COTERRA ENERGY INC. The following review of operations ofCoterra Energy Inc. ("Coterra," "our," "we" and "us") for the three and six month periods endedJune 30, 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
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 six months ended
•Equivalent production increased 46.5 MMboe from 67.7 MMboe, or 374.2 MBoepd, in 2021 to 114.2 MMboe, or 630.8 MBoepd in 2022. The increase was attributable to production during the first half of 2022 from properties acquired in the Merger, which significantly expanded our operations. •Natural gas production increased 103.9 Bcf from 406.4 Bcf, or 2,245.5 Mmcf per day, in the 2021 period to 510.3 Bcf, or 2,819.4 Mmcf per day, in the 2022 period. The increase was attributable to production during the first half of 2022 from properties acquired in the Merger, which significantly expanded our operations.
•Oil production increased 16 Mmbbl from prior year. The increase was attributable to production from properties acquired in the Merger.
•NGL production increased 14 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 six months ended
•Total capital expenditures were$798 million compared to$290 million in the corresponding period of the prior year. The increase in capital expenditures was attributable to our expanded operations after the Merger. •Drilled 127 gross wells (88.3 net) with a success rate of 100 percent compared to 56 gross wells (53.1 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 109 gross wells (68.3 net) in 2022 compared to 41 gross wells (37.1 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 6.3, 2.8 and 1.7 rigs in thePermian Basin ,Marcellus Shale andAnadarko Basin , respectively, compared to an average rig count of approximately 3.1 rigs in theMarcellus Shale during the corresponding period of 2021. •Paid dividends on our common stock of$1.16 per share, including$0.30 and$0.86 per share for regular quarterly and variable dividends, respectively, as part of the Company's returns-focused strategy. •Repurchased 20 million shares of the Company's common stock for$513 million under the Company's current share repurchase program. 20 -------------------------------------------------------------------------------- Table of Contents Impact of the COVID-19 Pandemic The ongoing coronavirus ("COVID-19") pandemic has caused widespread illness and significant loss of life, leading governments across the world to impose severely stringent limitations on movement and human interaction. 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 and safety and preventative measures developed to minimize unnecessary risk of exposure and prevent infection among our employees and the communities in which we operate, 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, vaccines and boosters, vaccination and immunization rates, 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 (including through 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 find, develop and 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. The ongoing 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 may have further global economic consequences, including disruptions of the global energy markets and the amplification of inflation and supply chain constraints. 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. In addition, the issue of, and increasing political and social attention on, climate change has resulted in both existing and pending national, regional and local legislation and regulatory measures, such as mandates for renewable energy and emissions reductions, targeted at limiting or reducing emissions of greenhouse gases. Changes in these laws or regulations may result in delays or restrictions in permitting and the development of projects, may result in increased costs and may impair our ability to move forward with our construction, completions, drilling, water management, waste handling, storage, transport and remediation activities, any of 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, and we may curtail our production during such low commodity price environments. Commodity prices have been and remain volatile, with prices sometimes fluctuating widely. Because of this volatility, we cannot accurately predict future commodity prices or, in turn determine with any degree of certainty what effect increases or decreases in these prices could have on our capital program, production volumes or revenues. Our long-term success also depends on finding and developing sufficient amounts of oil and natural gas reserves at economical costs. Certain of our capital expenditures and expenses are affected by general inflation, which has continued to rise throughout 2022, and we expect inflation to be elevated for the remainder of 2022, as well as specific increased costs for supplies and services needed in our operations, such as costs of drilling pipe, pipelines, drilling date rates, completion services and labor. Our realized prices are also further impacted by our hedging activities. 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. 21 -------------------------------------------------------------------------------- Table of Contents NYMEX oil and natural gas futures prices have strengthened since the reduction of pandemic-related restrictions and 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 flow returns to stockholders. In addition, natural gas prices have benefited from strong worldwide liquefied natural gas ("LNG") demand, which is, in part, a result of buyers shifting from Russian gas due to theUkraine invasion, sustained higherU.S. exports, lower associated gas growth from oil drilling and improvedU.S. economic activity. Oil price futures have improved (although such future prices are still lower than current spot prices) 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 continue to 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 or costs increase significantly 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.
Other Issues and Contingencies
Climate-related regulations and climate-related business trends may impact our business, financial conditions and results of our operations, and we may experience the following:
•decreased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources; •increased demand for goods that result in lower emissions than competing products; •increased competition to develop innovative new products that result in lower emissions; •increased demand for generation and transmission of energy from alternative energy sources; and •reputational risks resulting from our operations or oil, natural gas and NGLs that we sell to the extent they are perceived to produce material greenhouse gas emissions. Outlook Our 2022 capital program is expected to be approximately$1.6 billion to$1.7 billion , which includes$1.45 billion to$1.55 billion for drilling and completion activities. Our full-year expected 2022 capital program increased due to inflation and a modest increase in activity for the remaining half of 2022. 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 six months endedJune 30, 2022 , our capital program focused on thePermian Basin ,Marcellus Shale andAnadarko Basin , where we drilled 88.3 net wells and completed 68.3 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.
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As of June 30, 2022 , we had no borrowings outstanding under our revolving credit
facility, our unused commitments were $1.5 billion and we had unrestricted cash
on hand of $1.1 billion .
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 credit ratings, the agencies consider a number of qualitative and quantitative items including, but not limited to, current commodity prices, our liquidity position, our leverage ratios, our financial results, our asset quality and reserve mix, debt levels and cost structure. 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 credit rating fall below a certain level. However, a change in our credit 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. 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:
Six Months Ended
June 30,
(In millions) 2022 2021
Cash flows provided by operating activities $ 2,201 $ 469
Cash flows used in investing activities (741) (274)
Cash flows used in financing activities (1,437) (178)
Net increase in cash, cash equivalents and restricted cash $
23$ 17 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. AtJune 30, 2022 andDecember 31, 2021 , we had a working capital surplus of$1.3 billion 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 six months endedJune 30, 2022 increased by$1.7 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 a larger decrease in working capital and other assets and 23 -------------------------------------------------------------------------------- Table of Contents liabilities. The increase in natural gas, oil and NGL revenue was primarily due to our expanded operations after the Merger and an increase in realized natural gas prices from the six months endedJune 30, 2021 to the six months endedJune 30, 2022 . Refer to "Results of Operations" below for additional information relative to commodity prices, 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$467 million for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . The increase was primarily due to$471 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$1.3 billion for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . This increase was primarily due to higher dividend payments of$856 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 variable dividends of$0.41 and$0.45 per share inFebruary 2022 andMay 2022 , respectively, and additional shares issued inOctober 2021 as consideration in the Merger. The increase in cash flows used in financing activities was also due to share repurchases of$487 million during the six months endedJune 30, 2022 . These increases were partially offset by an$88 million decrease in debt repayments compared to the six months endedJune 30, 2021 .
Capitalization
Information about our capitalization is as follows:
June 30, December 31,
(In millions) 2022 2021
Debt (1) $ 3,105 $ 3,125
Stockholders' equity 12,191 11,738
Total capitalization $ 15,296 $ 14,863
Debt to total capitalization 20 % 21 %
Cash and cash equivalents $ 1,059 $ 1,036 ________________________________________________________
(1)Includes$124 million of current portion of long-term debt atJune 30, 2022 . There were no borrowings outstanding under our revolving credit facility as ofJune 30, 2022 andDecember 31, 2021 . Share repurchases. Under our authorized share repurchase program approved inFebruary 2022 , we repurchased 20 million shares of our common stock for$513 million during the six months endedJune 30, 2022 . We did not repurchase any shares of our common stock during the six months endedJune 30, 2021 . Dividends. During the six months endedJune 30, 2022 , we paid dividends of$940 million on our common stock, which included regular quarterly dividends on our common stock of$0.30 per share and variable dividends of$0.86 per share, and a dividend of$23.125 per share on Cimarex's redeemable preferred stock in each of the first and second quarters of 2022. During the six months endedJune 30, 2021 , we paid dividends of$84 million ($0.21 per share) on our common stock. InAugust 2022 , our Board of Directors approved a quarterly base dividend of$0.15 per share and a variable dividend of$0.50 per share, resulting in a total base-plus-variable dividend of$0.65 per share on our common stock.
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.
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The following table presents major components of our capital and exploration
expenditures:
Six Months Ended
June 30,
(In millions) 2022 2021
Capital expenditures:
Drilling and facilities $ 754 $ 284
Leasehold acquisitions 4 2
Pipeline and gathering 27 -
Other 13 4
798 290
Exploration expenditures(1) 13 5
$ 811 $ 295 ________________________________________________________
(1)There were no exploratory dry hole costs for the six months ended
For the six months endedJune 30, 2022 , our capital program was focused on thePermian Basin ,Marcellus Shale andAnadarko Basin , where we drilled 88.3 net wells and completed 68.3 net wells. We expect our 2022 capital program to be approximately$1.6 billion to$1.7 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. Our full-year expected 2022 capital program increased due to inflation and a modest increase in activity for the remaining half of 2022. 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.
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, Processing 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, except as discussed below.
On
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 2022 and 2021 Compared
Operating Revenues
Three Months Ended June 30, Variance
(In millions) 2022 2021 Amount Percent
Operating Revenues
Natural gas $ 1,468 $ 412 $ 1,056 256 %
Oil 876 - 876 100 %
NGL 280 - 280 100 %
Loss on derivative instruments (66) (88) 22 25 %
Other 14 - 14 100 %
$ 2,572 $ 324 $ 2,248 694 %
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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, which we expect to 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 June 30, Variance Increase
(Decrease)
2022 2021 Amount Percent (In millions)
Price variance ($/Mcf) $ 5.78 $ 2.05 $ 3.73 182 % $ 947
Volume variance (Bcf) 253.9 200.6 53.3 27 % 109
$ 1,056 Natural gas revenues increased
Oil Revenues
Oil revenues increased
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
June 30,
(In millions) 2022 2021
Cash paid on settlement of derivative instruments
Gas contracts $ (161) $ -
Oil contracts (132) -
Non-cash gain (loss) on derivative instruments
Gas contracts 133 (88)
Oil contracts 94 -
$ (66) $ (88)
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 and Anadarko
Basins. In addition, our costs for services, labor and supplies have recently
increased due to higher demand for those items, inflation and supply chain
disruptions.
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The following table reflects our operating costs and expenses for the periods
indicated and a discussion of the operating costs and expenses follows.
Three Months Ended June
30, Variance Per BOE
(In millions, except per BOE) 2022 2021 Amount Percent 2022 2021
Operating Expenses
Direct operations $ 116 $ 16 $ 100 625 % $ 2.03 $ 0.48
Transportation, processing and
gathering 238 133 105 79 % 4.13 3.99
Taxes other than income 98 4 94 2,350 % 1.72 0.13
Exploration 7 2 5 250 % 0.12 0.07
Depreciation, depletion and
amortization 414 92 322 350 % 7.21 2.74
General and administrative 87 23 64 278 % 1.52 0.69
$ 960 $ 270 $ 690 256 %
Direct Operations
Direct operations expense generally consists of costs for labor, equipment,
maintenance, saltwater disposal, compression, power, treating and miscellaneous
other costs (collectively, "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 June 30, Per BOE
(In millions, except per BOE) 2022 2021 Variance 2022 2021
Direct Operating Expense
Lease operating expense $ 94 $ 12 $ 82 $ 1.65 $ 0.35
Workover expense 22 4 18 0.38 0.13
$ 116 $ 16 $ 100 $ 2.03 $ 0.48 Lease operating and workover expense increased primarily due to our expanded operations after the Merger.
Transportation, Processing and Gathering
Transportation, processing and gathering costs principally consist of expenditures to prepare and transport production downstream from the wellhead, including gathering, fuel, and compression, and processing costs, which are incurred to extract NGLs from the raw natural gas stream. 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 costs increased$105 million primarily due to our expanded operations after the Merger, along with a slight increase in gathering charges in theMarcellus Shale . 27 -------------------------------------------------------------------------------- Table of Contents 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 June 30, (In millions) 2022 2021 Variance
Taxes Other than Income Production $ 82 $ -$ 82 Drilling impact fees 8 4 4 Ad valorem 8 - 8 $ 98 $ 4$ 94 Taxes other than income as a percentage of production revenue 3.7 %
1.0 %
Taxes other than income increased$94 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. Ad valorem taxes increased primarily due to our expanded operations after the Merger.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization ("DD&A") expense consisted of the following for the periods indicated:
Three Months Ended June 30, Per BOE
(In millions, except per BOE) 2022 2021 Variance 2022 2021
DD&A Expense
Depletion $ 356 $ 89 $ 267 $ 6.19 $ 2.66
Depreciation 16 2 14 0.31 0.05
Amortization of unproved properties 39 - 39 0.68 -
Accretion of ARO 3 1 2 0.03 0.03
$ 414 $ 92 $ 322 $ 7.21 $ 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 $267 million due to increased production and a higher
depletion rate of $6.19 per BOE for the three months ended June 30, 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 $2.66 per
BOE for the three months ended June 30, 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 ended June 30, 2022 as compared to the three months
ended June 30, 2021 is primarily due to depreciation on our gathering facilities
acquired in the Merger.
Unproved properties are amortized based on our drilling experience and our expectation of converting our unproved leaseholds to proved properties. If development of unproved properties is deemed unsuccessful and the properties are
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abandoned or surrendered, the capitalized costs are expensed in the period the
determination is made. The rate of amortization depends on the timing and
success of our exploration and development program. Our amortization of unproved
properties increased due to the release of certain leaseholds during the period
and an increase in the rate of amortization of certain of our unproved
properties 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. A portion of 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 June 30,
(In millions) 2022 2021 Variance
G&A Expense
General and administrative expense $ 52 $ 13 $ 39
Stock-based compensation expense 21 4 17
Merger-related expense 14 6 8
$ 87 $ 23 $ 64
G&A expense, excluding stock-based compensation and merger related expenses,
increased $39 million primarily due to the Merger, which significantly expanded
our headcount and office-related expenses.
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
Merger-related expenses increased$8 million primarily due to$14 million of employee-related severance and termination benefits associated with the expected termination of certain employees, which is being accrued over the expected transition period, partially offset by lower administrative and professional fees associated with the Merger.
Interest Expense, net
Interest expense, net increased$8 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$100 million of our 3.65% weighted-average private placement senior notes, which matured inSeptember 2021 . 29 --------------------------------------------------------------------------------
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Income Tax Expense
Three Months Ended June 30,
(In millions) 2022 2021 Variance
Income Tax Expense
Current tax expense $ 294 $ 8 $ 286
Deferred tax expense 65 3 62
$ 359 $ 11 $ 348
Combined federal and state effective
income tax rate 22.6 % 26.2 %
Income tax expense increased$348 million due to higher pre-tax income in the second quarter of 2022 compared the second quarter of 2021, partially offset by a lower effective tax rate. The effective tax rate was lower for the second quarter of 2022 compared to the second quarter of 2021 due to differences in the non-recurring discrete items recorded during the second quarter of 2022 versus the second quarter of 2021.
First Six Months of 2022 and 2021 Compared
Operating Revenues
Six Months Ended June 30, Variance
(In millions) 2022 2021 Amount Percent
Operating Revenues
Natural gas $ 2,579 $ 885 $ 1,694 191 %
Oil 1,575 - 1,575 100 %
NGL 525 - 525 100 %
Loss on derivative instruments (457) (101) (356) 352 %
Other 29 - 29 100 %
$ 4,251 $ 784 $ 3,467 442 %
Production Revenues
Natural Gas Revenues
Six Months Ended June 30, Variance Increase
(Decrease)
2022 2021 Amount Percent (In millions)
Price variance ($/Mcf) $ 5.05 $ 2.18 $ 2.87 132 % $ 1,468
Volume variance (Bcf) 510.3 406.4 103.9 26 % 226
$ 1,694 Natural gas revenues increased
Oil Revenues
Oil revenues increased
NGL Revenues
NGL revenues increased
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Loss on Derivative Instruments
The following table presents the components of "Loss on derivative instruments"
for the periods indicated:
Six Months Ended
June 30,
(In millions) 2022 2021
Cash (paid) received on settlement of derivative instruments Gas contracts
$ (203) $ 3 Oil contracts (261) - Non-cash (loss) gain on derivative instruments Gas contracts (49) (104) Oil contracts 56 -$ (457) $ (101)
Operating Costs and Expenses
Our operating costs and expenses in 2022 were substantially increased due to the Merger, which significantly expanded our operations to include the Permian and Anadarko Basins. In addition, our costs for services, labor and supplies have recently increased due to higher demand for those items, inflation and supply chain disruptions.
The following table reflects our operating costs and expenses for the periods indicated and a discussion of the operating costs and expenses follows.
Six Months Ended June 30, Variance Per BOE
(In millions, except per BOE) 2022 2021 Amount Percent 2022 2021
Operating Expenses
Direct operations $ 216 $ 33 $ 183 555 % $ 1.90 $ 0.49
Transportation, processing and
gathering 471 270 201 74 % 4.12 3.99
Taxes other than income 174 9 165 1,833 % 1.53 0.13
Exploration 13 5 8 160 % 0.11 0.07
Depreciation, depletion and
amortization 774 186 588 316 % 6.78 2.74
General and administrative 194 52 142 273 % 1.70 0.77
$ 1,842 $ 555 $ 1,287 232 %
Direct Operations
Direct operations expense consisted of lease operating expense and workover
expense as follows:
Six Months Ended June 30, Per BOE
(In millions, except per BOE) 2022 2021 Variance 2022 2021
Direct Operating Expense
Lease operating expense $ 176 $ 27 $ 149 $ 1.55 $ 0.40
Workover expense 40 6 34 0.35 0.09
$ 216 $ 33 $ 183 $ 1.90 $ 0.49 Lease operating and workover expense increased primarily due to our expanded operations after the Merger.
Transportation, Processing and Gathering
Transportation, processing and gathering costs increased$201 million primarily due to our expanded operations after the Merger, along with a slight increase in gathering charges in theMarcellus Shale . 31 -------------------------------------------------------------------------------- Table of Contents Taxes Other Than Income The following table presents taxes other than income for the periods indicated: Six Months Ended June 30, (In millions) 2022 2021 Variance
Taxes Other than Income Production $ 145 $ -$ 145 Drilling impact fees 15 9 6 Ad valorem 14 - 14 $ 174 $ 9$ 165 Taxes other than income as a percentage of production revenue 3.7 %
1.0 %
Taxes other than income increased$165 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. Ad valorem taxes increased primarily due to our expanded operations after the Merger.
Depreciation, Depletion and Amortization
DD&A expense consisted of the following for the periods indicated:
Six Months Ended June 30, Per BOE
(In millions, except per BOE) 2022 2021 Variance 2022 2021
DD&A Expense
Depletion $ 695 $ 180 $ 515 $ 6.09 $ 2.65
Depreciation 35 4 31 0.31 0.07
Amortization of unproved properties 39 - 39 0.34 -
Accretion of ARO 5 2 3 0.04 0.02
$ 774 $ 186 $ 588 $ 6.78 $ 2.74
Depletion expense increased $515 million due to increased production and a
higher depletion rate of $6.09 per BOE for the six months ended June 30, 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 $2.65
per BOE for the six months ended June 30, 2021 .
Depreciation expense increased
Amortization of unproved properties increased$39 million due to the release of certain leaseholds during the period and an increase in the rate of amortization of certain of our unproved properties acquired in the Merger.
General and Administrative
The table below reflects our G&A expense for the periods indicated:
Six Months Ended June 30,
(In millions) 2022 2021 Variance
G&A Expense
General and administrative expense $ 105 $ 30 $ 75
Stock-based compensation expense 44 16 28
Merger-related expense 45 6 39
$ 194 $ 52 $ 142
32-------------------------------------------------------------------------------- Table of Contents G&A expense, excluding stock-based compensation and merger-related expenses, increased$75 million primarily due to the Merger, which significantly expanded our headcount and office-related expenses.
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
Merger-related expenses increased$39 million primarily due to$38 million of employee-related severance and termination benefits associated with the expected termination of certain employees, which is being accrued over the expected transition period.
Interest Expense, net
Interest expense, net increased$17 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$100 million of our 3.65% weighted-average private placement senior notes, which matured inSeptember 2021 . Income Tax Expense Six Months Ended June 30, (In millions) 2022 2021 Variance Income Tax Expense Current tax expense $ 428 $ 33$ 395 Deferred tax expense 101 15 86 $ 529 $ 48$ 481 Combined federal and state effective income tax rate 22.4 %
23.2 %
Income tax expense increased$481 million due to higher pre-tax income attributable to higher commodity prices and our expanded operations following the Merger, partially offset by a lower effective tax rate. The effective tax rate was lower for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 due to differences in the non-recurring discrete items recorded during the six months endedJune 30, 2022 and 2021.
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 potential effects of further developments related to the long-term impact of the COVID-19 pandemic and variants 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. 33
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Table of Contents 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.
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