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 Reports on
Form 10-Q for the periods ended March 31, 2022 and June 30, 2022 , as well as our
unaudited condensed consolidated financial statements for the three and nine
months ended September 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 nine
months ended September 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 Eagle Ford, 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 31 -------------------------------------------------------------------------------- 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.
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 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. 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. TheU.S. inflation rate has been steadily increasing since 2021. 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, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including oilfield services, labor costs and equipment if our drilling activity increases. Higher oil and natural gas prices may cause the costs of materials and services to continue to rise. We cannot predict any future trends in the rate of inflation and a significant increase in inflation, to the extent we are unable to recover higher costs through higher oil and natural gas prices and revenues, would negatively impact our business, financial condition and results of operations. See Part II, Item 1A. Risk Factors-Continuing or worsening inflationary issues and associated changes in monetary policy have resulted in and may result in additional increases to the cost of our goods, services and personnel, which in turn cause our capital expenditures and operating costs to rise. InAugust 2022 , the Inflation Reduction Act of 2022 ("IRA 2022") was signed into law. The IRA 2022 contains hundreds of billions of dollars in incentives for the development of renewable energy, clean hydrogen, clean fuels, electric vehicles and supporting infrastructure and carbon capture and sequestration, amongst other provisions. These incentives could further accelerate the transition of theU.S. economy away from the use of fossil fuels towards lower- or zero-carbon emissions alternatives, which could decrease demand for the oil and gas we produce and consequently materially and adversely affect our business and results of operations. In addition, the IRA 2022 imposes a federal fee on the emission of GHGs through a methane emissions charge, including onshore petroleum and natural gas production. The methane emissions charge will start in calendar year 2024 and the fee is based on certain thresholds established in the IRA 2022. The methane emissions charge could increase our operating costs and adversely affect our business and results of operations. See Part II, Item 1A. Risk Factors for additional information. Finally, the IRA 2022 includes a new corporate alternative minimum tax of 15% on the adjusted financial statement income ("AFSI") of corporations with average AFSI exceeding$1.0 billion over a three-year period. While we are evaluating the impact of the new corporate alternative minimum tax will have, we do not believe that it will have a material impact on our near-term taxes.
Equity Transactions
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In September 2022 , Independence Energy Aggregator L.P. , the entity through which
certain affiliated entities hold their interests in us, exchanged 6.3 million
units representing membership interests in OpCo (together with a corresponding
number of shares of our Class B Common Stock) for shares of our Class A Common
Stock and agreed to sell 5.75 million shares of our Class A Common Stock (the
"Offering") at a price to the public of $15.00 per share, or a net of $14.10 per
share after deducting the underwriters' discounts and commissions. We did not
receive any cash proceeds from the Offering. Concurrent with the closing of the
Offering, we repurchased an aggregate of approximately 2.6 million OpCo Units
from PT Independence Energy Holdings LLC for $36.2 million and cancelled a
corresponding number of shares of our Class B Common Stock (the "Concurrent OpCo
Unit Purchase," and, together with the Offering, the "Equity Transactions"). As
a result of the Equity Transactions, the total number of shares of our Class A
Common Stock increased by 6.3 million shares, including 0.6 million shares of
our Class A Common Stock that were not included as part of the Offering but
rather issued in exchange for shares of Class B Common Stock and distributed
in-kind by Independence Energy Aggregator L.P. to affiliates and the number of
shares of our Class B Common Stock decreased by 8.9 million. After the Equity
Transactions, shares of our Class A Common Stock represent approximately 29% of
the outstanding shares of Class A Common Stock and Class B Common Stock, taken
together, and we own approximately 29% of the outstanding OpCo Units. Redeemable
noncontrolling interests decreased by $158.1 million while APIC increased by
$121.8 million as a result of the Equity Transactions and to reflect the new
ownership of OpCo.
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. located in theState of Utah . 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 under our Revolving Credit Facility (as defined below). 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.
In
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--------------------------------------------------------------------------------cash on hand and borrowings under our prior credit agreements. We accounted for the DJ Basin Acquisition as an asset acquisition.
Divestitures
OnNovember 4, 2022 , we entered into a definitive purchase and sale agreement with an unaffiliated third party to sell certain of our non-core producing properties and related oil and natural gas leases inEctor County in thePermian Basin in exchange for cash consideration, subject to customary purchase price adjustments, of$80.0 million . The net book value for these assets is$77.7 million , including ARO liability of$3.9 million as ofSeptember 30, 2022 . Subject to customary closing conditions, this transaction is expected to close by year-end 2022. 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 nine months endedSeptember 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, which we valued at approximately$3.8 million . As a result, we derecognized these contributed assets and liabilities from our condensed consolidated balance sheets and recorded an equity method investment for our interest in Chama, as well as a$4.5 million gain related to on the deconsolidation of these assets and liabilities.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. The carrying value of our equity method investment in Chama atSeptember 30, 2022 was$4.1 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. InSeptember 2022 , we released our 2021 ESG report. The report included benchmarks for measuring future performance, consistent with Crescent's commitment to aligning with theSASB and Task Force on Climate-related Financial Disclosures frameworks, noted the progress of our key ESG priorities and detailed our goals to reduce greenhouse gas ("GHG") emissions in support of an economy-wide transition to a net-zero world. We also established anESG Advisory Council to advise management and our Board of Directors on ESG-related issues. We are working to reduce GHG emissions by implementing ambitious 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. Our inaugural OGMP 2.0 submission was rated the highest-level, "Gold Standard." 34 --------------------------------------------------------------------------------
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. The majority of our program is allocated to D&C, with approximately 80% allocated to our operated assets primarily in the Eagle Ford and Uinta basins. 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 revenues
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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Oil 64 % 63 % 66 % 64 %
Natural gas 28 % 24 % 25 % 24 %
NGLs 8 % 13 % 9 % 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 3% or less of our total revenues for the three and
nine months ended September 30, 2022 and 2021.
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--------------------------------------------------------------------------------Production volumes sold
The following table presents historical sales volumes for our properties:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Oil (MBbls) 6,348 3,197 16,114 9,866
Natural gas (MMcf) 33,735 21,620 96,102 64,925
NGLs (MBbls) 1,840 1,551 5,452 4,488
Total (MBoe) 13,811 8,351 37,583 25,175
Daily average (MBoe/d) 150 91 138 92
Total sales volume increased 5,460 MBoe and 12,408 MBoe during the three and
nine months ended September 30, 2022 , respectively, compared to the three and
nine months ended September 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 2,977 MBoe and 2,878 MBoe for the three months ended
September 30, 2022 , respectively, and 8,813 MBoe and 5,234 MBoe for the nine
months ended September 30, 2022 , respectively. Sales volumes from our other
assets decreased by 395 and 1,639 MBoe during the three and nine months ended
September 30, 2022 , respectively, compared to the three and nine months ended
September 30, 2021 , primarily as a result of the natural decline from our
existing asset base, partially offset by new operated Eagle Ford and Uinta well
completions in 2022.
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. Commodity prices were higher in the three and nine months endedSeptember 30, 2022 , compared with the three and nine months endedSeptember 30, 2021 , reflecting the ongoing recovery in the oil and gas industry in 2022 due to increasing demand as more states and countries re-open and national and global economies 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, the continued effect from the COVID-19 pandemic, inflation and 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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Oil 58 % 80 % 65 % 81 %
Natural gas 61 % 86 % 67 % 84 %
NGLs 42 % 65 % 47 % 69 %
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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Oil (Bbl):
Average NYMEX $ 91.56 $ 70.62 $ 98.09 $ 64.83
Realized price (excluding derivative
settlements) 86.77 69.46 94.69 63.63
Realized price (including derivative
settlements) (1) 72.55 54.10 73.77 51.97
Natural Gas (Mcf):
Average NYMEX $ 7.37 $ 4.36 $ 6.50 $ 3.62
Realized price (excluding derivative
settlements) 6.99 4.01 6.10 3.55
Realized price (including derivative
settlements) 3.56 2.97 3.41 3.16
NGLs (Bbl):
Realized price (excluding derivative
settlements) $ 35.22 $ 30.53 $ 40.33 $ 27.10
Realized price (including derivative
settlements) 32.04 16.99 29.65 17.04
(1) For the three and nine months ended September 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 September 30,
2022 2021 $ Change % Change
Revenues (in thousands):
Oil $ 550,823 $ 222,074 $ 328,749 148 %
Natural gas 235,830 86,779 149,051 172 %
Natural gas liquids 64,810 47,322 17,488 37 %
Midstream and other 13,494 9,553 3,941 41 %
Total revenues $ 864,957 $ 365,728 $ 499,229 137 %
Average realized prices, before effects of
derivative settlements:
Oil ($/Bbl) $ 86.77 $ 69.46 $ 17.31 25 %
Natural gas ($/Mcf) 6.99 4.01 2.98 74 %
NGLs ($/Bbl) 35.22 30.51 4.71 15 %
Total ($/Boe) 61.65 42.65 19.00 45 %
Net sales volumes:
Oil (MBbls) 6,348 3,197 3,151 99 %
Natural gas (MMcf) 33,735 21,620 12,115 56 %
NGLs (MBbls) 1,840 1,551 289 19 %
Total (MBoe) 13,811 8,351 5,460 65 %
Average daily net sales volumes:
Oil (MBbls/d) 69 35 34 97 %
Natural gas (MMcf/d) 367 235 132 56 %
NGLs (MBbls/d) 20 17 3 18 %
Total (MBoe/d) 150 91 59 65 %
Oil revenue. Oil revenue increased $328.7 million , or 148%, in the three months
ended September 30, 2022 , compared to the three months ended September 30, 2021 .
This was driven primarily by higher realized oil prices that resulted in an
increase of $109.9 million (an increase of 25% per Bbl) and a $218.8 million
increase in sales volume (34 MBbls/d or 97%). The increase in sales volumes is
primarily related to our 2021 Acquisitions and our Uinta Transaction, which
contributed an additional 963 MBbls and 2,086 MBbls, respectively, combined with
an increase from our existing asset base of 102 MBbls driven by new operated
Eagle Ford and Uinta well completions in 2022.
Natural gas revenue. Natural gas revenue increased $149.1 million , or 172% in
the three months ended September 30, 2022 , compared to the three months ended
September 30, 2021 . This was driven primarily by higher natural gas prices that
resulted in an increase of $100.5 million (an increase of 74% per Mcf) and a
$48.6 million increase in sales volume (132 MMcf/d, or 56%). The increase in
sales volumes were primarily related to our 2021 Acquisitions and our Uinta
Transaction, which contributed an additional 9,439 MMcf and 4,758 MMcf,
respectively, partially offset by the natural decline from our existing asset
base of 2,082 MMcf.
NGL revenue. NGL revenue increased $17.5 million , or 37%, in the three months
ended September 30, 2022 , compared to the three months ended September 30, 2021 .
This was driven primarily by higher realized NGL prices that resulted in an
increase of $8.7 million (an increase of 15% per Bbl) and a $8.8 million
increase in sales volume (3 MBbls/d, or 18%).
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Midstream and other revenue. Midstream and other revenue increased $3.9 million ,
or 41%, in the three months ended September 30, 2022 , compared to the three
months ended September 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
2022 2021 $ Change % Change
Expenses (in thousands):
Operating expense $ 283,289 $ 147,322 $ 135,967 92 %
Depreciation, depletion and amortization 145,008 73,025 71,983 99 %
General and administrative expense 17,311 11,024 6,287 57 %
Other operating costs 1,782 753 1,029 NM*
Total expenses $ 447,390 $ 232,124 $ 215,266 93 %
Selected expenses per Boe:
Operating expense, excluding production and
other taxes $ 15.33 $ 14.28 $ 1.05 7 %
Production and other taxes 5.18 3.36 1.82 54 %
Depreciation, depletion and amortization 10.50 8.74 1.76 20 %
* NM = Not meaningful.
Operating expense. Operating expense increased
(i)Lease and asset operating expense increased$73.2 million , or 106%, in the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . Additionally, lease and asset operating expense per Boe increased$2.03 per Boe from$8.28 per Boe to$10.31 per Boe. This$73.2 million increase was driven primarily by higher production during the three months endedSeptember 30, 2022 , due in part to the 2021 Acquisitions and Uinta Transaction, which contributed$44.8 million and$8.6 million to the increase, respectively, general inflationary costs across our assets and certain costs that are indexed to oil commodity prices, such as CO2 purchase costs related to our CO2 flood asset inWyoming . 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 increased$0.1 million , or a nominal percentage, in the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . Additionally, gathering, transportation and marketing expense per Boe decreased$2.10 per Boe from$5.34 per Boe to$3.24 per Boe. The decrease on a per Boe basis was driven primarily by lower sulfur processing and transportation expenses. (iii)Production and other taxes increased$43.4 million , or 155%, in the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 and increased$1.82 per Boe, an increase of 54%, to$5.18 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$18.2 million , or 621%, in the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . Additionally, workover expense per Boe increased$1.18 per Boe from$0.35 per Boe to$1.53 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, (ii) general inflationary costs across our assets and (iii) additional costs from our 2021 Acquisitions and Uinta Transaction, which contributed$8.6 million and$4.2 million to the increase, respectively. (v)Midstream operating expense increased$1.0 million , or 41%, in the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . Depreciation, depletion and amortization. In the three months endedSeptember 30, 2022 , depreciation, depletion and amortization increased$72.0 million , or 99%, compared to the three months endedSeptember 30, 2021 , driven primarily by 39 --------------------------------------------------------------------------------
General and administrative expense. General and administrative expense ("G&A")
increased $6.3 million , or 57%, for the three months ended September 30, 2022 ,
compared to the three months ended September 30, 2021 , primarily driven by (i)
an increase in equity-based compensation expense of $0.9 million due to awards
that were granted as part of the Merger Transactions offset by the changes in
the fair value of the Company's liability-classified profits interest awards and
(ii) $3.8 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 $1.7 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
2022 2021 $ Change % Change
General and administrative expense (in
thousands):
Recurring general and administrative expense $ 9,917 $ 2,871 $ 7,046 245 %
Transaction and nonrecurring expenses 1,558 3,262 (1,704) (52) %
Equity-based compensation 5,836 4,891 945 19 %
Total general and administrative expense $ 17,311
57 %
General and administrative expense per Boe:
Recurring general and administrative expense $ 0.72 $ 0.34 $ 0.38 112 %
Transaction and nonrecurring expenses 0.11 0.39 (0.28) (72) %
Equity-based compensation 0.42 0.59 (0.17) (29) %
Other operating costs. Other operating costs include exploration expense and
gain on sale of assets. Other operating costs changed by $1.0 million , compared
to the three months ended September 30, 2021 , primarily driven by $1.2 million
higher exploration expense recognized during the three months ended
September 30, 2022 .
Interest expense
In the three months endedSeptember 30, 2022 , we incurred interest expense of$27.1 million , as compared to$13.0 million in the three months endedSeptember 30, 2021 , a 108% 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 September 30,
2022 2021 $ Change % Change
Gain (loss) on derivatives (in
thousands):
Gain (loss) on commodity derivatives $ 205,130 $ (281,871) $ 487,001 (173) %
Gain (loss) on interest rate derivatives - (351) 351 (100) %
Gain (loss) on derivatives $ 205,130 $ (282,222) $ 487,352 (173) %
Our gain on commodity derivatives during the three months ended September 30,
2022 changed by $487.0 million , or 173%, from a comparable loss during the three
months ended September 30, 2021 primarily due to changes in commodity prices
relative to our strike price.
40
--------------------------------------------------------------------------------Income tax benefit (expense)
For the three months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2022 we recognized income tax expense of$38.5 million for an effective tax rate of 6.5%. 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 September 30,
2022 2021 $ Change % Change
(in thousands)
Net income (loss) $ 555,349 $ (162,043) $ 717,392 (443) %
Adjustments to reconcile to Adjusted EBITDAX:
Interest expense 27,057 12,984
Realized (gain) loss on interest rate derivatives -
351
Income tax expense (benefit) 38,455
393
Depreciation, depletion and amortization 145,008
73,025
Exploration expense 1,909
754
Non-cash (gain) loss on derivatives (416,842)
189,119
Non-cash equity-based compensation expense 5,836 4,318 (Gain) loss on sale of assets (127) (1) Other (income) expense 2,670 49 Certain redeemable noncontrolling interest distributions made by OpCo related to Manager Compensation (9,471)
-
Transaction and nonrecurring expenses (1) 8,861
7,619
Early settlement of derivative contracts -
-
Adjusted EBITDAX (non-GAAP)$ 358,705 $ 126,568 $ 232,137 183 % Adjustments to reconcile to Levered Free Cash Flow: Interest expense, excluding non-cash deferred financing cost amortization (24,552)
(9,043)
Realized (gain) loss on interest rate derivatives -
(351)
Current income tax benefit (expense) 877
(393)
Tax-related redeemable noncontrolling interest distributions made by OpCo (803)
-
Development of oil and natural gas properties (189,928)
(42,899)
Levered Free Cash Flow (non-GAAP)$ 144,299 $ 73,882 $ 70,417 95 % (1)Transaction and nonrecurring expenses of$8.9 million for the three months endedSeptember 30, 2022 were primarily related to (i) merger integration costs and (ii) transition service agreement costs incurred for the Uinta Transaction. Transaction and nonrecurring expenses of$7.6 million for the three months endedSeptember 30, 2021 were primarily related to legal, consulting and other fees incurred for the Merger Transactions. Adjusted EBITDAX increased by$232.1 million , or 183%, in the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 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, our Uinta 41 -------------------------------------------------------------------------------- Transaction and new operatedEagle Ford and Uinta well completions in 2022. This increase was partially offset by a corresponding increase in operating costs due to higher production volumes, commodity prices and our 2021 Acquisitions and our Uinta Transaction. Levered Free Cash Flow increased by$70.4 million , or 95%, in the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , primarily driven by our increased Adjusted EBITDAX offset by$147.0 million of increased capital expenditures related to our additional reinvestment activities.
Nine Months Ended
Revenues
The following table provides the components of our revenues, respective average realized prices and net sales volumes for the periods indicated:
Nine Months Ended
September 30,
2022 2021 $ Change % Change
Revenues (in thousands):
Oil $ 1,525,899 $ 627,817 $ 898,082 143 %
Natural gas 586,318 230,271 356,047 155 %
Natural gas liquids 219,853 121,613 98,240 81 %
Midstream and other 40,231 34,017 6,214 18 %
Total revenues $ 2,372,301 $ 1,013,718 $ 1,358,583 134 %
Average realized prices, before effects of derivative settlements: Oil ($/Bbl)$ 94.69 $ 63.63 $ 31.06 49 % Natural gas ($/Mcf) 6.10 3.55 2.55 72 % NGLs ($/Bbl) 40.33 27.10 13.23 49 % Total ($/Boe) 62.05 38.92 23.13 59 % Net sales volumes: Oil (MBbls) 16,114 9,866 6,248 63 % Natural gas (MMcf) 96,102 64,925 31,177 48 % NGLs (MBbls) 5,452 4,488 964 21 % Total (MBoe) 37,583 25,175 12,408 49 % Average daily net sales volumes: Oil (MBbls/d) 59 36 23 64 % Natural gas (MMcf/d) 352 238 114 48 % NGLs (MBbls/d) 20 16 4 25 % Total (MBoe/d) 138 92 46 50 % Oil revenue. Oil revenue increased$898.1 million , or 143%, in the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . This was driven primarily by higher realized oil prices that resulted in an increase of$500.5 million (an increase of 49% per Bbl) and a$397.6 million increase in sales volume (23 MBbls/d or 64%). The increase in sales volumes primarily related to our 2021 Acquisitions and Uinta Transaction, which contributed an additional 2,881 MBbls and 3,679 MBbls, respectively, partially offset by the natural decline from our existing asset base of 312 MBbls. Natural gas revenue. Natural gas revenue increased$356.0 million , or 155% in the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . This was driven primarily by higher natural gas prices that resulted in an increase of$245.3 million (an increase of 72% per Mcf) and a$110.7 million increase in sales volume (114 MMcf/d, or 48%). The increase in sales volumes was primarily related to our 2021 Acquisitions and Uinta Transaction, which contributed an additional 28,113 MMcf and 9,328 MMcf, respectively, partially offset by the natural decline from our existing asset base of 6,264 MMcf. 42 -------------------------------------------------------------------------------- NGL revenue. NGL revenue increased$98.2 million , or 81%, in the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . This was driven primarily by higher realized NGL prices that resulted in an increase of$72.1 million (an increase of 49% per Bbl) and a$26.1 million increase in sales volume (4 MBbls/d, or 25%). Midstream and other revenue. Midstream and other revenue increased$6.2 million , or 18%, in the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 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:
Nine Months Ended
September 30,
2022 2021 $ Change % Change
Expenses (in thousands):
Operating expense $ 758,241 $ 433,275 $ 324,966 75 %
Depreciation, depletion and amortization 375,600 233,122 142,478 61 %
General and administrative expense 59,489 33,775 25,714 76 %
Other operating costs (1,266) (8,585) 7,319 NM*
Total expenses $ 1,192,064 $ 691,587 $ 500,477 72 %
Selected expenses per Boe:
Operating expense, excluding production and
other taxes $ 15.29 $ 14.02 $ 1.27 9 %
Production and other taxes 4.88 3.19 1.69 53 %
Depreciation, depletion and amortization 9.99 9.26 0.73 8 %
* NM = Not meaningful.
Operating expense. Operating expense increased
(i)Lease and asset operating expense increased$177.1 million , or 88%, in the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . Additionally, lease and asset operating expense per Boe increased$2.08 per Boe from$7.96 per Boe to$10.04 per Boe. This$177.1 million increase was driven primarily by higher production during the nine months endedSeptember 30, 2022 , due in part to the 2021 Acquisitions and Uinta Transaction, which contributed$117.5 million and$17.1 million to the increase, respectively, general inflationary costs across our assets and certain costs that are indexed to oil commodity prices, such as CO2 purchase costs related to our CO2 flood asset inWyoming . 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$4.8 million , or 4%, in the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . Additionally, gathering, transportation and marketing expense per Boe decreased$1.91 per Boe from$5.40 per Boe to$3.49 per Boe. This decrease was driven primarily by lower sulfur processing and transportation expenses. (iii)Production and other taxes increased$103.2 million , or 129%, in the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 and increased$1.69 per Boe, an increase of 53%, to$4.88 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$48.3 million , or 617%, in the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . Additionally, workover expense per Boe increased$1.18 per Boe from$0.31 per Boe to$1.49 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, (ii) general inflationary costs across our assets and (iii) additional costs from our 2021 Acquisitions and Uinta Transaction, which contributed$28.9 million and$7.1 million to the increase, respectively. The 2021 Acquisitions increase includes additional costs related to a standard turnaround at our natural gas processing plant inWyoming . 43 --------------------------------------------------------------------------------
(v)Midstream operating expense increased
Depreciation, depletion and amortization. In the nine months endedSeptember 30, 2022 , depreciation, depletion and amortization increased$142.5 million , or 61%, compared to the nine months endedSeptember 30, 2021 , driven primarily by$82.0 million and$76.6 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$25.7 million , or 76%, for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , primarily driven by (i) an increase in equity-based compensation expense of$11.7 million due to awards that were granted as part of the Merger Transactions offset by the changes in the fair value of the Company's liability-classified profits interest awards and (ii)$10.4 million related to expense payable under the Management Agreement withKKR Energy Assets Manager LLC , which is the pro-rata portion of the Manager Compensation borne by us, offset by$3.8 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"). Nine Months Ended September 30, 2022 2021 $ Change % Change General and administrative expense (in thousands): Recurring general and administrative expense$ 26,232 $ 8,445 $ 17,787 211 % Transaction and nonrecurring expenses 6,951 10,703 (3,752) (35) % Equity-based compensation 26,306 14,627 11,679 80 % Total general and administrative expense$ 59,489 $ 33,775 $ 25,714 76 % General and administrative expense per Boe: Recurring general and administrative expense$ 0.70 $ 0.34 $ 0.36 106 % Transaction and nonrecurring expenses 0.18 0.43 (0.25) (58) % Equity-based compensation 0.70 0.58 0.12 21 % Other operating costs. Other operating costs include exploration expense and gain on sale of assets. Other operating costs changed by$7.3 million , compared to the nine months endedSeptember 30, 2021 , primarily driven by a$4.3 million lower gain on sale of assets recognized during the nine months endedSeptember 30, 2022 and$3.0 million in higher exploration expenses.
Interest expense
In the nine months endedSeptember 30, 2022 , we incurred interest expense of$68.5 million , as compared to$37.8 million in the nine months endedSeptember 30, 2021 , an 81% 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. 44 --------------------------------------------------------------------------------
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:
Nine Months Ended
September 30,
2022 2021 $ Change % Change
Gain (loss) on derivatives (in thousands):
Gain (loss) on commodity derivatives $ (645,565) $ (885,006) $ 239,441 (27) %
Gain (loss) on interest rate derivatives - (26) 26 (100) %
Gain (loss) on derivatives $ (645,565) $ (885,032) $ 239,467 (27) %
Our loss on commodity derivatives during the nine months ended September 30,
2022 decreased $239.4 million , or 27%, compared to the nine months ended
September 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 nine months ended September 30, 2022 .
Income from equity affiliates
Our income from equity method investments was$4.1 million for the nine months endedSeptember 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 nine months endedSeptember 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 nine months endedSeptember 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 nine months endedSeptember 30, 2022 we recognized income tax expense of$34.5 million for an effective tax rate of 7.4%. 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:
45
--------------------------------------------------------------------------------
Nine Months Ended
September 30,
2022 2021 $ Change % Change
(in thousands)
Net income (loss) $ 431,240 $ (601,172) $ 1,032,412 (172) %
Adjustments to reconcile to Adjusted EBITDAX:
Interest expense 68,518 37,810
Realized (gain) loss on interest rate derivatives - 7,373
Income tax expense (benefit) 34,528 407
Depreciation, depletion and amortization 375,600 233,122
Exploration expense 3,848 833
Non-cash (gain) loss on derivatives (8,812) 493,698
Non-cash equity-based compensation expense 26,306 14,054
(Gain) loss on sale of assets (5,114) (9,418)
Other (income) expense 4,472 55
Certain redeemable noncontrolling interest
distributions made by OpCo related to Manager
Compensation (29,599) -
Transaction and nonrecurring expenses (1) 25,968 12,438
Early settlement of derivative contracts (2) - 198,688
Adjusted EBITDAX (non-GAAP) $ 926,955 $ 387,888 $ 539,067 139 %
Adjustments to reconcile to Levered Free Cash
Flow:
Interest expense, excluding non-cash deferred
financing cost amortization (62,087) (28,460)
Realized (gain) loss on interest rate derivatives - (7,373)
Current income tax benefit (expense) (7,099) (407)
Tax-related redeemable noncontrolling interest
distributions made by OpCo (17,970) -
Development of oil and natural gas properties (468,796) (107,998)
Levered Free Cash Flow (non-GAAP) $ 371,003 $ 243,650 $ 127,353 52 %
(1)Transaction and nonrecurring expenses of $26.0 million for the nine months
ended September 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, (iii)
merger integration costs and (iv) acquisition and debt transaction related
costs. Transaction and nonrecurring expenses of $12.4 million for the nine
months ended September 30, 2021 were primarily related to legal, consulting and
other fees incurred for (i) the redemption by certain of our consolidated
subsidiaries of the noncontrolling equity interests held in such subsidiaries by
a certain third-party investor in exchange for its proportionate share of the
underlying oil and natural gas interests held directly or indirectly by such
subsidiaries, (ii) the redemption by certain of our consolidated subsidiaries of
the noncontrolling equity interests held in such subsidiaries by certain
third-party investors in exchange for our membership interests in April 2021 and
(iii) the Merger 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 $539.1 million , or 139%, in the nine months ended
September 30, 2022 , compared to the nine months ended September 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, our Uinta Transaction and new operated Eagle
Ford and Uinta well completions in 2022. 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 $127.4 million , or 52%, in the nine months
ended September 30, 2022 compared to the nine months ended September 30, 2021 ,
primarily driven by our increased Adjusted EBITDAX offset by $360.8 million of
increased capital expenditures related to our reinvestment activities.
46
--------------------------------------------------------------------------------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 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:
September 30, 2022 December 31, 2021
(in thousands)
Cash and cash equivalents $ 22,478 $ 128,578
Long-term debt 1,372,334 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:
Nine Months Ended
September 30,
2022 2021
(in thousands)
Net cash provided by operating activities $ 797,354 $ 148,632
Net cash used in investing activities (1,060,934) (126,776)
Net cash provided by financing activities 158,117 4,939
Net cash provided by operating activities. Net cash provided by operating
activities for the nine months ended September 30, 2022 increased by $648.7
million , or 436%, compared to the nine months ended September 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 nine months ended September 30, 2022 increased by $934.2 million , or 737%,
compared to the nine months ended September 30, 2021 , primarily due to $562.1
million of additional acquisitions of oil and natural gas properties in 2022,
driven by the Uinta Transaction, and an additional $356.7 million of cash
development capital expenditures as we have resumed reinvestment activity in
light of higher commodity prices.
47
--------------------------------------------------------------------------------
Net cash provided by financing activities. Net cash provided by financing
activities for the nine months ended September 30, 2022 was $158.1 million , as
compared to $4.9 million in the nine months ended September 30, 2021 . This
increase was primarily due to net cash inflows from our debt transactions,
including the issuance of our 7.250% senior notes due 2026 (the "New Notes") in
February 2022 and additional borrowings from our Revolving Credit Facility to
fund our Uinta Transaction. These net cash inflows in 2022 were partially offset
by $99.5 million in distributions to redeemable noncontrolling interests and
$19.3 million in dividends to holders of our Class A Common Stock.
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 onSeptember 23, 2027 . AtSeptember 30, 2022 , we had$685.0 million of outstanding borrowings under the Revolving Credit Facility and$12.2 million in outstanding letters of credit. 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 ofSeptember 30, 2022 was 5.39%. 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) 48 -------------------------------------------------------------------------------- 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 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:
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Nine Months Ended
September 30,
2022 2021
(in thousands)
Total development of oil and natural gas properties $ 468,796 $ 107,998
Change in accruals or other non-cash adjustments (28,421) (24,301)
Cash used in development of oil and natural gas properties 440,375 83,697
Cash used in acquisition of oil and natural gas properties 627,539 65,391
Non-cash acquisition of oil and natural gas properties - 10,537
Total expenditures on acquisition and development of oil and
natural gas properties $ 1,067,914 $ 159,625
Our development of oil and natural gas properties was higher during the nine
months ended September 30, 2022 , compared to the nine months ended September 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 nine months ended September 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 $627.5 million
in 2022 for the acquisition of oil and natural gas properties, primarily related
to our Uinta Transaction, as compared to $65.4 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
OnNovember 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 third quarter of 2022. The quarterly dividend is payable onDecember 7, 2022 to shareholders of record as of the close of business onNovember 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 ofSeptember 30, 2022 .
Non-GAAP financial measures
Our MD&A includes financial measures that have not been calculated in accordance
with
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--------------------------------------------------------------------------------•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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