The following review of operations ofCoterra Energy Inc. ("Coterra," "our," "we" and "us") for the three month periods endedMarch 31, 2022 and 2021 should be read in conjunction with our Condensed Consolidated Financial Statements and the Notes included in this Quarterly Report on Form 10-Q (this "Form 10-Q") and with the Consolidated Financial Statements, Notes and Management's Discussion and Analysis included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (our "Form 10-K").
OVERVIEW
Cimarex Merger
On
Certain financial and operational information set forth herein does not include the activity of Cimarex for periods prior to the closing of the Merger.
Financial and Operating Overview
Financial and operating results for the three months ended
•Equivalent production increased 22.7 MMBOE from 34.0 MMBOE, or 381.1 MBOEPD, in 2021 to 56.7 MMBOE, or 629.9 MBOEPD in 2022.
•Natural gas production increased 50.6 Bcf from 205.8 Bcf, or 2,287 Mmcf per day, in the 2021 period to 256.4 Bcf, or 2,850 Mmcf per day, in the 2022 period. The increase was attributable to production during the first quarter of 2022 from properties acquired in the Merger, which significantly expanded our operations, partially offset by lower production related to the timing of our drilling and completion activities in theMarcellus Shale in 2022.
•Oil production increased 8 Mmbbl from prior year. The increase was attributable to production from properties acquired in the Merger.
•NGL production increased 7 Mmbbl from prior year. The increase was attributable to production from properties acquired in the Merger.
•Average realized natural gas price was
•Average realized oil and NGL prices for the first quarter of 2022 were
•Total capital expenditures were$326 million compared to$124 million in the corresponding period of the prior year. The increase in capital expenditures was attributable to our expanded operations after the Merger. •Drilled 54 gross wells (41.4 net) with a success rate of 100 percent compared to 28 gross wells (25.1 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 38 gross wells (20.9 net) in 2022 compared to 14 gross wells (13.0 net) in the corresponding period of 2021. Wells completed includes wells completed during the period, regardless of when they were drilled.
•Average rig count during 2022 was approximately 6.0, 2.6 and 2.0 rigs in thePermian Basin ,Marcellus Shale andAnadarko Basin , respectively, compared to an average rig count of approximately 3.0 rigs in theMarcellus Shale during the corresponding period of 2021 prior to the Merger. •Paid dividends on our common stock of$0.56 per share, including$0.15 per share for regular quarterly dividend and$0.41 per share for a variable dividend inFebruary 2022 .
Impact of the COVID-19 Pandemic
The ongoing coronavirus ("COVID-19") outbreak has caused widespread illness and significant loss of life, leading governments across the world to impose severely stringent limitations on movement and human interaction. Since the outbreak
19 -------------------------------------------------------------------------------- Table of Contents of the COVID-19 pandemic, we have implemented safety and 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. 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 we will take such precautions as we believe are warranted should the need arise. 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. The long-term 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, the global availability and efficacy of treatments and vaccines and boosters and the acceptance of such treatments and vaccines by a significant portion of the population, any significant resurgence in virus transmission and infection in regions that have experienced improvements, the extent and duration of governmental and other measures implemented to try to slow the spread of the virus (whether through a continuation of existing measures or the re-imposition of prior measures), 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. In recent months, the conflict betweenRussia andUkraine has driven oil and natural gas prices up significantly, in part because of sanctions by theEuropean Union , theUnited Kingdom and theU.S. on imports of oil and gas fromRussia , and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Recent Russian actions have further contributed to global uncertainties for the future, causing even higher oil and natural gas prices. The ultimate impact of the war inUkraine will depend on future developments and the timing and extent to which normal economic and operating conditions resume.
However, continuing political and social attention to the issue of global climate change has resulted in both existing and pending national, regional, and local legislation and regulatory measures to limit or reduce emissions of greenhouse gases, such as mandates for renewable energy.
The trend in oil and natural gas regulation has been to increase regulatory restrictions and limitations on such activities. Any changes in, or more stringent enforcement of, these laws and regulations may result in delays or restrictions in permitting or development of projects or more stringent or costly construction, drilling, water management or completion activities or waste handling, storage, transport, remediation, or disposal emission or discharge requirements which could have an adverse effect on our financial results.
Our revenues, operating results, financial condition and ability to borrow funds or obtain additional capital depend substantially on prevailing commodity prices, particularly oil and natural gas prices. Material declines in commodity prices could have a material adverse effect on our operating results, financial condition, liquidity and ability to obtain financing. Lower commodity prices also may reduce the amount of oil, natural gas, and NGLs that we can produce economically. In addition, in periods of low commodity prices, we may elect to curtail a portion of our production from time to time. Historically, commodity prices have been volatile, with prices sometimes fluctuating widely, and 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 oil and natural gas reserves at economical costs are critical to our long-term success. Certain of our capital expenditures and expenses are affected by general inflation and we expect costs for the remainder of 2022 to continue to increase.
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" below and Note 5 of the Notes to the Condensed Consolidated Financial Statements for more information.
NYMEX oil and natural gas futures prices have strengthened since the reduction of pandemic-related restrictions and recent OPEC+ cooperation. Improving oil and natural gas futures prices in part reflect market expectations of limitedU.S. supply growth from publicly traded companies as a result of capital investment discipline and a focus on delivering free cash 20 -------------------------------------------------------------------------------- Table of Contents flow returns to stockholders. In addition, natural gas prices have benefited from strong worldwide liquefied natural gas ("LNG") demand, including as a result of buyers shifting from Russian gas due to theUkraine invasion, and sustained higherU.S. exports, lower associated gas growth from oil drilling and improvedU.S. economic activity. Oil price futures have improved coinciding with recovering global economic activity, lower supply from major oil producing countries, OPEC+ cooperation and moderating inventory levels. Although the current outlook on oil and 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 oil, natural gas and NGL 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.
For information about the impact of realized commodity prices on our revenues, refer to "Results of Operations" below.
Outlook
Our 2022 capital program is expected to be approximately$1.4 billion to$1.5 billion , which includes$1.2 billion to$1.3 billion for drilling and completion activities. We expect to fund these capital expenditures with our operating cash flow and, if required, cash on hand. In 2021, we drilled 114 gross wells (99.9 net) and completed 132 gross wells (108.3 net), of which 14 gross wells (13.0 net) were drilled but uncompleted in prior years. For the first three months of 2022, our capital program focused on thePermian Basin ,Marcellus Shale andAnadarko Basin , where we drilled 41.4 net wells and completed 20.9 net wells. Our capital program for the remainder of 2022 will focus on execution of our 2022 plan, which remains in line with the full-year guidance released in February. 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 oil and natural gas price environment and may adjust our capital expenditures accordingly.
FINANCIAL CONDITION
Liquidity and Capital Resources
We strive to maintain an adequate liquidity level to address commodity price volatility and risk. Our primary sources of liquidity are (1) cash on hand, (2) net cash provided by operating activities and (3) available borrowing capacity under our revolving credit facility. Our liquidity requirements consist primarily of (1) capital expenditures, (2) payment of contractual obligations, including debt maturity and interest payments, (3) working capital requirements, (4) dividend payments and (5) share repurchases. See below for additional discussion and analysis of our cash flows. We believe that, with operating cash flow, cash on hand and availability under our revolving credit facility, we have the ability to finance our spending plans over the next twelve months and, based on current expectations, for the long term. AtMarch 31, 2022 , we had no borrowings outstanding under our revolving credit facility and our unused commitments were$1.5 billion . We also have unrestricted cash on hand of$1.4 billion as ofMarch 31, 2022 .
Our revolving credit facility includes a covenant limiting our borrowing capacity based on our leverage ratio. Refer to Note 4 of the Notes to the Consolidated Financial Statements, "Debt and Credit Agreements," in our Form 10-K for further details regarding our leverage ratio.
Our debt is currently rated as investment grade by the three leading rating agencies. In determining our debt ratings, the agencies consider a number of qualitative and quantitative items including, but not limited to, current commodity prices, our liquidity position, our asset quality and reserve mix, debt levels, cost structure and growth plans. Credit ratings are not recommendations to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. There are no "rating triggers" in any of our debt agreements that would accelerate the scheduled maturities should our debt rating fall below a certain level. However, a change in our debt rating could impact our interest rate on any borrowings under our revolving credit facility and our ability to economically access debt markets in the future and could trigger the requirement to post credit support under various agreements, which could reduce the borrowing capacity under our revolving credit facility. 21 -------------------------------------------------------------------------------- Table of Contents Our investments are generally funded with cash flow provided by operating activities together with cash on hand, bank borrowings, sales of non-strategic assets, and, from time to time, private or public financing based on our monitoring of capital markets and our balance sheet. We also may use a combination of these sources of funds to refinance or retire our outstanding debt through privately negotiated transactions, open market repurchases, redemptions, exchanges, tender offers or otherwise, but we have no obligation to do so.
At
Cash Flows
Our cash flows from operating activities, investing activities and financing activities were as follows: Three Months Ended March 31, (In millions) 2022 2021 Cash flows provided by operating activities$ 1,322 $ 290 Cash flows used in investing activities (269) (123) Cash flows used in financing activities (642) (134)
Net increase in cash, cash equivalents and restricted cash
Operating Activities. Operating cash flow fluctuations are substantially driven by changes in commodity prices, production volumes and operating expenses. Commodity prices have historically been volatile, primarily as a result of supply and demand for oil and natural gas, pipeline infrastructure constraints, basis differentials, inventory storage levels, seasonal influences and geopolitical, economic and other factors. In addition, fluctuations in cash flow may result in an increase or decrease in our capital expenditures. OnOctober 1, 2021 , we and Cimarex completed the Merger. Although we expect to achieve certain general and administrative expense synergies over the long-term through cost savings, in the near-term we will continue to incur certain Merger-related costs, which in total are expected to range from$100 million to$110 million . These payments will primarily relate to workforce reductions and the associated employee severance benefits. 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. AtMarch 31, 2022 andDecember 31, 2021 , we had a working capital surplus of$938 million and$916 million , respectively. We believe we have adequate liquidity and availability under our revolving credit facility to meet our working capital requirements over the next 12 months. Net cash provided by operating activities for the three months endedMarch 31, 2022 increased by$1.0 billion compared to the same period in 2021. This increase was primarily due to higher natural gas, oil and NGL revenue, partially offset by higher operating expenses, higher cash paid on derivative settlements and higher changes in working capital and other assets and liabilities. The increase in natural gas, oil and NGL revenue was primarily due to our expanded operations after the Merger and an 81 percent increase in realized natural gas prices from the three months endedMarch 31, 2021 to the three months endedMarch 31, 2022 . 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 increased by$146 million for the first three months of 2022 compared to the first three months of 2021. The increase was primarily due to$148 million of higher capital expenditures as a result of our expanded operations after the Merger. Financing Activities. Cash flows used in financing activities increased by$508 million for the first three months of 2022 compared to the first three months of 2021. This increase was primarily due to higher dividend payments of$416.0 million as a result of the increase in our base dividend rate from$0.10 per share inApril 2021 to$0.15 per share inFebruary 2022 , the payment of a variable dividend of$0.41 per share inFebruary 2022 and additional shares issued inOctober 2021 as consideration in the Merger. The increase in cash flows from financing activities was also due to share repurchases of 22
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Capitalization
Information about our capitalization is as follows:
March 31, December 31, (In millions) 2022 2021 Debt (1)$ 3,115 $ 3,125 Stockholders' equity 11,718 11,738 Total capitalization$ 14,833 $ 14,863 Debt to total capitalization 21 % 21 % Cash and cash equivalents$ 1,447 $ 1,036
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(1)Includes$25 million of current portion of long-term debt atMarch 31, 2022 . There were no borrowings outstanding under our revolving credit facility as ofMarch 31, 2022 andDecember 31, 2021 . Share repurchases. Under our authorized share repurchase program approved inFebruary 2022 , we repurchased 8 million shares of our common stock for$192 million during the first three months of 2022. We did not repurchase any shares of our common stock during the first three months of 2021. Dividends. During the first three months of 2022, we paid dividends of$456 million , which included a quarterly dividend on our common stock of$0.15 per share and a variable dividend of$0.41 per share, and a dividend of$23.125 per share on Cimarex's redeemable preferred stock. During the first three months of 2021, we paid dividends of$40 million ($0.10 per share) on our common stock.
In
Capital and Exploration Expenditures
On an annual basis, we generally fund most of our capital expenditures, excluding any significant property acquisitions, with cash generated from operations, and, if required, borrowings under our revolving credit facility. We budget these expenditures based on our projected cash flows for the year.
The following table presents major components of our capital and exploration expenditures: Three Months Ended March 31, (In millions) 2022 2021 Capital expenditures: Drilling and facilities$ 314 $ 123 Leasehold acquisitions 1 1 Pipeline and gathering 8 - Other 3 - 326 124 Exploration expenditures(1) 6 3$ 332 $ 127
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(1)There were no exploratory dry hole costs for the first three months of 2022 and 2021.
For the first three months of 2022, our capital program was focused on thePermian Basin ,Marcellus Shale andAnadarko Basin , where we drilled 41.4 net wells and completed 20.9 net wells. We expect our 2022 capital program to be approximately$1.4 billion to$1.5 billion and will focus on thePermian Basin , where we are currently running six rigs and two completion crews, and theMarcellus Shale , where we are currently running two rigs and plan to run one to two completion crews. Refer to "Outlook" for additional information regarding the current year drilling program. We will continue to assess the commodity price environment and may adjust our capital expenditures accordingly. 23 -------------------------------------------------------------------------------- Table of Contents 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 8 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
First Three Months of 2022 and 2021 Compared
Operating Revenues Three Months Ended March 31, Variance (In millions) 2022 2021 Amount Percent Operating Revenues Natural gas $ 1,111$ 473 $ 638 135 % Oil 699 - 699 100 % NGL 245 - 245 100 % Loss on derivative instruments (391) (13) (378) (2,908) % Other 15 - 15 100 % 1,679 460 1,219 265 % Production Revenues Our production revenues are derived from the sale of our oil, natural gas and NGL production. Our 2022 production revenues were substantially higher due to the Merger, which significantly expanded our operations to include the Permian and Anadarko Basins. Increases and decreases in our revenues, profitability and future production growth are highly dependent on the commodity prices we receive. Commodity prices are market driven and we expect that future prices will continue to fluctuate due to supply and demand factors, the availability of transportation, seasonality and geopolitical, economic and other factors. Natural Gas Revenues Three Months Ended March 31, Variance Increase (Decrease) 2022 2021 Amount Percent (In millions) Price variance ($/Mcf) $ 4.33$ 2.30 $ 2.03 89 % $ 522 Volume variance (Bcf) 256.4 205.8 50.6 25 % 116 $ 638 Natural gas revenues increased$638 million primarily due to significantly higher natural gas prices and production. The increase in production was primarily related to properties acquired in the Merger, which significantly expanded our operations, partially offset by lower production related to the timing of our drilling and completion activities in theMarcellus Shale in the first three months of 2022. Oil Revenues
Oil revenues increased
24 -------------------------------------------------------------------------------- Table of Contents NGL Revenues
NGL revenues increased
Loss on Derivative Instruments
Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly cash settlements (if any) of the instruments. We have elected not to designate our derivatives as hedging instruments for accounting purposes and, therefore, we do not apply hedge accounting treatment to our derivative instruments. Consequently, changes in the fair value of our derivative instruments and cash settlements on the instruments are included as a component of operating revenues as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. The following table presents the components of "Loss on derivative instruments" for the periods indicated: Three Months Ended March 31, (In millions) 2022 2021
Cash received (paid) on settlement of derivative instruments Gas Contracts
$ (42) $ 3 Oil Contracts (129) - Non-cash loss on derivative instruments Gas Contracts (182) (16) Oil Contracts (38) -$ (391) $ (13)
Operating Costs and Expenses
Costs associated with producing oil and natural gas are substantial. Among other factors, some of these costs vary with commodity prices, some trend with the volume and commodity mix of production, some are a function of the number of wells we own, some depend on the prices charged by service companies, and some fluctuate based on a combination of the foregoing. Our operating costs and expenses in 2022 were substantially increased due to the Merger, which significantly expanded our operations to include the Permian andAnadarko Basins. In addition, our costs for services, labor and supplies have recently increased due to increased demand for those items and supply chain disruptions related to the COVID-19 pandemic and inflation.
The following table reflects our operating costs and expenses for the years indicated and a discussion of the operating costs and expenses follows.
Three Months Ended March 31, Variance Per BOE (In millions, except per BOE) 2022 2021 Amount Percent 2022 2021 Operating Expenses Direct operations$ 100 $ 17 $ 83 488 %$ 1.76 $ 0.50 Transportation, processing and gathering 233 137 96 70 % 4.11 3.99 Taxes other than income 76 5 71 1,420 % 1.34 0.15 Exploration 6 3 3 100 % 0.11 0.09 Depreciation, depletion and amortization 360 94 266 283 % 6.35 2.74 General and administrative 107 29 78 269 % 1.89 0.84$ 882 $ 285 $ 597 209 % 25
-------------------------------------------------------------------------------- Table of Contents Direct Operations Direct operations expense generally consists of costs for labor, equipment, maintenance, saltwater disposal, compression, power, treating and miscellaneous other costs (lease operating expense). Direct operations expense also includes well workover activity necessary to maintain production from existing wells. Direct operations expense consisted of lease operating expense and workover expense as follows: Three Months Ended March 31, Per BOE (In millions, except per BOE) 2022 2021 Variance 2022 2021 Direct Operating Expense Lease operating expense $ 82$ 15 $ 67 $ 1.44 $ 0.44 Workover expense 18 2 16 0.32 0.06 $ 100$ 17 $ 83 $ 1.76 $ 0.50 Lease operating and workover expense increased primarily due to our expanded operations after the Merger, along with a slight increase in workover expense in theMarcellus Shale .
Transportation, Processing and Gathering
Transportation, processing and gathering costs principally consist of expenditures to prepare and transport production from the wellhead, including gathering, fuel, compression and processing costs. Gathering costs also include costs associated with operating our gas gathering infrastructure, including operating and maintenance expenses. Costs vary by operating area and will fluctuate with increases or decreases in production volumes, contractual fees, and changes in fuel and compression costs.
Transportation, processing and gathering increased
Taxes Other Than Income
Taxes other than income consist of production (or severance) taxes, drilling impact fees, ad valorem taxes and other taxes. State and local taxing authorities assess these taxes, with production taxes being based on the volume or value of production, drilling impact fees being based on drilling activities and prevailing natural gas prices and ad valorem taxes being based on the value of properties. The following table presents taxes other than income for the periods indicated: Three Months Ended March 31, (In millions) 2022 2021 Variance
Taxes Other than Income Production $ 63 $ -$ 63 Drilling impact fees 7 5 2 Ad valorem 6 - 6 $ 76 $ 5$ 71 Taxes other than income as a percentage of production revenue 3.7 % 1.1 % Taxes other than income increased$71 million . Production taxes represented the majority of our taxes other than income, which increased primarily due to higher production related to properties acquired in the Merger and higher commodity prices. Drilling impact fees increased primarily due to higher natural gas prices. 26 -------------------------------------------------------------------------------- Table of Contents Depreciation, Depletion and Amortization
Depreciation, depletion and amortization ("DD&A") expense consisted of the following for the periods indicated:
Three Months Ended March 31, Per BOE (In millions, except per BOE) 2022 2021 Variance 2022 2021 DD&A Expense Depletion$ 339 $ 91 $ 248 $ 5.98 $ 2.68 Depreciation 19 2 17 0.33 0.03 Accretion of ARO 2 1 1 0.04 0.03$ 360 $ 94 $ 266 $ 6.35 4.16$ 2.74 Depletion of our producing properties is computed on a field basis using the units-of-production method under the successful efforts method of accounting. The economic life of each producing property depends upon the estimated proved reserves for that property, which in turn depend upon the assumed realized sales price for future production. Therefore, fluctuations in oil and gas prices will impact the level of proved developed and proved reserves used in the calculation. Higher prices generally have the effect of increasing reserves, which reduces depletion expense. Conversely, lower prices generally have the effect of decreasing reserves, which increases depletion expense. The cost of replacing production also impacts our depletion expense. In addition, changes in estimates of reserve quantities, estimates of operating and future development costs, reclassifications of properties from unproved to proved and impairments of oil and gas properties will also impact depletion expense. Our depletion expense increased$248 million due to increased production and a higher depletion rate of$5.98 per BOE for the three months endedMarch 31, 2022 , both of which are attributable to a significant increase in the value of the oil and gas properties acquired on the closing date of the Merger, compared to$2.68 per BOE for the three months endedMarch 31, 2021 . Fixed assets consist primarily of gas gathering facilities, water infrastructure, buildings, vehicles, aircraft, furniture and fixtures and computer equipment and software. These items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets, which range from three to 30 years. Also included in our depreciation expense is the depreciation of the right-of-use asset associated with our finance lease gathering system. The increase in depreciation expense during the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 is primarily due to increased depreciation on our gathering and facilities acquired in the Merger.
General and Administrative
General and administrative ("G&A") expense consists primarily of salaries and related benefits, stock-based compensation, office rent, legal and consulting fees, systems costs and other administrative costs incurred. Our G&A expense is reported net of amounts reimbursed to us by working interest owners of the oil and gas properties we operate. The table below reflects our G&A expense for the periods indicated: Three Months Ended March 31, (In millions) 2022 2021 Variance G&A Expense General and administrative expense $ 53 $ 17$ 36 Stock-based compensation expense 23 12 11 Merger-related expense 31 - 31 $ 107 $ 29$ 78
General and administrative expense increased
Periodic stock-based compensation expense will fluctuate based on the grant date fair value of awards, the number of awards, the requisite service period of the awards, estimated employee forfeitures, and the timing of the awards. Stock-based compensation expense increased$11 million primarily due to the issuance of additional shares as consideration in the Merger and increased headcount. 27 -------------------------------------------------------------------------------- Table of Contents Merger-related expenses increased$31 million primarily due to$7 million of Merger integration costs and$24 million of employee-related severance and termination benefits associated with the expected termination of certain Cimarex employees, which is being accrued over the expected transition period.
Interest Expense, net
Interest expense increased$9 million primarily due to the incremental interest expense, net of premium amortization associated with the debt assumed in the Merger of$2.2 billion . This increase was partially offset by lower interest expense due to the repayment of$88 million of our 5.58% weighted-average private placement senior notes, which matured inJanuary 2021 , and the repayment of$100 million of our 3.65% weighted-average private placement senior notes, which matured inSeptember 2021 . Income Tax Expense Three Months Ended March 31, (In millions) 2022 2021 Variance Income Tax Expense Current tax expense $ 134$ 25 $ 109 Deferred tax expense 36 12 24 $ 170$ 37 $ 133 Combined federal and state effective income tax rate 22 % 22 %
Income tax expense increased
Forward-Looking Information The statements regarding future financial and operating performance and results, the anticipated effects of, and certain other matters related to, the Merger involving Cimarex, strategic pursuits and goals, market prices, future hedging and risk management activities, 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", "potential", "possible", "may", "should", "could", "would", "will", strategy", "outlook" and similar expressions are also intended to identify forward-looking statements. We can provide no assurance that the forward-looking statements contained in this report will occur as expected, and actual results may differ materially from those included in this report. Forward-looking statements are based on current expectations and assumptions that involve a number of risks and uncertainties that could cause actual results to differ materially from those included in this report. These risks and uncertainties include, without limitation, the continuing effects of the COVID-19 pandemic and the impact thereof on our business, financial condition and results of operations and the economy as a whole, the risk that our and Cimarex's businesses will not be integrated successfully, the risk that the cost savings and any other synergies from the Merger may not be fully realized or may take longer to realize than expected, 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 oil and natural gas, impacts of inflation, labor shortages and economic disruption, including as a result of pandemics and geopolitical disruptions such as the war inUkraine , results of future drilling and marketing activity, future production and costs, 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. Forward-looking statements are based on the estimates and opinions of management at the time the statements are made. Except to the extent required by applicable law, we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Investors should note that we announce material financial information inSEC filings, press releases and public conference calls. Based on guidance from theSEC , we may use the Investors section of our website (www.coterra.com) to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. The information on our website is not part of, and is not incorporated into, this report. 28
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