of long-term debt atJune 30, 2021 andDecember 31, 2020 , respectively. There were no borrowings outstanding under our revolving credit facility as ofJune 30, 2021 andDecember 31, 2020 . We did not repurchase any shares of our common stock during the first six months of 2021 and 2020. During the first six months of 2021 and 2020, we paid dividends of$83.9 million ($0.21 per share) and$79.7 million ($0.20 per share), respectively, on our common stock. InApril 2021 , our Board of Directors approved an increase in the quarterly dividend on our common stock from$0.10 per share to$0.11 per share. Capital and Exploration Expenditures On an annual basis, we generally fund most of our capital expenditures, excluding any significant property acquisitions, with operating cash flows, cash on hand and, if required, borrowings under our revolving credit facility. We budget these expenditures based on our projected cash flows for the year. 20 -------------------------------------------------------------------------------- Table of Contents The following table presents major components of our capital and exploration expenditures: Six Months Ended June 30, (In thousands) 2021 2020 Capital expenditures: Drilling and facilities$ 284,198 $ 329,843 Leasehold acquisitions 2,434 1,331 Other 3,429 4,395 290,061 335,569 Exploration expenditures(1) 4,995 6,769$ 295,056 $ 342,338
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(1)There were no exploratory dry hole costs for the first six months of 2021. Exploration expenditures include$2.0 million of exploratory dry hole costs for the first six months of 2020. For the full year of 2021, we plan to allocate substantially all of our capital to theMarcellus Shale , where we expect to drill and complete 80 net wells. Our 2021 capital program is expected to be approximately$530.0 million to$540.0 million . Refer to "Outlook" for additional information regarding the current year drilling program. We will continue to assess the commodity price environment and may increase or decrease our capital expenditures accordingly. Contractual Obligations We have various contractual obligations in the normal course of our operations. There have been no material changes to our contractual obligations described under "Transportation and Gathering Agreements" and "Lease Commitments" as disclosed in Note 9 of the Notes to the Consolidated Financial Statements and the obligations described under "Contractual Obligations" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Form 10-K. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Refer to our Form 10-K for further discussion of our critical accounting policies. Results of Operations Second Quarters of 2021 and 2020 Compared We reported net income in the second quarter of 2021 of$30.5 million , or$0.08 per share, compared to net income of$30.4 million , or$0.08 per share, in the second quarter of 2020. Although net income was flat over the periods, net income in the second quarter of 2021 was impacted by lower operating expenses and interest expense, partially offset by lower operating revenues and higher income tax expense. Revenues Our revenues vary from year to year as a result of changes in commodity prices and production volumes. Below is a discussion of revenue, price and volume variances. Three Months Ended June 30, Variance (In thousands) 2021 2020 Amount Percent Operating Revenues Natural gas$ 411,718 $ 288,286 $ 123,432 43 % (Loss) gain on derivative instruments (87,121) 43,974 (131,095) (298) % Other 70 88 (18) (20) %$ 324,667 $ 332,348 $ (7,681) (2) % 21
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Natural Gas Revenue Price and Volume Variances
Three Months Ended June 30, Variance Increase
(Decrease)
2021 2020 Amount Percent (In thousands)
Average price ($/Mcf) $ 2.05 $ 1.42 $ 0.63 44 % $ 126,378
Volume (Bcf) 200.6 202.9 (2.3) (1) % (2,946)
Total $ 123,432
The increase in natural gas revenues of $123.4 million was primarily due to
higher natural gas prices, partially offset by a slight decrease in production.
Production decreased due to reduced capital spending during 2020 related to our
maintenance capital program and the timing of our drilling and completion
activities in the Marcellus Shale in 2021.
Impact of Derivative Instruments on Operating Revenues
Three Months Ended
June 30,
(In thousands) 2021 2020Cash received (paid) on settlement of derivative instruments (Loss) gain on derivative instruments
$ (347) $ 19,423 Non-cash gain (loss) on derivative instruments (Loss) gain on derivative instruments (86,774) 24,551$ (87,121) $ 43,974 Operating and Other Expenses Three Months Ended June 30, Variance (In thousands) 2021 2020 Amount Percent Operating Expenses Direct operations$ 16,154 $ 17,423 $ (1,269) (7) % Transportation and gathering 133,488 135,249 (1,761) (1) % Taxes other than income 4,183 3,352 831 25 % Exploration 2,368 4,579 (2,211) (48) % Depreciation, depletion and amortization 91,549 94,622 (3,073) (3) % General and administrative 23,037 23,166 (129) (1) %$ 270,779 $ 278,391 $ (7,612) (3) % Gain (loss) on sale of assets $ 20$ (241) $ 261 (108) % Interest expense, net 12,558 14,543 (1,985) (14) % Other expense 46 48 (2) (4) % Income tax expense 10,840 8,751 2,089 24 % Total costs and expenses from operations decreased by$7.6 million in the second quarter of 2021 compared to the corresponding period of 2020. The primary reasons for this fluctuation are as follows: •Direct operations decreased$1.3 million , primarily due to a decrease in production. •Transportation and gathering decreased$1.8 million , primarily due to lower gathering charges as a result of lower production. •Taxes other than income increased$0.8 million , primarily due to$0.9 million higher drilling impact fees driven by an increase in rates associated with higher natural gas prices. •Exploration decreased$2.2 million , primarily due to$2.1 million of dry hole expense recognized in the second quarter of 2020. 22 -------------------------------------------------------------------------------- Table of Contents •Depreciation, depletion and amortization (DD&A) decreased$3.1 million , primarily due to lower amortization of unproved properties of$2.1 million and lower DD&A of$1.1 million in the second quarter of 2021 compared to the second quarter of 2020. Amortization of unproved properties decreased due to lower amortization rates. The decrease in DD&A was primarily due to lower equivalent production. The DD&A rate was flat at$0.44 per Mcfe for the second quarter of 2021 and 2020, respectively. •General and administrative decreased$0.1 million , primarily due to lower stock-based compensation expense of$3.9 million associated with certain of our market-based performance awards and a$2.8 million decrease in previously accrued fines and penalties related to compliance matters with theOffice of Natural Resource Revenue (ONRR), partially offset by$6.2 million of transaction-related costs associated with the pending Merger. The remaining changes in general and administrative expenses were not individually significant. Interest Expense, net Interest expense, net decreased$2.0 million , primarily due to the repayment of$87.0 million of our 6.51% weighted-average senior notes, which matured inJuly 2020 , and the repayment of$88.0 million of our 5.58% weighted-average senior notes, which matured inJanuary 2021 . Income Tax Expense Income tax expense increased$2.1 million due to higher pre-tax income and a higher effective tax rate. The effective tax rates for the second quarter of 2021 and 2020 were 26.2 percent and 22.4 percent, respectively. The effective tax rate was higher for the second quarter of 2021 compared to the second quarter of 2020, primarily due to an increase in the blended state statutory tax rate as a result of enacted tax rate increases in the states in which we operate, partially offset by non-recurring discrete items recorded during the second quarter of 2021 versus the second quarter of 2020. First Six Months of 2021 and 2020 Compared We reported net income in the first six months of 2021 of$156.8 million , or$0.39 per share, compared to net income of$84.3 million , or$0.21 per share, in the first six months of 2020. The increase in net income was primarily due to higher operating revenues and lower operating expenses, partially offset by higher income tax expense. Revenues Our revenues vary from year to year as a result of changes in commodity prices and production volumes. Below is a discussion of revenue, price and volume variances. Six Months Ended June 30, Variance (In thousands) 2021 2020 Amount Percent Operating Revenues Natural gas$ 884,577 $ 658,626 $ 225,951 34 % (Loss) gain on derivative instruments (100,358) 60,036 (160,394) (267) % Other 129 143 (14) (10) %$ 784,348 $ 718,805 $ 65,543 9 %
Natural Gas Revenue Price and Volume Variances
Six Months Ended June 30, Variance Increase
(Decrease)
2021 2020 Amount Percent (In thousands)
Average price ($/Mcf) $ 2.18 $ 1.58 $ 0.60 38 % $ 243,927
Volume (Bcf) 406.4 417.8 (11.4) (3) % (17,976)
Total $ 225,951 The increase in natural gas revenues of
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Impact of Derivative Instruments on Operating Revenues
Six Months Ended
June 30,
(In thousands) 2021 2020Cash received (paid) on settlement of derivative instruments (Loss) gain on derivative instruments
$ 3,050 $ 19,423 Non-cash gain (loss) on derivative instruments (Loss) gain on derivative instruments (103,408) 40,613$ (100,358) $ 60,036 Operating and Other Expenses Six Months Ended June 30, Variance (In thousands) 2021 2020 Amount Percent Operating Expenses Direct operations$ 33,030 $ 34,667 $ (1,637) (5) % Transportation and gathering 270,190 278,581 (8,391) (3) % Taxes other than income 8,988 7,090 1,898 27 % Exploration 4,995 6,769 (1,774) (26) % Depreciation, depletion and amortization 185,697 194,757 (9,060) (5) % General and administrative 52,193 56,595 (4,402) (8) %$ 555,093 $ 578,459 $ (23,366) (4) % Loss on equity method investments $ -$ (59) $ 59 (100) % Gain (loss) on sale of assets 91 (170) (261) (154) % Interest expense, net 24,935 28,754 (3,819) (13) % Other expense 92 114 (22) (19) % Income tax expense 47,501 26,965 20,536 76 % Total costs and expenses from operations decreased by$23.4 million in the first six months of 2021 compared to the corresponding period of 2020. The primary reasons for this fluctuation are as follows: •Direct operations decreased$1.6 million , primarily due to a decrease in production. •Transportation and gathering decreased$8.4 million , primarily due to lower gathering charges as a result of lower production. •Taxes other than income increased$1.9 million , primarily due to$2.0 million higher drilling impact fees driven by an increase in rates associated with higher natural gas prices. •Exploration expense decreased$1.8 million , primarily due to$2.1 million of dry hole expense recognized in the second quarter of 2020. •Depreciation, depletion and amortization decreased$9.1 million , primarily due to lower DD&A of$4.9 million and lower amortization of unproved properties of$4.4 million . The decrease in DD&A was due to lower production in 2021 compared to the corresponding period of 2020. The DD&A rate was flat at$0.44 per Mcfe for the first six months of 2021 and 2020, respectively. Amortization of unproved properties decreased due to lower amortization rates. •General and administrative decreased$4.4 million , primarily due to lower stock-based compensation expense of$8.6 million associated with certain of our market-based performance awards and a$2.8 million decrease in previously accrued fines and penalties related to compliance matters with the ONRR. These decreases were partially offset by$6.2 million of transaction-related costs incurred in the second quarter of 2021 related to the pending Merger and$2.4 million of higher severance costs incurred in the first quarter of 2021 related to our early retirement program. The remaining changes in general and administrative expenses were not individually significant. 24 -------------------------------------------------------------------------------- Table of Contents Interest Expense, net Interest expense, net decreased$3.8 million , primarily due to the repayment of$87.0 million of our 6.51% weighted-average senior notes, which matured inJuly 2020 , and the repayment of$88.0 million of our 5.58% weighted-average senior notes, which matured inJanuary 2021 . Income Tax Expense Income tax expense increased$20.5 million due to higher pre-tax income, partially offset by a lower effective tax rate. The effective tax rates for the first six months of 2021 and 2020 were 23.2 percent and 24.2 percent, respectively. The effective tax rate was lower for the first six months of 2021 compared to the first six months of 2020 due to a decrease in tax expense related to book compensation expense exceeding the federal and state tax deductions for employee stock-based compensation awards that vested during the period and a decrease in non-deductible executive compensation, partially offset by an increase in deferred tax expense during the first six months of 2021 from the increase in the blended state statutory tax rate as a result of enacted tax rate increases in the states in which we operate. Forward-Looking Information The statements regarding future financial and operating performance and results, strategic pursuits and goals, market prices, future hedging and risk management activities, the anticipated benefits of the proposed merger transaction involving us and Cimarex, the anticipated impact of the proposed merger transaction on the combined business and future financial and operating results, the expected amount and the timing of synergies from the proposed merger transaction, the anticipated timing of the closing of the proposed merger transaction and other statements that are not historical facts contained in this report are forward-looking statements. The words "expect," "project," "estimate," "believe," "anticipate," "intend," "budget," "plan," "forecast," "target," "predict," "may," "should," "could" and similar expressions are also intended to identify forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, the continuing effects of the COVID-19 pandemic and the impact thereof on our business, financial condition and results of operations, the availability of cash on hand and other sources of liquidity to fund our capital expenditures, actions by, or disputes among or between, members of OPEC+, market factors, market prices (including geographic basis differentials) of natural gas, results of future drilling and marketing activity, future production and costs, the ability to obtain the requisite Cabot and Cimarex stockholder approvals, the risk that an event, change or other circumstances could give rise to the termination of the Merger Agreement, the risk that a condition to closing of the Merger may not be satisfied on a timely basis or at all, the length of time necessary to close the proposed merger transaction, the risk that the businesses will not be integrated successfully, the risk that the cost savings and any other synergies from the transaction may not be fully realized or may take longer to realize than expected, the risk of litigation related to the proposed merger transaction, legislative and regulatory initiatives, electronic, cyber or physical security breaches and other factors detailed herein and in our otherSecurities and Exchange Commission (SEC) filings. Refer to "Risk Factors" in Item 1A of Part I of our Form 10-K and in Item 1A of Part II of this Form 10-Q for additional information about these risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Market Risk Our primary market risk is exposure to natural gas prices. Realized prices are mainly driven by spot market prices for North American natural gas production, which can be volatile and unpredictable. Derivative Instruments and Risk Management Activities Our risk management strategy is designed to reduce the risk of commodity price volatility for our production in the natural gas markets through the use of financial commodity derivatives. A committee that consists of members of senior management oversees our risk management activities. Our financial commodity derivatives generally cover a portion of our production and provide only partial price protection by limiting the benefit to us of increases in prices, while protecting us in the event of price declines. Further, if any of our counterparties defaulted, this protection might be limited as we might not receive the full benefit of our financial commodity derivatives. Please read the discussion below as well as Note 6 of the Notes to the Consolidated Financial Statements in our Form 10-K for a more detailed discussion of our derivative instruments. Periodically, we enter into financial commodity derivatives including collar and swap agreements, to protect against exposure to commodity price declines related to our natural gas production. Our credit agreement restricts our ability to enter into financial commodity derivatives other than to hedge or mitigate risks to which we have actual or projected exposure or as permitted under our risk management policies and not subjecting us to material speculative risks. All of our financial 25 -------------------------------------------------------------------------------- Table of Contents derivatives are used for risk management purposes and are not held for trading purposes. Under the collar agreements, if the index price rises above the ceiling price, we pay the counterparty. If the index price falls below the floor price, the counterparty pays us. Under the swap agreements, we receive a fixed price on a notional quantity of natural gas in exchange for paying a variable price based on a market-based index, such as the NYMEX natural gas futures. As ofJune 30, 2021 , we had the following outstanding financial commodity derivatives: Collars Estimated Fair Floor Ceiling Swaps Value Asset Range Weighted-Average Range Weighted-Average Weighted-Average (Liability) Type of Contract Volume (Mmbtu) Contract Period ($/Mmbtu) ($/Mmbtu) ($/Mmbtu) ($/Mmbtu) ($/Mmbtu) (In thousands) Natural gas (NYMEX) 9,200,000 Jul. 2021-Dec. 2021 $ 2.74 $ (8,389) Natural gas (NYMEX) 82,800,000 Jul. 2021-Dec. 2021$2.50 -$2.85 $ 2.68$2.88 -$3.80 $ 3.05 (53,364) Natural gas (NYMEX) 6,150,000 Jul. 2021-Oct. 2021 $ - $ 2.50 $ - $ 2.80 (5,141) Natural gas (NYMEX) 12,300,000 Jul. 2021-Oct. 2021 $ 2.78 (10,478) $ (77,372) The amounts set forth in the table above represent our total unrealized derivative position atJune 30, 2021 and exclude the impact of non-performance risk. Non-performance risk is considered in the fair value of our derivative instruments that are recorded in our Condensed Consolidated Financial Statements and is primarily evaluated by reviewing credit default swap spreads for the various financial institutions with which we have derivative contracts, while our non-performance risk is evaluated using a market credit spread provided by several of our banks. InJuly 2021 , we entered into the following financial commodity derivatives: Swaps Weighted-Average Type of Contract Volume (Mmbtu) Contract Period ($/Mmbtu) Natural gas (NYMEX) 9,200,000 Oct. 2021-Dec. 2021 $ 4.01 Natural gas (NYMEX) 9,150,000 Nov. 2021-Dec. 2021 $ 4.02 A significant portion of our expected natural gas production for 2021 and beyond is currently unhedged and directly exposed to the volatility in natural gas prices, whether favorable or unfavorable. During the first six months of 2021, natural gas collars with floor prices ranging from$2.50 to$2.85 per Mmbtu and ceiling prices ranging from$2.80 to$3.94 per Mmbtu covered 83.5 Bcf, or 21 percent of natural gas production at a weighted-average price of$2.81 per Mmbtu. Natural gas swaps covered 17.6 Bcf, or four percent of natural gas production at a weighted-average price of$2.71 per Mmbtu. We are exposed to market risk on financial commodity derivative instruments to the extent of changes in market prices of natural gas. However, the market risk exposure on these derivative contracts is generally offset by the gain or loss recognized upon the ultimate sale of the commodity. Although notional contract amounts are used to express the volume of natural gas agreements, the amounts that can be subject to credit risk in the event of non-performance by third parties are substantially smaller. Our counterparties are primarily commercial banks and financial service institutions that our management believes present minimal credit risk and our derivative contracts are with multiple counterparties to minimize our exposure to any individual counterparty. We perform both quantitative and qualitative assessments of these counterparties based on their credit ratings and credit default swap rates where applicable. We have not incurred any losses related to non-performance risk of our counterparties and we do not anticipate any material impact on our financial results due to non-performance by third parties. However, we cannot be certain that we will not experience such losses in the future. The preceding paragraphs contain forward-looking information concerning future production and projected gains and losses, which may be impacted by both production and changes in the future commodity prices. Refer to "Forward-Looking Information" for further details. Fair Value of Other Financial Instruments The estimated fair value of other financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The carrying amounts reported in the Condensed Consolidated Balance Sheet for cash, cash equivalents and restricted cash approximate fair value due to the short-term maturities of these instruments. 26 -------------------------------------------------------------------------------- Table of Contents We use available market data and valuation methodologies to estimate the fair value of debt. The fair value of debt is the estimated amount we would have to pay a third party to assume the debt, including a credit spread for the difference between the issue rate and the period end market rate. The credit spread is our default or repayment risk. The credit spread (premium or discount) is determined by comparing our outstanding debt to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt. The estimated fair value of our outstanding debt is based on interest rates currently available to us. The carrying amount and estimated fair value of debt is as follow: June 30, 2021 December 31, 2020 Carrying Estimated Fair Carrying Estimated Fair (In thousands) Amount Value Amount Value Long-term debt$ 1,046,316 $ 1,118,321 $ 1,133,924 $ 1,213,811 Current maturities (100,000) (100,444) (188,000) (189,332) Long-term debt, excluding current maturities$ 946,316
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