CRESCENT ENERGY COMPANY
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide the reader of the financial
statements with a narrative from the perspective of management on the financial
condition, results of operations, liquidity and certain other factors that may
affect the Company's operating results. The following discussion and analysis
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the year ended December 31, 2021 ("Annual Report"), our Quarterly Report on
Form 10-Q for the period ended March 31, 2022 , as well as our unaudited
condensed consolidated financial statements for the three and six months ended
June 30, 2022 and 2021. The following information updates the discussion of our
financial condition provided in our previous filings, and analyzes the changes
in the results of operations between the three and six months ended June 30,
2022 and 2021. The following discussion contains forward-looking statements that
reflect our future plans, estimates, beliefs and expected performance. The
forward-looking statements are dependent upon events, risks and uncertainties
that may be outside our control. Our actual results could differ materially from
those discussed in these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, commodity price
volatility, capital requirements and uncertainty of obtaining additional funding
on terms acceptable to the Company, realized oil, natural gas and NGL prices,
the timing and amount of future production of oil, natural gas and NGLs,
shortages of equipment, supplies, services and qualified personnel, as well as
those factors discussed below and elsewhere in this Quarterly Report and in our
Annual Report, particularly under "Risk Factors" and "Cautionary Statement
Regarding Forward Looking Statements," all of which are difficult to predict. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed may not occur. We do not undertake any obligation to publicly update
any forward-looking statements except as otherwise required by applicable law.
Unless otherwise stated or the context otherwise indicates, all references to
"we," "us," "our," "Crescent" and the "Company" or similar expressions for time
periods prior to the Merger Transactions refer to Crescent Energy OpCo LLC
(f/k/a Independence Energy LLC ) and its subsidiaries, our predecessor for
accounting purposes. For time periods subsequent to the Merger Transactions,
these terms refer to Crescent Energy Company and its subsidiaries.
Business
We are a well-capitalizedU.S. independent energy company with a portfolio of assets in key proven regions across the lower 48 states, including the EagleFord , Rockies, Barnett and Permian. Our approach employs a unique business model that combines an investor mindset and deep operational expertise to pursue a cash flow-based investment mandate focused on operated working interests with an active risk management strategy. We pursue our strategy through the production, development and acquisition of oil, natural gas and NGL reserves.
Merger Transactions and Reorganization
OnDecember 7, 2021 , we completed a series of transactions, pursuant to which the business ofContango Oil & Gas Company ("Contango") and the business ofIndependence Energy LLC ("Independence") combined under a new publicly traded holding company named "Crescent Energy Company " (the "Merger Transactions"). Our Class A common stock, par value$0.0001 per share ("Class A Common Stock") is listed onThe New York Stock Exchange under the symbol "CRGY." The combined company is structured as an "Up-C," with all of our assets and operations (including those of Contango) indirectly held by our operating subsidiary,Crescent Energy OpCo LLC ("OpCo").Crescent Energy Company ("Crescent") is a holding company, the sole material asset of which consists of economic, non-voting limited liability company interests in OpCo ("OpCo Units"), and is responsible for all operational, management and administrative decisions related to OpCo's business. We are the sole managing member of OpCo. Crescent consolidates the financial results of OpCo and its subsidiaries. Former Contango shareholders own shares of Class A Common Stock, which have both voting and economic rights. The former owners of our predecessor,Independence Energy LLC , own economic, non-voting OpCo Units and corresponding shares of Class B common stock, par value$0.0001 per share ("Class B Common Stock," together with Class A Common Stock, the "Common Stock"), which shares of Class B Common Stock have voting (but no economic) rights. OpCo Units may be redeemed or exchanged for Class A Common Stock or, at our election, cash on the terms and conditions set forth in the Amended and Restated Limited Liability Company Agreement of OpCo. In connection with the Merger Transactions, we underwent a reorganization (the "Crescent Reorganization"), whereby Independence merged with and into OpCo (the "Isla Merger"). The financial statements include the accounts of Independence from the date of the Isla Merger, which is the date the Company obtained a controlling financial interest in Independence on a consolidated basis. Because the Isla Merger resulted in a change in the reporting entity, and in order to furnish comparative financial information prior to the Isla Merger, our financial statements have been retrospectively recast to reflect the historical accounts of Independence, our accounting predecessor (the "Predecessor"), on a combined basis. 29 --------------------------------------------------------------------------------
Geopolitical developments and economic environment
During the last several years, prices of crude oil, natural gas and NGLs have experienced periodic downturns and sustained volatility. In particular, the global spread of the COVID-19 virus during 2020 and 2021 had a negative impact on the global demand for oil and natural gas and caused significant commodity market volatility. While the increase in domestic vaccination programs and reduced spread of the COVID-19 virus has contributed to an improvement in the economy and higher realized prices for commodities, the current price environment remains uncertain as responses to the COVID-19 pandemic and newly emerging variants of the virus continue to evolve. Given the dynamic nature of these events, we cannot reasonably estimate the period of time that the COVID-19 pandemic and related market conditions will persist. While we use derivative instruments to partially mitigate the impact of commodity price volatility, our revenues and operating results depend significantly upon the prevailing prices for oil and natural gas. In addition, inFebruary 2022 ,Russia launched a large-scale invasion ofUkraine that has led to significant armed hostilities. As a result,the United States , theUnited Kingdom , the member states of theEuropean Union and other public and private actors have levied severe sanctions on Russian financial institutions, businesses and individuals. This conflict, and the resulting sanctions, have contributed to significant increases and volatility in the price for oil and natural gas, with the posted price for WTI reaching a high of over$120 per barrel. Such volatility may lead to a more difficult investing and planning environment for us and our customers. While the near-term impact of these events resulted in higher oil and gas prices in the first six months of 2022, the geopolitical and macroeconomic consequences of this invasion and associated sanctions cannot be predicted, and such events, or any further hostilities inUkraine or elsewhere, could severely impact the world economy and may adversely affect our financial condition. Furthermore,the United States has experienced a significant inflationary environment in 2022 that, along with international geopolitical risks, has contributed to concerns of a potential recession that has caused oil and gas prices to retreat from their earlier highs in 2022 and has created further volatility. Finally, due to the cyclical nature of the oil and gas industry, fluctuating demand for oilfield goods and services can put pressure on the pricing structure within our industry. As commodity prices rise, the cost of oilfield goods and services generally also increase, while during periods of commodity price declines, oilfield costs typically lag and do not adjust downward as fast as oil prices do. In addition, theU.S. inflation rate has been steadily increasing since 2021 and into 2022. These inflationary pressures have resulted in and may result in additional increases to the costs of our oilfield goods, services and personnel, which in turn cause our capital expenditures and operating costs to rise. Sustained levels of high inflation have likewise caused theU.S. Federal Reserve and other central banks to increase interest rates, which could have the effects of raising the cost of capital and depressing economic growth, either of which-or the combination thereof-could hurt our business.
Acquisitions and divestitures
Acquisitions
InMarch 2022 , we consummated the acquisition contemplated by the Membership Interest Purchase Agreement datedFebruary 15, 2022 (the "Purchase Agreement" and the transactions contemplated therein, the "Uinta Transaction") between certain of our subsidiaries, including OpCo, andVerdun Oil Company II LLC , aDelaware limited liability company, pursuant to which we purchased all of the issued and outstanding membership interests ofUinta AssetCo, LLC , aTexas limited liability company that held all development and production assets of, and certain obligations of,EP Energy E&P Company, L.P. ("EP") located in theState of Utah (the "Utah Assets"). Such assets include an aggregate approximately 145,000 net acres, primarily located inDuchesne andUintah Counties,Utah , with approximately 400 currently producing wells. Upon closing of the Uinta Transaction onMarch 30, 2022 , we paid$621.3 million in cash consideration and related transaction fees and assumed certain commodity derivatives. The Uinta Transaction was funded with cash on hand and borrowings under our Revolving Credit Facility. In connection with the closing of the Uinta Transaction, we entered into an amendment to our Revolving Credit Facility to, among other things, increase the borrowing base to$1.8 billion and the elected commitment amount to$1.3 billion . We incurred financing costs of$13.4 million associated with this amendment. Subsequent to the closing of the Uinta Transaction, we settled certain acquired oil commodity derivative positions and entered into new commodity derivative contracts for 2022 with a swap price of$75 per barrel for a net cost of$54.1 million , including restructuring fees, during the three months endedMarch 31, 2022 . InDecember 2021 , we acquired from an unrelated third-party certain operated producing oil and natural gas properties predominately located in the Central Basin Platform inTexas andNew Mexico , with additional properties in the southwestern Permian and Powder River Basins, for total cash consideration of$60.4 million , including customary purchase price adjustments (the "Central Basin Platform Acquisition"). The purchase price was funded using cash on hand and borrowings 30 --------------------------------------------------------------------------------
under our Revolving Credit Facility (as defined below). We accounted for the Central Basin Platform Acquisition as an asset acquisition.
InMay 2021 , certain of our consolidated subsidiaries redeemed the noncontrolling equity interests held in such subsidiaries by a third-party investor in exchange for the third-party investor's proportionate share of the underlying oil and natural gas interests held by its consolidated subsidiaries as part of the "Noncontrolling Interest Carve-out." Additionally, the third-party investor contributed cash of approximately$35.5 million to repay its proportionate share of the underlying debt outstanding under our prior credit agreements and other liabilities. The percentage ownership of these certain consolidated subsidiaries owned by the third-party investor ranges from 2.21% to 7.38%. InApril 2021 , certain minority investors exchanged 100% of their interests in our Barnett basin natural gas assets for 9,508 of our Class A Units, representing 0.77% of our consolidated ownership pursuant to (the "April 2021 Exchange"). Since we already consolidate the results of these assets, this transaction was accounted for as an equity transaction and reflected as a reclassification from noncontrolling interests to members' equity with no gain or loss recognized on theApril 2021 Exchange. InMarch 2021 , we acquired a portfolio of oil and natural gas mineral assets located in theDJ Basin from an unrelated third-party operator for total consideration of$60.8 million (the "DJ Basin Acquisition").The DJ Basin Acquisition was funded using cash on hand and borrowings under our prior credit agreements. We accounted for the DJ Basin Acquisition as an asset acquisition.
Divestitures
InApril 2022 , our equity method investment,Exaro Energy III, LLC ("Exaro") entered into a purchase and sale agreement to sell its operations in the Jonah Field inWyoming . During the three and six months endedJune 30, 2022 we received a distribution from Exaro Energy of$6.8 million primarily as a result of the sale. InFebruary 2022 , we contributed all of the assets and prospects in theGulf of Mexico formerly owned by Contango toChama Energy LLC ("Chama"), in exchange for a 9.4% interest in Chama. Such interest is valued at approximately$3.8 million .John Goff , the Chairman of our Board of Directors, holds an approximate interest of 17.5% in Chama, and the remaining interests are held by other investors. Pursuant to the Limited Liability Company Agreement of Chama, we may be required to fund certain workover costs, and we will be required to fund plugging and abandonment costs related to the producing assets we contributed to Chama. During the first quarter of 2022, we derecognized the assets and liabilities that were contributed to Chama from our condensed consolidated balance sheets. We recorded a$4.5 million gain related to on the deconsolidation of these assets and liabilities and recorded an equity method investment for our interest in Chama. The carrying value of our equity method investment in Chama atJune 30, 2022 is$3.9 million . InDecember 2021 , we entered into an assignment, conveyance and bill of sale with an unaffiliated third-party that encompassed the sale of certain producing properties and oil and natural gas leases inClaiborne Parish, Louisiana in exchange for cash consideration, net of closing adjustments, of$4.3 million . InMay 2021 , we executed a purchase and sale agreement with an unaffiliated third-party that encompassed the sale of certain producing properties and oil and natural gas leases in theArkoma Basin in exchange for cash consideration, net of closing adjustments, of$22.1 million .
Environmental, social and corporate governance ("ESG") initiatives
We view exceptional ESG performance as an opportunity to differentiate Crescent from our peers, mitigate risks and strengthen operational performance as well as benefit our stakeholders and the communities in which we operate. InDecember 2021 , we released our inaugural ESG report, which included key performance metrics according toValue Reporting Foundation's SASB Standard for Oil & Gas - Exploration & Production and also established our key ESG priorities. We also established anESG Advisory Council to advise management and our Board of Directors on ESG-related issues. We are working to reduce greenhouse gas ("GHG") emissions by implementing aggressive methane reduction targets and eliminating routine flaring, among other initiatives. InFebruary 2022 , we joined theOil & Gas Methane Partnership ("OGMP") 2.0 Initiative to enhance reporting of methane emissions reduction programs. 31 --------------------------------------------------------------------------------
How we evaluate our operations
We use a variety of financial and operational metrics to assess the performance of our oil, natural gas and NGL operations, including:
•Production volumes sold,
•Commodity prices and differentials,
•Operating expenses,
•Adjusted EBITDAX (non-GAAP), and
•Levered Free Cash Flow (non-GAAP)
Development program and capital budget
Our development program is designed to prioritize the generation of attractive risk-adjusted returns and meaningful free cash flow and is inherently flexible, with the ability to modify our capital program as necessary to react to the current market environment. We expect to incur approximately$600 million to$700 million , excluding acquisitions, for our 2022 capital program. Our program is approximately 95% allocated to D&C (80 to 85% to our operated assets primarily in the Eagle Ford and Uinta basins and 10 to 15% to non-operated activity) and approximately 5% to other capital expenditures. We expect to fund our 2022 capital program through cash flow from operations. Due to the flexible nature of our capital program and the fact that the majority of our acreage is held by production, we could choose to defer a portion or all of these planned capital expenditures depending on a variety of factors, including, but not limited to, the success of our drilling activities, prevailing and anticipated prices for oil, gas and NGLs and resulting well economics, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners.
Sources of revenue
Our revenues are primarily derived from the sale of our oil, natural gas and NGL
production and are influenced by production volumes and realized prices,
excluding the effect of our commodity derivative contracts. Pricing of
commodities are subject to supply and demand as well as seasonal, political and
other conditions that we generally cannot control. Our revenues may vary
significantly from period to period as a result of changes in volumes of
production sold or changes in commodity prices. The following table illustrates
our production revenue mix for each of the periods presented:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Oil 68 % 68 % 66 % 65 %
Natural gas 23 % 20 % 24 % 23 %
NGLs 9 % 12 % 10 % 12 %
In addition, revenue from our midstream assets is supported by commercial
agreements that have established minimum volume commitments. These midstream
revenues comprise the majority of our midstream and other revenue. Midstream and
other revenue accounts for 4% or less of our total revenues for the three and
six months ended June 30, 2022 and 2021.
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--------------------------------------------------------------------------------Production volumes sold
The following table presents historical sales volumes for our properties:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Oil (MBbls) 5,781 3,351 9,766 6,669
Natural gas (MMcf) 32,353 22,482 62,367 43,305
NGLs (MBbls) 1,785 1,492 3,612 2,937
Total (MBoe) 12,958 8,590 23,773 16,824
Daily average (MBoe/d) 142 94 131 93
Total sales volume increased 4,368 MBoe and 6,949 MBoe during the three and six
months ended June 30, 2022 , respectively, compared to the three and six months
ended June 30, 2021 . The increase is primarily due to the Merger Transactions,
DJ Basin Acquisition and Central Basin Platform Acquisition (collectively, the
"2021 Acquisitions") and our Uinta Transaction, which contributed an additional
2,701 MBoe and 2,356 MBoe for the three months ended June 30, 2022 ,
respectively, and 5,836 MBoe and 2,356 MBoe for the six months ended June 30,
2022 , respectively. Sales volumes from our other assets decreased by 689 and
1,243 MBoe during the three and six months ended June 30, 2022 , respectively,
compared to the three and six months ended June 30, 2021 , primarily as a result
of the natural decline from our existing asset base.
Commodity prices and differentials
Our results of operations depend upon many factors, particularly the price of commodities and our ability to market our production effectively.
The oil and natural gas industry is cyclical and commodity prices can be highly volatile. In recent years, commodity prices have been subject to significant fluctuations. The outbreak of the COVID-19 virus followed by certain actions taken byOPEC caused crude oil prices to decline significantly beginning in the first half of 2020 and prices remained below pre-pandemic levels for a prolonged period of time. Despite the impact of the COVID-19 virus on the global economy, commodity prices trended higher in the three and six months endedJune 30, 2022 , compared with the three and six months endedJune 30, 2021 , reflecting the ongoing recovery in the oil and gas industry in early 2022 due to increasing demand as more states and countries re-open and national and global economies continue to recover from the global COVID-19 pandemic and a premium due to the reduction in crude oil supply resulting from sanctions imposed onRussia in response to its large-scale invasion ofUkraine inFebruary 2022 . Although commodity prices have increased substantially in 2022, uncertainty persists regardingOPEC's actions, increasedU.S. drilling and the continued effect from the COVID-19 pandemic, as well the armed conflict inUkraine . In order to reduce the impact of fluctuations in oil and natural gas prices on revenues, we regularly enter into derivative contracts with respect to a portion of the estimated oil, natural gas and NGL production through various transactions that fix the future prices received. We plan to continue the practice of entering into economic hedging arrangements to reduce near-term exposure to commodity prices, protect cash flow and corporate returns and maintain our liquidity.
The following table presents the percentages of our production that was economically hedged through the use of derivative contracts:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Oil 66 % 81 % 70 % 82 %
Natural gas 67 % 80 % 71 % 84 %
NGLs 49 % 70 % 49 % 71 %
The following table sets forth the average NYMEX oil and natural gas prices and our average realized prices for the periods presented:
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Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Oil (Bbl):
Average NYMEX $ 108.41 $ 66.07 $ 101.35 $ 61.96
Realized price (excluding derivative
settlements) 104.23 64.70 99.84 60.84
Realized price (including derivative
settlements) (1) 78.84 51.60 74.57 50.95
Natural Gas (Mcf):
Average NYMEX $ 7.17 $ 2.83 $ 6.06 $ 2.76
Realized price (excluding derivative
settlements) 6.40 2.78 5.62 3.31
Realized price (including derivative
settlements) 3.51 2.68 3.32 3.26
NGLs (Bbl):
Realized price (excluding derivative
settlements) $ 46.98 $ 25.60 $ 42.92 $ 25.30
Realized price (including derivative
settlements) 32.15 17.25 28.44 17.07
(1) For the three and six months ended June 30, 2021, the realized price
excludes the impact of the settlement of certain of our outstanding derivative
oil commodity contracts associated with calendar years 2022 and 2023 for $198.7
million in June 2021 . Subsequent to the settlement, we entered into new
commodity derivative contracts at prevailing market prices.
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--------------------------------------------------------------------------------Results of operations:
Three Months Ended
Revenues
The following table provides the components of our revenues, respective average realized prices and net sales volumes for the periods indicated:
Three Months Ended June 30,
2022 2021 $ Change % Change
Revenues (in thousands):
Oil $ 602,567 $ 216,820 $ 385,747 178 %
Natural gas 207,177 62,449 144,728 232 %
Natural gas liquids 83,864 38,192 45,672 120 %
Midstream and other 14,826 12,668 2,158 17 %
Total revenues $ 908,434 $ 330,129 $ 578,305 175 %
Average realized prices, before effects of
derivative settlements:
Oil ($/Bbl) $ 104.23 $ 64.70 $ 39.53 61 %
Natural gas ($/Mcf) 6.40 2.78 3.62 130 %
NGLs ($/Bbl) 46.98 25.60 21.38 84 %
Total ($/Boe) 68.96 36.96 32.00 87 %
Net sales volumes:
Oil (MBbls) 5,781 3,351 2,430 73 %
Natural gas (MMcf) 32,353 22,482 9,871 44 %
NGLs (MBbls) 1,785 1,492 293 20 %
Total (MBoe) 12,958 8,590 4,368 51 %
Average daily net sales volumes:
Oil (MBbls/d) 64 37 27 73 %
Natural gas (MMcf/d) 356 247 109 44 %
NGLs (MBbls/d) 20 16 4 25 %
Total (MBoe/d) 142 94 48 51 %
Oil revenue. Oil revenue increased $385.7 million , or 178%, in the three months
ended June 30, 2022 , compared to the three months ended June 30, 2021 . This was
driven primarily by higher realized oil prices that resulted in an increase of
$228.5 million (an increase of 61% per Bbl) and a $157.2 million increase in
sales volume (27 MBbls/d or 73%). The increase in sales volumes is primarily
related to our 2021 Acquisitions and our Uinta Transaction, which contributed an
additional 923 MBbls and 1,593 MBbls, respectively, partially offset by the
natural decline from our existing asset base of 86 MBbls.
Natural gas revenue. Natural gas revenue increased $144.7 million , or 232% in
the three months ended June 30, 2022 , compared to the three months ended
June 30, 2021 . This was driven primarily by higher natural gas prices that
resulted in an increase of $117.1 million (an increase of 130% per Mcf) and a
$27.4 million increase in sales volume (109 MMcf/d, or 44%). The increase in
sales volumes were primarily related to our 2021 Acquisitions and our Uinta
Transaction, which contributed an additional 8,283 MMcf and 4,570 MMcf,
respectively, partially offset by the natural decline from our existing asset
base of 2,982 MMcf.
NGL revenue. NGL revenue increased $45.7 million , or 120%, in the three months
ended June 30, 2022 , compared to the three months ended June 30, 2021 . This was
driven primarily by higher realized NGL prices that resulted in an increase of
$38.2 million (an increase of 84% per Bbl) and a $7.5 million increase in sales
volume (4 MBbls/d, or 25%).
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Midstream and other revenue. Midstream and other revenue increased $2.2 million ,
or 17%, in the three months ended June 30, 2022 , compared to the three months
ended June 30, 2021 , driven primarily by higher midstream revenue related to the
2021 Acquisitions.
Expenses
The following table summarizes our expenses for the periods indicated and includes a presentation on a per Boe basis, as we use this information to evaluate our performance relative to our peers and to identify and measure trends we believe may require additional analysis:
Three Months Ended June 30,
2022 2021 $ Change % Change
Expenses (in thousands):
Operating expense $ 255,713 $ 146,690 $ 109,023 74 %
Depreciation, depletion and amortization 131,573 76,228 55,345 73 %
General and administrative expense 19,656 16,122 3,534 22 %
Other operating costs 1,651 (9,394) 11,045 NM*
Total expenses $ 408,593 $ 229,646 $ 178,947 78 %
Selected expenses per Boe:
Operating expense, excluding production and
other taxes $ 14.68 $ 14.06 $ 0.62 4 %
Production and other taxes 5.05 3.01 2.04 68 %
Depreciation, depletion and amortization 10.15 8.87 1.28 14 %
* NM = Not meaningful.
Operating expense. Operating expense increased $109.0 million , or 74%, in the
three months ended June 30, 2022 , compared to the three months ended June 30,
2021 , driven primarily by the following factors:
(i)Lease and asset operating expense increased $56.3 million , or 84%, in the
three months ended June 30, 2022 , compared to the three months ended June 30,
2021 . Additionally, lease and asset operating expense per Boe increased $1.70
per Boe from $7.84 per Boe to $9.54 per Boe. This $56.3 million increase was
driven primarily by higher production during the three months ended June 30,
2022 , due in part to the 2021 Acquisitions and Uinta Transaction, which
contributed $36.4 million and $8.5 million to the increase, respectively, and
certain costs that are indexed to oil commodity prices, such as CO2 purchase
costs related to our CO2 flood asset in Wyoming . These contractually commodity
indexed operating expenses move in tandem with oil commodity prices, and as oil
prices increase, higher contractually commodity-linked operating costs are
offset by higher realizations.
(ii)Gathering, transportation and marketing expense decreased $10.0 million , or
21%, in the three months ended June 30, 2022 , compared to the three months ended
June 30, 2021 . Additionally, gathering, transportation and marketing expense per
Boe decreased $2.67 per Boe from $5.62 per Boe to $2.95 per Boe. This decrease
was driven primarily by lower sulfur processing and transportation expenses.
(iii)Production and other taxes increased $39.6 million , or 153%, in the three
months ended June 30, 2022 , compared to the three months ended June 30, 2021 and
increased $2.04 per Boe, an increase of 68%, to $5.05 per Boe. This increase was
driven primarily by higher oil and natural gas revenues, which increased the tax
base upon which production and other taxes are calculated.
(iv)Workover expense increased $22.4 million , or 851%, in the three months ended
June 30, 2022 , compared to the three months ended June 30, 2021 . Additionally,
workover expense per Boe increased $1.62 per Boe from $0.31 per Boe to $1.93 per
Boe. This increase was driven by (i) higher well workover activities that meet
our internal return thresholds due to the higher commodity price environment and
(ii) additional costs from our 2021 Acquisitions and Uinta Transaction, which
contributed $14.8 million and $2.9 million to the increase, respectively. The
2021 Acquisitions increase includes additional costs related to a standard
turnaround at our natural gas processing plant in Wyoming .
(v)Midstream operating expense increased $0.7 million , or 29%, in the three
months ended June 30, 2022 , compared to the three months ended June 30, 2021 .
Depreciation, depletion and amortization. In the three months ended June 30,
2022 , depreciation, depletion and amortization increased $55.3 million , or 73%,
compared to the three months ended June 30, 2021 , driven primarily by $24.3
million and
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$33.4 million of additional depreciation, depletion and amortization due to our
2021 Acquisitions and our Uinta Transaction, respectively, partially offset by a
lower depletion rate on increased reserves of our other assets.
General and administrative expense. General and administrative expense ("G&A")
increased $3.5 million , or 22%, for the three months ended June 30, 2022 ,
compared to the three months ended June 30, 2021 , primarily driven by (i) an
increase in equity-based compensation expense of $3.0 million due to awards that
were granted as part of the Merger Transactions and the increase in fair value
of the Company's liability-classified profits interest awards and (ii) $3.3
million related to expense payable under the management agreement with KKR
Energy Assets Manager LLC , which is the pro-rata portion of the Manager
Compensation borne by us, offset by $1.5 million in lower transaction and
nonrecurring related expenses. While only the portion borne by us impacts our
consolidated statements of operations, we include the full Manager Compensation
in the calculation of Adjusted EBITDAX and Levered Free Cash Flow (the
difference between the Manager Compensation and the amount presented in G&A is
represented by "Certain-redeemable noncontrolling interest distributions made by
OpCo related to Manager Compensation").
Three Months Ended June 30,
2022 2021 $ Change % Change
General and administrative expense (in
thousands):
Recurring general and administrative expense $ 8,052 $ 6,019 $ 2,033 34 %
Transaction and nonrecurring expenses 2,249 3,704 (1,455) (39) %
Equity-based compensation 9,355 6,399 2,956 46 %
Total general and administrative expense
22 %
General and administrative expense per Boe:
Recurring general and administrative expense $ 0.62
(11) %
Transaction and nonrecurring expenses 0.17 0.43 (0.26) (60) %
Equity-based compensation 0.72 0.74 (0.02) (3) %
Other operating costs. Other operating costs include exploration expense and
gain on sale of assets. Other operating costs changed by $11.0 million , compared
to the three months ended June 30, 2021 , primarily driven by $9.2 million lower
gain on sale of assets recognized during the three months ended June 30, 2022 .
Interest expense
In the three months endedJune 30, 2022 , we incurred interest expense of$24.9 million , as compared to$17.4 million in the three months endedJune 30, 2021 , a 43% increase. This increase was driven primarily by higher interest rates associated with the issuance of the Senior Notes (as defined below) and an increase in our weighted average debt outstanding during the period related to the Uinta Transaction. Gain (loss) on derivatives We have entered into derivative contracts to manage our exposure to commodity price risks that impact our revenues and interest rate risks on our variable interest rate debt. The following table presents gain (loss) on derivatives for the periods presented: Three Months Ended June 30, 2022 2021 $ Change % Change Gain (loss) on derivatives (in thousands): Gain (loss) on commodity derivatives$ (177,209) $ (356,308) $ 179,099 (50) % Gain (loss) on interest rate derivatives - 312 (312) (100) % Gain (loss) on derivatives$ (177,209) $ (355,996) $ 178,787 (50) % Our loss on commodity derivatives during the three months endedJune 30, 2022 decreased$178.8 million , or 50%, compared to the three months endedJune 30, 2021 primarily due to changes in commodity prices relative to our strike price. In addition, inJune 2021 , we incurred additional losses on derivatives from the settlement of certain derivative oil contracts for$198.7 37 --------------------------------------------------------------------------------
million. The derivative losses that were realized were offset by the higher
revenue prices that we received during the three months ended
Income from equity affiliates
Our income from equity method investments was$2.3 million for the three months endedJune 30, 2022 primarily due to a gain on sale of substantially all of the oil and gas assets held by Exaro.
Income tax benefit (expense)
For the three months endedJune 30, 2021 , we were organized as a limited liability company and treated as a flow-through entity forU.S. federal income tax purposes. As a result, the tax provision for the three months endedJune 30, 2021 was minimal. Subsequent to the Merger Transactions, we are a corporation that is subject toU.S. federal and state and income taxes on its allocable share of any taxable income from OpCo. For the three months endedJune 30, 2022 we recognized income tax expense of$17.8 million for an effective tax rate of 5.9%. Our effective tax rate is lower than theU.S. federal statutory income tax rate of 21% primarily due to effects of removing income and losses related to our noncontrolling interests and redeemable noncontrolling interests.
Adjusted EBITDAX (non-GAAP) and Levered Free Cash Flow (non-GAAP)
Adjusted EBITDAX and Levered Free Cash Flow are supplemental non-GAAP financial measures used by our management to assess our operating results. See "-Non-GAAP Financial Measures" below for their definitions and application.
The following table presents a reconciliation of Adjusted EBITDAX (non-GAAP) and Levered Free Cash Flow (non-GAAP) to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP:
Three Months Ended June 30,
2022 2021 $ Change % Change
(in thousands)
Net income (loss) $ 281,898 $ (272,861) $ 554,759 (203) %
Adjustments to reconcile to Adjusted EBITDAX:
Interest expense 24,937 17,443
Realized (gain) loss on interest rate derivatives -
3,394
Income tax expense (benefit) 17,798
1
Depreciation, depletion and amortization 131,573
76,228
Exploration expense 1,848
23
Non-cash (gain) loss on derivatives (89,655)
95,459
Non-cash equity-based compensation expense 9,355 6,399 (Gain) loss on sale of assets (197) (9,417) Other (income) expense 303 (96) Certain redeemable noncontrolling interest distributions made by OpCo related to Manager Compensation (10,064)
-
Transaction and nonrecurring expenses (1) 5,548
4,175
Early settlement of derivative contracts (2) -
198,688
Adjusted EBITDAX (non-GAAP)$ 373,344 $ 119,436 $ 253,908 213 % Adjustments to reconcile to Levered Free Cash Flow: Interest expense, excluding non-cash deferred financing cost amortization (22,608)
(12,884)
Realized (gain) loss on interest rate derivatives -
(3,394)
Current income tax benefit (expense) (3,026)
(1)
Tax-related redeemable noncontrolling interest distributions made by OpCo (17,167)
-
Development of oil and natural gas properties (193,388)
(40,272)
Levered Free Cash Flow (non-GAAP)$ 137,155 $ 62,885 $ 74,270 118 % 38
-------------------------------------------------------------------------------- (1)Transaction and nonrecurring expenses of$5.5 million for the three months endedJune 30, 2022 were primarily related to (i) transition service agreement costs incurred for the Uinta Transaction and (ii) acquisition and debt transaction related costs. Transaction and nonrecurring expenses of$4.2 million for the three months endedJune 30, 2021 were primarily related to legal, consulting and other fees related to the formation of Independence, the acquisition ofTitan Energy Holdings, LLC (f/k/aLiberty Energy LLC ) (the "Titan Acquisition") and the related reorganization transactions. (2)Represents the settlement inJune 2021 of certain outstanding derivative oil commodity contracts for open positions associated with calendar years 2022 and 2023. Subsequent to the settlement, we entered into commodity derivative contracts at prevailing market prices. Adjusted EBITDAX increased by$253.9 million , or 213%, in the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 , primarily driven by higher revenue associated with our oil, natural gas and NGL production as a result of increased (i) realized prices and (ii) sales volume driven by our 2021 Acquisitions and our Uinta Transaction. This increase was partially offset by a corresponding increase in operating costs due to higher production volumes and commodity prices, as well as higher realized losses on our commodity derivatives. Levered Free Cash Flow increased by$74.3 million , or 118%, in the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 , primarily driven by our increased Adjusted EBITDAX offset by$153.1 million of increased capital expenditures related to our additional reinvestment activities following the increase in commodity prices.
Six Months Ended
Revenues
The following table provides the components of our revenues, respective average realized prices and net sales volumes for the periods indicated:
Six Months Ended
June 30,
2022 2021 $ Change % Change
Revenues (in thousands):
Oil $ 975,076 $ 405,743 $ 569,333 140 %
Natural gas 350,488 143,492 206,996 144 %
Natural gas liquids 155,043 74,291 80,752 109 %
Midstream and other 26,737 24,464 2,273 9 %
Total revenues $ 1,507,344 $ 647,990 $ 859,354 133 %
Average realized prices, before effects of
derivative settlements:
Oil ($/Bbl) $ 99.84 $ 60.84 $ 39.00 64 %
Natural gas ($/Mcf) 5.62 3.31 2.31 70 %
NGLs ($/Bbl) 42.92 25.29 17.63 70 %
Total ($/Boe) 62.28 37.06 25.22 68 %
Net sales volumes:
Oil (MBbls) 9,766 6,669 3,097 46 %
Natural gas (MMcf) 62,367 43,305 19,062 44 %
NGLs (MBbls) 3,612 2,937 675 23 %
Total (MBoe) 23,773 16,824 6,949 41 %
Average daily net sales volumes:
Oil (MBbls/d) 54 37 17 46 %
Natural gas (MMcf/d) 345 239 106 44 %
NGLs (MBbls/d) 20 16 4 25 %
Total (MBoe/d) 131 93 38 41 %
39-------------------------------------------------------------------------------- Oil revenue. Oil revenue increased$569.3 million , or 140%, in the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 . This was driven primarily by higher realized oil prices that resulted in an increase of$380.9 million (an increase of 64% per Bbl) and a$188.4 million increase in sales volume (17 MBbls/d or 46%). The increase in sales volumes primarily related to our 2021 Acquisitions and Uinta Transaction, which contributed an additional 1,918 MBbls and 1,593 MBbls, respectively, partially offset by the natural decline from our existing asset base of 414 MBbls. Natural gas revenue. Natural gas revenue increased$207.0 million , or 144% in the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 . This was driven primarily by higher natural gas prices that resulted in an increase of$143.9 million (an increase of 70% per Mcf) and a$63.1 million increase in sales volume (106 MMcf/d, or 44%). The increase in sales volumes was primarily related to our 2021 Acquisitions and Uinta Transaction, which contributed an additional 18,674 MMcf and 4,570 MMcf, respectively, partially offset by the natural decline from our existing asset base of 4,182 MMcf. NGL revenue. NGL revenue increased$80.8 million , or 109%, in the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 . This was driven primarily by higher realized NGL prices that resulted in an increase of$63.7 million (an increase of 70% per Bbl) and a$17.1 million increase in sales volume (4 MBbls/d, or 25%). Midstream and other revenue. Midstream and other revenue increased$2.3 million , or 9%, in the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 , driven primarily by higher midstream revenue related to the 2021 Acquisitions. Expenses
The following table summarizes our expenses for the periods indicated and includes a presentation on a per Boe basis, as we use this information to evaluate our performance relative to our peers and to identify and measure trends we believe may require additional analysis:
Six Months Ended
June 30,
2022 2021 $ Change % Change
Expenses (in thousands):
Operating expense $ 474,952 $ 285,953 $ 188,999 66 %
Depreciation, depletion and amortization 230,592 160,097 70,495 44 %
General and administrative expense 42,178 22,751 19,427 85 %
Other operating costs (3,048) (9,338) 6,290 NM*
Total expenses $ 744,674 $ 459,463 $ 285,211 62 %
Selected expenses per Boe:
Operating expense, excluding production and
other taxes $ 15.27 $ 13.89 $ 1.38 10 %
Production and other taxes 4.71 3.10 1.61 52 %
Depreciation, depletion and amortization 9.70 9.52 0.18 2 %
* NM = Not meaningful.
Operating expense. Operating expense increased $189.0 million , or 66%, in the
six months ended June 30, 2022 , compared to the six months ended June 30, 2021 ,
driven primarily by the following factors:
(i)Lease and asset operating expense increased $103.9 million , or 79%, in the
six months ended June 30, 2022 , compared to the six months ended June 30, 2021 .
Additionally, lease and asset operating expense per Boe increased $2.10 per Boe
from $7.79 per Boe to $9.89 per Boe. This $103.9 million increase was driven
primarily by higher production during the six months ended June 30, 2022 , due in
part to the 2021 Acquisitions and Uinta Transaction, which contributed $72.7
million and $8.5 million to the increase, respectively, and certain costs that
are indexed to oil commodity prices, such as CO2 purchase costs related to our
CO2 flood asset in Wyoming . These contractually commodity indexed operating
expenses move in tandem with oil commodity prices, and as oil prices increase,
higher contractually commodity-linked operating costs are offset by higher
realizations.
(ii)Gathering, transportation and marketing expense decreased $4.9 million , or
5%, in the six months ended June 30, 2022 , compared to the six months ended
June 30, 2021 . Additionally, gathering, transportation and marketing expense per
Boe decreased $1.79 per Boe from $5.43 per Boe to $3.64 per Boe. This decrease
was driven primarily by lower sulfur processing and transportation expenses.
40
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(iii)Production and other taxes and increased $59.8 million , or 115%, in the six
months ended June 30, 2022 , compared to the six months ended June 30, 2021 and
increased $1.61 per Boe, an increase of 52%, to $4.71 per Boe. This increase was
driven primarily by higher oil and natural gas revenues, which increased the tax
base upon which production and other taxes are calculated.
(iv)Workover expense increased $30.1 million , or 615%, in the six months ended
June 30, 2022 , compared to the six months ended June 30, 2021 . Additionally,
workover expense per Boe increased $1.18 per Boe from $0.29 per Boe to $1.47 per
Boe. This increase was driven primarily by (i) higher well workover activities
that meet our internal return thresholds due to the higher commodity price
environment and (ii) additional costs from our 2021 Acquisitions and Uinta
Transaction, which contributed $20.3 million and $2.9 million to the increase,
respectively. The 2021 Acquisitions increase includes additional costs related
to a standard turnaround at our natural gas processing plant in Wyoming .
(v)Midstream operating expense increased $0.1 million , or 1%, in the six months
ended June 30, 2022 , compared to the six months ended June 30, 2021 .
Depreciation, depletion and amortization. In the six months ended June 30, 2022 ,
depreciation, depletion and amortization increased $70.5 million , or 44%,
compared to the six months ended June 30, 2021 , driven primarily by $55.1
million and $33.4 million of additional depreciation, depletion and amortization
due to our 2021 Acquisitions and Uinta Transaction, respectively, partially
offset by a lower depletion rate on increased reserves of our other assets.
General and administrative expense. General and administrative expense ("G&A")
increased $19.4 million , or 85%, for the six months ended June 30, 2022 ,
compared to the six months ended June 30, 2021 , primarily driven by (i) an
increase in equity-based compensation expense of $10.7 million due to awards
that were granted as part of the Merger Transactions and the increase in fair
value of the Company's liability-classified profits interest awards and (ii)
$6.6 million related to expense payable under the management agreement with KKR
Energy Assets Manager LLC , which is the pro-rata portion of the Manager
Compensation borne by us. While only the portion borne by us impacts our
consolidated statements of operations, we include the full Manager Compensation
in the calculation of Adjusted EBITDAX and Levered Free Cash Flow (the
difference between the Manager Compensation and the amount presented in G&A is
represented by "Certain-redeemable noncontrolling interest distributions made by
OpCo related to Manager Compensation").
Six Months Ended
June 30,
2022 2021 $ Change % Change
General and administrative expense (in
thousands):
Recurring general and administrative expense $ 16,315 $ 8,667 $ 7,648 88 %
Transaction and nonrecurring expenses 5,393 4,348 1,045 24 %
Equity-based compensation 20,470 9,736 10,734 110 %
Total general and administrative expense $ 42,178 $ 22,751 $ 19,427 85 %
General and administrative expense per Boe:
Recurring general and administrative expense $ 0.69 $ 0.52 $ 0.17 33 %
Transaction and nonrecurring expenses 0.23 0.26 (0.03) (12) %
Equity-based compensation 0.86 0.58 0.28 48 %
Other operating costs. Other operating costs include exploration expense and
gain on sale of assets. Other operating costs changed by $6.3 million , compared
to the six months ended June 30, 2021 , primarily driven by a $4.4 million lower
gain on sale of assets recognized during the six months ended June 30, 2022 .
Interest expense
In the six months endedJune 30, 2022 , we incurred interest expense of$41.5 million , as compared to$24.8 million in the six months endedJune 30, 2021 , a 67% increase. This increase was driven primarily by higher interest rates associated with the issuance of the Senior Notes (as defined below) and an increase in our weighted average debt outstanding during the period.
Gain (loss) on derivatives
41
--------------------------------------------------------------------------------
We have entered into derivative contracts to manage our exposure to commodity
price risks that impact our revenues and interest rate risks on our variable
interest rate debt. The following table presents gain (loss) on derivatives for
the periods presented:
Six Months Ended
June 30,
2022 2021 $ Change % Change
Gain (loss) on derivatives (in thousands):
Gain (loss) on commodity derivatives $ (850,695) $ (603,135) $ (247,560) 41 %
Gain (loss) on interest rate derivatives - 325 (325) (100) %
Gain (loss) on derivatives $ (850,695) $ (602,810) $ (247,885) 41 %
Our loss on commodity derivatives during the six months ended June 30, 2022
increased $247.9 million , or 41%, compared to the six months ended June 30, 2021
primarily due to changes in commodity prices relative to our strike price. In
addition, in June 2021 , we incurred additional losses on derivatives from the
settlement of certain derivative oil contracts for $198.7 million . The
derivative losses that were realized were offset by the higher revenue prices
that we received during the six months ended June 30, 2022 .
Income from equity affiliates
Our income from equity method investments was$3.3 million for the six months endedJune 30, 2022 primarily due to a gain on sale of substantially all of the oil and gas assets held by Exaro.
Income tax benefit (expense)
For the six months endedJune 30, 2021 , we were organized as a limited liability company and treated as a flow-through entity forU.S. federal income tax purposes. As a result, the tax provision for the six months endedJune 30, 2021 was minimal. Subsequent to the Merger Transactions we are a corporation that is subject toU.S. federal and state and income taxes on its allocable share of any taxable income from OpCo. For the six months endedJune 30, 2022 we recognized income tax expense of$3.9 million for an effective tax rate of 3.1%. Our effective tax rate is lower than theU.S. federal statutory income tax rate of 21% primarily due to effects of removing income and losses related to our noncontrolling interests and redeemable noncontrolling interests.
Adjusted EBITDAX (non-GAAP) and Levered Free Cash Flow (non-GAAP)
Adjusted EBITDAX and Levered Free Cash Flow are supplemental non-GAAP financial measures used by our management to assess our operating results. See "-Non-GAAP Financial Measures" below for their definitions and application.
The following table presents a reconciliation of Adjusted EBITDAX (non-GAAP) and Levered Free Cash Flow (non-GAAP) to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP:
42
--------------------------------------------------------------------------------
Six Months Ended
June 30,
2022 2021 $ Change % Change
(in thousands)
Net income (loss) $ (124,109) $ (439,129) $ 315,020 (72) %
Adjustments to reconcile to Adjusted EBITDAX:
Interest expense 41,461 24,826
Realized (gain) loss on interest rate derivatives - 7,022
Income tax expense (benefit) (3,927) 14
Depreciation, depletion and amortization 230,592 160,097
Exploration expense 1,939 79
Non-cash (gain) loss on derivatives 408,030 304,579
Non-cash equity-based compensation expense 20,470 9,736
(Gain) loss on sale of assets (4,987) (9,417)
Other (income) expense 1,802 6
Certain redeemable noncontrolling interest
distributions made by OpCo related to Manager
Compensation (20,128) -
Transaction and nonrecurring expenses (1) 17,107 4,819
Early settlement of derivative contracts (2) - 198,688
Adjusted EBITDAX (non-GAAP) $ 568,250 $ 261,320 $ 306,930 117 %
Adjustments to reconcile to Levered Free Cash
Flow:
Interest expense, excluding non-cash deferred
financing cost amortization (37,535) (19,417)
Realized (gain) loss on interest rate derivatives - (7,022)
Current income tax benefit (expense) (7,976) (14)
Tax-related redeemable noncontrolling interest
distributions made by OpCo (17,167) -
Development of oil and natural gas properties (278,868) (65,099)
Levered Free Cash Flow (non-GAAP) $ 226,704 $ 169,768 $ 56,936 34 %
(1)Transaction and nonrecurring expenses of $17.1 million for the six months
ended June 30, 2022 were primarily related to (i) legal, consulting, transition
service agreement costs, related restructuring of acquired derivative contracts
and other fees incurred for the Uinta Transaction and Merger Transactions, (ii)
severance costs subsequent to the Merger Transactions and (iii) acquisition and
debt transaction related costs. Transaction and nonrecurring expenses of $4.8
million for the six months ended June 30, 2021 were primarily related to legal,
consulting and other fees related to the formation of Independence, the Titan
Acquisition and the related reorganization transactions.
(2)Represents the settlement in June 2021 of certain outstanding derivative oil
commodity contracts for open positions associated with calendar years 2022 and
2023. Subsequent to the settlement, we entered into commodity derivative
contracts at prevailing market prices.
Adjusted EBITDAX increased by $306.9 million , or 117%, in the six months ended
June 30, 2022 , compared to the six months ended June 30, 2021 , primarily driven
by higher revenue associated with our oil, natural gas and NGL production as a
result of increased (i) realized prices and (ii) sales volume driven by our 2021
Acquisitions and our Uinta Transaction. This increase was partially offset by a
corresponding increase in operating costs due to higher production volumes and
commodity prices, as well as higher realized losses on our commodity
derivatives.
Levered Free Cash Flow increased by $56.9 million , or 34%, in the six months
ended June 30, 2022 compared to the six months ended June 30, 2021 , primarily
driven by our increased Adjusted EBITDAX offset by $213.8 million of increased
capital expenditures related to our additional reinvestment activities following
the increase in commodity prices.
Liquidity and capital resources
Our primary sources of liquidity are cash flow from operations and borrowings under a senior secured reserve-based revolving credit agreement (as amended, restated, amended and restated or otherwise modified to date, the "Revolving Credit Facility") withWells Fargo Bank, N.A. , as administrative agent for the lenders and letter of credit issuer, and the lenders from time to 43 --------------------------------------------------------------------------------
time party thereto. Our primary use of capital is for dividends to shareholders, debt repayment, development of our existing assets and acquisitions.
Our development program is designed to prioritize the generation of meaningful free cash flow and attractive risk-adjusted returns and is inherently flexible, with the ability to scale our capital program as necessary to react to the existing market environment and ongoing asset performance. See "-Development plan and capital budget" above for additional discussion of our capital program. We plan to continue our practice of entering into economic hedging arrangements to reduce the impact of the near-term volatility of commodity prices and the resulting impact on our cash flow from operations. A key tenet of our focused risk management effort is an active economic hedge strategy to mitigate near-term price volatility while maintaining long-term exposure to underlying commodity prices. Our commodity derivative program focuses on entering into forward commodity contracts when investment decisions regarding reinvestment in existing assets or new acquisitions are finalized, targeting economic hedges for a portion of expected production as well as adding incremental derivatives to our production base over time. Our active derivative program allows us to preserve capital and protect margins and corporate returns through commodity cycles.
The following table presents our cash balances and outstanding borrowings at the end of each period presented:
June 30, 2022 December 31, 2021
(in thousands)
Cash and cash equivalents $ 54,580 $ 128,578
Long-term debt 1,515,702 1,030,406
Based on our planned capital spending, our forecasted cash flows and projected
levels of indebtedness, we expect to maintain compliance with the covenants
under our debt agreements. Further, based on current market indications, we
expect to meet in the ordinary course of business other contractual cash
commitments to third parties pursuant to the various agreements described under
the heading "Contractual obligations" in our Annual Report, recognizing we may
be required to meet such commitments even if our business plan assumptions were
to change.
Cash flows
The following table summarizes our cash flows for the periods indicated:
Six Months Ended June 30,
2022 2021
(in thousands)
Net cash provided by operating activities $ 398,454 $ 35,678
Net cash used in investing activities (864,036) (86,670)
Net cash provided by financing activities 394,613 90,209
Net cash provided by operating activities. Net cash provided by operating activities for the six months endedJune 30, 2022 increased by$362.8 million , or 1017%, compared to the six months endedJune 30, 2021 primarily due to higher EBITDAX and the restructuring of certain derivative contracts in 2021, partially offset by the restructuring of certain oil commodity derivative contracts acquired in connection with the Uinta Transaction. Net cash used in investing activities. Net cash used in investing activities for the six months endedJune 30, 2022 increased by$777.4 million , or 897%, compared to the six months endedJune 30, 2021 , primarily due to$566.6 million of additional acquisitions of oil and natural gas properties in 2022, driven by the Uinta Transaction, and an additional$191.6 million of cash development capital expenditures as we have resumed reinvestment activity in relation to higher commodity prices. Net cash provided by financing activities. Net cash provided by financing activities for the six months endedJune 30, 2022 was$394.6 million , as compared to a$90.2 million use of cash in the six months endedJune 30, 2021 . This increase was primarily due to net cash inflows from our debt transactions, primarily the result of the issuance of our 7.250% senior notes due 2026 (the "New Notes") inFebruary 2022 and additional borrowings from our Revolving Credit Facility to fund our Uinta Transaction. 44 --------------------------------------------------------------------------------
These net cash inflows in 2022 were partially offset by
Debt agreements
Senior Notes
OnMay 6, 2021 ,Crescent Energy Finance LLC ("Crescent Finance") issued$500.0 million aggregate principal amount of senior notes due 2026 at par (the "Original Notes"). InFebruary 2022 , Crescent Finance issued an additional$200.0 million aggregate principal amount of our senior notes due 2026 at 101% of par (the "New Notes" and, together with the Original Notes, the "Senior Notes"). Both issuances of the Senior Notes are treated as a single series and vote together as a single class, and have identical terms and conditions, other than the issue date, the issue price and the first interest payment. The Senior Notes bear interest at an annual rate of 7.250%, which is payable onMay 1 andNovember 1 of each year and mature onMay 1, 2026 . The Senior Notes are our senior unsecured obligations, and the notes and the guarantees issued in connection with the issuance of the Senior Notes rank equally in right of payment with the borrowings under the Revolving Credit Facility and all of its other future senior indebtedness and senior to any of its future subordinated indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of our existing and future subsidiaries that guarantee the Revolving Credit Facility. The Senior Notes and the guarantees are effectively subordinated to all of our secured indebtedness (including all borrowings and other obligations under the Revolving Credit Facility) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated in right of payment to all existing and future indebtedness and other liabilities (including trade payables) of any future subsidiaries that do not guarantee the Senior Notes. We may, at our option, redeem all or a portion of the Senior Notes at any time on or afterMay 1, 2023 at certain redemption prices. We may also redeem up to 40% of the aggregate principal amount of the Senior Notes beforeMay 1, 2023 with an amount of cash not greater than the net proceeds that we raise in certain equity offerings at a redemption price equal to 107.250% of the principal amount of the Senior Notes being redeemed, plus accrued and unpaid interest, if any, to, but excluding the redemption date. In addition, prior toMay 1, 2023 , we may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus a "make-whole" premium, plus accrued and unpaid interest, if any, to, but excluding the redemption date. If we experience certain kinds of changes of control accompanied by a ratings decline, holders of the Senior Notes may require us to repurchase all or a portion of their notes at certain redemption prices. The Senior Notes are not listed, and we do not intend to list the Senior Notes in the future, on any securities exchange, and currently there is no public market for the Senior Notes.
Revolving Credit Facility
In connection with the issuance of the Senior Notes, Crescent Finance entered into the Revolving Credit Facility. The Revolving Credit Facility matures onMay 6, 2025 . AtJune 30, 2022 , we had$829.0 million of outstanding borrowings under the Revolving Credit Facility and$17.8 million in outstanding letters of credit.
In connection with the closing of the Uinta Transaction, we entered into an
amendment to our Revolving Credit Facility to increase the borrowing base to
Borrowings under the Revolving Credit Facility bear interest at either a (i)U.S. dollar alternative base rate (based on the prime rate, the federal funds effective rate or an adjusted secured overnight financing rate ("SOFR")), plus an applicable margin, or (ii) SOFR, plus an applicable margin, at the election of the borrowers. The applicable margin varies based upon our borrowing base utilization then in effect. The fee payable for the unused revolving commitments is 0.50% per year. Our weighted average interest rate on loan amounts outstanding as ofJune 30, 2022 was 4.42%. The borrowing base is subject to semi-annual scheduled redeterminations on or aboutApril 1 andOctober 1 of each year, as well as (i) elective borrowing base interim redeterminations at our request not more than twice during any consecutive 12-month period or the required lenders not more than once during any consecutive 12-month period and (ii) elective borrowing base interim redeterminations at our request following any acquisition of oil and natural gas properties with a purchase price in the aggregate of at least 5.0% of the then effective borrowing base. The borrowing base will be automatically reduced upon (a) the issuance of certain permitted junior lien debt and other permitted additional debt, (b) the sale or other disposition of borrowing base properties if the aggregate net present value, discounted at 9% per annum ("PV-9") of such properties sold or 45 -------------------------------------------------------------------------------- disposed of is in excess of 5.0% of the borrowing base then in effect and (c) early termination or set-off of swap agreements (x) the administrative agent relied on in determining the borrowing base or (y) if the value of such swap agreements so terminated is in excess of 5.0% of the borrowing base then in effect. The obligations under the Revolving Credit Facility remain secured by first priority liens on substantially all of our and the guarantors' tangible and intangible assets, including without limitation, oil and natural gas properties and associated assets and equity interests owned by us and such guarantors. In connection with each redetermination of the borrowing base, we must maintain mortgages on at least 85% of the PV-9 of the oil and gas properties that constitute borrowing base properties. Our domestic direct and indirect subsidiaries are required to be guarantors under the Revolving Credit Facility, subject to certain exceptions. The Revolving Credit Facility contains certain covenants that restrict the payment of cash dividends, certain borrowings, sales of assets, loans to others, investments, merger activity, commodity swap agreements, liens and other transactions without the adherence to certain financial covenants or the prior consent of our lenders. We are subject to (i) maximum leverage ratio and (ii) current ratio financial covenants calculated as of the last day of each fiscal quarter. The Revolving Credit Facility also contains representations, warranties, indemnifications and affirmative and negative covenants, including events of default relating to nonpayment of principal, interest or fees, inaccuracy of representations or warranties in any material respect when made or when deemed made, violation of covenants, bankruptcy and insolvency events, certain unsatisfied judgments and a change of control. If an event of default occurs and we are unable to cure such default, the lenders will be able to accelerate maturity and exercise other rights and remedies. We expect to remain in compliance with these covenants for the foreseeable future.
Prior Credit Agreements
Certain of our subsidiaries had revolving credit facilities with syndicates of lenders with original expiration dates between 2022 and 2024 (the "Prior Credit Agreements"). The amounts we were able to borrow under each of the Prior Credit Agreements was limited by a borrowing base, which was based on our oil and natural gas properties, proved reserves and total indebtedness, as well as other factors, and was consistent with customary lending criteria. OnMay 6, 2021 , we terminated the Prior Credit Agreements with the proceeds from the issuance of the Senior Notes, the redemption of certain noncontrolling equity interests in exchange for a third-party investor's proportionate share of underlying oil and natural gas interests held by its consolidated subsidiaries and borrowings under our Revolving Credit Facility.
Capital expenditures
Our acquisition and development expenditures consist of acquisitions of proved and unproved property, expenditures associated with the development of our oil and natural gas properties and other asset additions. Cash expenditures for drilling, completion and recompletion activities are presented as "Development of oil and natural gas properties" in investing activities on our condensed consolidated statements of cash flows. We expect to fund our 2022 capital program through cash flow from operations. The amount and timing of capital expenditures on development of oil and natural gas properties is substantially within our control due to the held-by-production nature of our assets. We regularly review our capital expenditures throughout the year and could choose to adjust our investments based on a variety of factors, including but not limited to the success of our drilling activities, prevailing and anticipated prices for oil, natural gas and NGLs, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners. Any postponement or elimination of our development drilling program could result in a reduction of proved reserve volumes, the related standardized measure and conversions of proved undeveloped volumes to proved developed volumes. These risks could materially affect our business, financial condition and results of operations.
The table below presents our capital expenditures and related metrics that we use to evaluate our business for the periods presented:
46
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Six Months Ended
June 30,
2022 2021
(in thousands)
Total development of oil and natural gas properties $ 278,868 $ 65,099
Change in accruals or other non-cash adjustments (38,512) (16,302)
Cash used in development of oil and natural gas properties 240,356 48,797
Cash used in acquisition of oil and natural gas properties 627,390 60,828
Non-cash acquisition of oil and natural gas properties - 10,537
Total expenditures on acquisition and development of oil and
natural gas properties $ 867,746 $ 120,162
Our development of oil and natural gas properties was higher during the six
months ended June 30, 2022 , compared to the six months ended June 30, 2021 . Due
to the low commodity price environment experienced throughout 2020 resulting
from the COVID-19 pandemic and the actions from OPEC , we significantly reduced
our development capital expenditures starting in the second quarter of 2020 but
resumed development activities in the second half of 2021 as commodity prices
recovered. During the six ended June 30, 2022 , commodity prices remained at or
above levels prior to the COVID-19 pandemic. Our budget for 2022 reflects the
current price environment. We used cash of $627.4 million in 2022 for the
acquisition of oil and natural gas properties, primarily related to our Uinta
Transaction, as compared to $60.8 million in 2021, primarily related to our DJ
Basin Acquisition (see Notes to condensed consolidated financial statements,
NOTE 3 - Acquisitions and Divestitures in Part I, Item 1. Financial Statements
of this Quarterly Report).
Contractual obligations
As of
Dividends
Our future dividends depend on our level of earnings, financial requirements and other factors and will be subject to approval by our Board of Directors, applicable law and the terms of our existing debt documents, including the indenture governing the Senior Notes.
We paid cash dividends of
OnAugust 9, 2022 , the Board of Directors approved a quarterly cash dividend of$0.17 per share, or$0.68 per share on an annualized basis, to be paid to shareholders of our Class A Common Stock with respect to the second quarter of 2022. The quarterly dividend is payable onSeptember 6, 2022 to shareholders of record as of the close of business onAugust 23, 2022 . OpCo unitholders will also receive a distribution based on their pro rata ownership of OpCo Units. The payment of quarterly cash dividends is subject to management's evaluation of our financial condition, results of operations and cash flows in connection with such payments and approval by our Board of Directors. In light of current economic conditions, management will evaluate any future increases in cash dividend on a quarterly basis.
Critical accounting policies and estimates
This discussion and analysis of our financial and results of operations are based upon our unaudited condensed consolidated financial statements. A complete list of our significant accounting policies is described in Note 2 - Summary of Significant Accounting Policies in our audited financial statements as of and for the year endedDecember 31, 2021 in our Annual Report. Refer also to "Critical accounting estimates" in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report. There have been no changes to our significant accounting policies and critical accounting estimates as ofJune 30, 2022 .
Non-GAAP financial measures
Our MD&A includes financial measures that have not been calculated in accordance
with
47
--------------------------------------------------------------------------------•Adjusted EBITDAX; and
•Levered Free Cash Flow
These are supplemental non-GAAP financial measures used by our management to assess our operating results and assist us make our investment decisions. We believe that the presentation of these non-GAAP financial measures provides investors with greater transparency with respect to our results of operations, as well as liquidity and capital resources, and that these measures are useful for period-to-period comparison of results. We define Adjusted EBITDAX as net income (loss) before interest expense, realized (gain) loss on interest rate derivatives, income tax expense, depreciation, depletion and amortization, exploration expense, non-cash gain (loss) on derivative contracts, impairment of oil and natural gas properties, non-cash equity-based compensation, (gain) loss on sale of assets, other (income) expense, certain redeemable noncontrolling interest distributions made by OpCo related to Manager Compensation, transaction and nonrecurring expenses and early settlement of derivative contracts. We believe Adjusted EBITDAX is a useful performance measure because it allows for an effective evaluation of our operating performance when compared against our peers, without regard to our financing methods, corporate form or capital structure. We exclude the items listed above from net income (loss) in arriving at Adjusted EBITDAX because these amounts can vary substantially within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDAX should not be considered as an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP, of which such measure is the most comparable GAAP measure. Certain items excluded from Adjusted EBITDAX are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax burden, as well as the historic costs of depreciable assets, none of which are reflected in Adjusted EBITDAX. Our presentation of Adjusted EBITDAX should not be construed as an inference that our results will be unaffected by unusual or nonrecurring items. Our computations of Adjusted EBITDAX may not be identical to other similarly titled measures of other companies. In addition, the Revolving Credit Facility and Senior Notes include a calculation of Adjusted EBITDAX for purposes of covenant compliance. We define Levered Free Cash Flow as Adjusted EBITDAX less interest expense, excluding non-cash deferred financing cost amortization, realized gain (loss) on interest rate derivatives, current income tax benefit (expense), tax-related redeemable noncontrolling interest distributions made by OpCo and development of oil and natural gas properties. Levered Free Cash Flow does not take into account amounts incurred on acquisitions. Levered Free Cash Flow is not a measure of performance as determined by GAAP. Levered Free Cash Flow is a supplemental non-GAAP performance measure that is used by our management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Levered Free Cash Flow is a useful performance measure because it allows for an effective evaluation of our operating and financial performance and the ability of our operations to generate cash flow that is available to reduce leverage or distribute to our equity holders. Levered Free Cash Flow should not be considered as an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP, of which such measure is the most comparable GAAP measure, or as an indicator of actual operating performance or investing activities. Our computations of Levered Free Cash Flow may not be comparable to other similarly titled measures of other companies. Adjusted EBITDAX and Levered Free Cash Flow should be read in conjunction with the information contained in our condensed consolidated financial statements prepared in accordance with GAAP.
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