VITAL ENERGY, INC. The following discussion and analysis of our financial condition and results of operations is for the three and six months endedJune 30, 2022 and 2021, and should be read in conjunction with our unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Quarterly Report as well as our audited consolidated financial statements and notes thereto included in our 2021 Annual Report. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see "Cautionary Statement Regarding Forward-Looking Statements" and "Part II, Item 1A. Risk Factors." Except for purposes of the unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Quarterly Report, references in this Quarterly Report to "Laredo ," "we," "us," "our" or similar terms refer toLaredo , LMS and GCM collectively, unless the context otherwise indicates or requires. Unless otherwise specified, references to "average sales price" refer to average sales price excluding the effects of our derivative transactions. All amounts, dollars and percentages presented in this Quarterly Report are rounded and therefore approximate.
Executive overview
We are an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties in thePermian Basin ofWest Texas . The oil and liquids-richPermian Basin is characterized by multiple target horizons, extensive production histories, long-lived reserves, high drilling success rates and high initial production rates. We have grown primarily through our drilling program, coupled with select strategic acquisitions. As ofJune 30, 2022 , we had assembled 165,511 net acres in thePermian Basin . We are currently operating two drilling rigs and one completions crew and expect to maintain two drilling rigs and one completions crew for the remainder of 2022. Our planned capital expenditures for 2022 are expected to be approximately$550.0 million . However, we will continue to monitor commodity prices and service costs and adjust activity levels in order to proactively manage our cash flows and preserve liquidity. Below is a summary and comparative analysis of our financial and operating performance for the periods presented: 2022 compared to Three months ended June 30, 2021 (in thousands) 2022 2021 Change (#) Change (%) Oil sales volumes (MBbl) 3,690 2,406 1,284 53 % Oil equivalents sales volumes (MBOE) 7,920 7,819 101 1 % Oil, NGL and natural gas sales(1)$ 549,470 $ 232,326 $ 317,144 137 % Net income (loss)$ 262,546 $ (132,661) $ 395,207 298 %
Net cash provided by operating activities
$ 251,579 216 % Free Cash Flow (a non-GAAP financial measure)(2)$ 110,475 $ (31,191) $ 141,666 454 % Adjusted EBITDA (a non-GAAP financial measure)(2)$ 278,390 $ 96,991 $ 181,399 187 %
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(1)Our oil, NGL and natural gas sales increased as a result of a 134% increase in average sales price per BOE and a 53% increase in oil sales volumes.
(2)See pages 39-40 for discussion and calculations of these non-GAAP financial measures.
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2022 compared to
Six months ended June 30, 2021
(in thousands) 2022 2021 Change (#) Change (%)
Oil sales volumes (MBbl) 7,317 4,590 2,727 59 %
Oil equivalents sales volumes (MBOE) 15,581 14,928 653 4 %
Oil, NGL and natural gas sales(1) $ 1,000,657 $ 434,783 $ 565,874 130 %
Net income (loss) $ 175,765 $ (208,100) $ 383,865 184 %
Net cash provided by operating activities
$ 187,697 $ 351,310 187 % Free Cash Flow (a non-GAAP financial measure)(2)$ 133,682 $ (9,431) $ 143,113 1,517 % Adjusted EBITDA (a non-GAAP financial measure)(2)$ 500,479 $ 190,314 $ 310,165 163 %
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(1)Our oil, NGL and natural gas sales increased as a result of a 120% increase in average sales price per BOE and a 59% increase in oil sales volumes.
(2)See pages 39-40 for discussion and calculations of these non-GAAP financial measures.
Recent developments
Volatility in commodity prices
Commodity prices remained strong during the second quarter of 2022, sustaining levels reached at the end of the first quarter as increased commodity demand has continued to outpace increased supply. Worldwide commodity demand continues to exceed pre-pandemic levels as the impact from COVID-19 has subsided and economies have returned to a more normal level of activity. Supply has been constrained and pricing has been affected, in part, by the impact of the Russian-Ukrainian military conflict on global commodity and financial markets, and the resulting effect of sanctions by theEuropean Union ,United Kingdom andU.S. on imports of oil and gas fromRussia . Supply has also been restrained, to a degree, by the continued cooperation of OPEC+ and its commitment to steady and predictable production increases throughout 2022. However, because any of the above factors could suddenly change or reverse, global commodity and financial markets remain subject to heightened levels of uncertainty and volatility, and future disruptions and industry-specific impacts could result.
Rising inflation and interest rates
While certain drilling and completions costs and costs of oilfield services, equipment, and materials decreased in recent years, as service providers reduced their costs in response to reduced demand arising from historically low crude oil prices, such costs began to rise in 2021 and have continued to persist in 2022 in conjunction with the significant increase in commodity prices, labor tightening, and heightened levels of inflation. In addition to the effect of inflationary pressures on our costs of operations, rising interest rates as a result of theFederal Reserve's tightening monetary policy have the potential to increase our borrowing costs on debt under our Senior Secured Credit Facility. We remain committed to our ongoing efforts to increase the efficiency of our operations and improve costs, which may, in part, offset cost increases from inflation and reduce our borrowing needs.
Senior unsecured notes repurchases
Subsequent toJune 30, 2022 we repurchased$11.0 million ,$22.5 million and$25.9 million in aggregate principal of theJanuary 2025 Notes,January 2028 Notes andJuly 2029 Notes, respectively, throughAugust 2, 2022 . See Note 5 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our senior unsecured notes repurchases.
Share repurchase program
Subsequent toJune 30, 2022 , we repurchased 99,012 shares of our common stock on the open market at a weighted-average price of$71.38 per common share for a total of$7.0 million under our share repurchase program throughAugust 2, 2022 . See Note 6 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our share repurchases. 24
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Pricing and reserves
Our results of operations are heavily influenced by oil, NGL and natural gas prices. Historically, commodity prices have experienced significant fluctuations; however, the volatility in prices has substantially increased in recent years. We maintain an active, multi-year commodity derivatives strategy to minimize commodity price volatility and support cash flows needed for operations. We have entered into a number of commodity derivative contracts that have enabled us to offset a portion of the changes in our cash flow caused by fluctuations in price and basis differentials for our sales of oil, NGL and natural gas, as discussed in "Item 3. Quantitative and Qualitative Disclosures About Market Risk." See Notes 8 and 9 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our commodity derivatives. Notwithstanding our derivatives strategy, another collapse in commodity prices may affect the economic viability of, and our ability to fund, our drilling projects, as well as the economic recovery of oil, NGL and natural gas reserves. See "Critical accounting estimates" in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2021 Annual Report for further discussion of our oil, NGL and natural gas reserve quantities and standardized measure of discounted future net cash flows. Our reserves are reported in three streams: oil, NGL and natural gas. The Realized Prices, which are utilized to value our proved reserves and calculated using the average first-day-of-the-month prices for each month within the 12-month period prior to the end of the reporting period, adjusted for factors affecting price received at the delivery point, as ofJune 30, 2022 were$86.39 for oil,$31.27 for NGL and$3.72 for natural gas. The unamortized cost of evaluated oil and natural gas properties being depleted did not exceed the full cost ceiling as ofJune 30, 2022 andJune 30, 2021 . As such, no full cost ceiling impairments were recorded during the six months endingJune 30, 2022 andJune 30, 2021 . Additionally, if prices remain at current levels we do not anticipate recording any full cost ceiling impairments for the foreseeable future. See Notes 2 and 6 in our 2021 Annual Report for discussion of the full cost method of accounting and our Realized Prices. Results of operations Revenues Sources of our revenue Our revenues are derived from the sale of produced oil, NGL and natural gas, the sale of purchased oil and providing midstream services to third parties, all within the continentalU.S. and do not include the effects of derivatives. See Note 2 in our 2021 Annual Report for additional information regarding our revenue recognition policies. The following tables present our sources of revenue as a percentage of total revenues for the periods presented and the corresponding changes for such periods: Three months ended June 30, 2022 compared to 2021 2022 2021 Change (#) Change (%) Oil sales 73 % 54 % 19 35 % NGL sales 13 % 15 % (2) (13) % Natural gas sales 12 % 11 % 1 9 % Midstream service revenues - % - % - - % Sales of purchased oil 2 % 20 % (18) (90) % Total 100 % 100 % Six months ended June 30, 2022 compared to 2021 2022 2021 Change (#) Change (%) Oil sales 69 % 52 % 17 33 % NGL sales 13 % 16 % (3) (19) % Natural gas sales 10 % 12 % (2) (17) % Midstream service revenues - % - % - - % Sales of purchased oil 8 % 20 % (12) (60) % Total 100 % 100 % 25
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Oil, NGL and natural gas sales volumes, revenues and prices
The following tables present information regarding our oil, NGL and natural gas
sales volumes, sales revenues and average sales prices for the periods presented
and the corresponding changes for such periods:
Three months ended
June 30, 2022 compared to 2021
2022 2021 Change (#) Change (%)
Sales volumes:
Oil (MBbl) 3,690 2,406 1,284 53 %
NGL (MBbl) 2,100 2,551 (451) (18) %
Natural gas (MMcf) 12,774 17,169 (4,395) (26) %
Oil equivalents (MBOE)(1)(2) 7,920 7,819 101 1 %
Average daily oil equivalent sales volumes (BOE/D)(2) 87,032 85,924 1,108 1 %
Average daily oil sales volumes (Bbl/D)(2) 40,553 26,440 14,113 53 %
Sales revenues (in thousands):
Oil $ 410,359 $ 157,722 $ 252,637 160 %
NGL 72,505 43,494 29,011 67 %
Natural gas 66,606 31,110 35,496 114 %
Total oil, NGL and natural gas sales revenues $ 549,470 $ 232,326 $ 317,144 137 %
Average sales prices(2):
Oil ($/Bbl)(3) $ 111.20 $ 65.55 $ 45.65 70 %
NGL ($/Bbl)(3) $ 34.52 $ 17.05 $ 17.47 102 %
Natural gas ($/Mcf)(3) $ 5.21 $ 1.81 $ 3.40 188 %
Average sales price ($/BOE)(3) $ 69.38 $ 29.71 $ 39.67 134 %
Oil, with commodity derivatives ($/Bbl)(4) $ 74.72 $ 47.00 $ 27.72 59 %
NGL, with commodity derivatives ($/Bbl)(4) $ 27.24 $ 10.40 $ 16.84 162 %
Natural gas, with commodity derivatives ($/Mcf)(4) $ 3.33 $ 1.46 $ 1.87 128 %
Average sales price, with commodity derivatives ($/BOE)(4) $ 47.41 $ 21.05 $ 26.36 125 %
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(1)BOE is calculated using a conversion rate of six Mcf per one Bbl.
(2)The numbers presented in the three months ended
(3)Price reflects the average of actual sales prices received when control passes to the purchaser/customer adjusted for quality, certain transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the delivery point.
(4)Price reflects the after-effects of our commodity derivative transactions on
our average sales prices. Our calculation of such after-effects includes
settlements of matured commodity derivatives during the respective periods in
accordance with GAAP and an adjustment to reflect premiums incurred previously
or upon settlement that are attributable to commodity derivatives that settled
during the respective periods.
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Six months ended June
30, 2022 compared to 2021
2022 2021 Change (#) Change (%)
Sales volumes:
Oil (MBbl) 7,317 4,590 2,727 59 %
NGL (MBbl) 4,094 4,872 (778) (16) %
Natural gas (MMcf) 25,017 32,799 (7,782) (24) %
Oil equivalents (MBOE)(1)(2) 15,581 14,928 653 4 %
Average daily oil equivalent sales volumes (BOE/D)(2) 86,080 82,475 3,605 4 %
Average daily oil sales volumes (Bbl/D)(2) 40,424 25,357 15,067 59 %
Sales revenues (in thousands):
Oil $ 757,802 $ 285,423 $ 472,379 166 %
NGL 137,660 85,172 52,488 62 %
Natural gas 105,195 64,188 41,007 64 %
Total oil, NGL and natural gas sales revenues $ 1,000,657 $ 434,783 $ 565,874 130 %
Average sales prices(2):
Oil ($/Bbl)(3) $ 103.57 $ 62.19 $ 41.38 67 %
NGL ($/Bbl)(3) $ 33.62 $ 17.48 $ 16.14 92 %
Natural gas ($/Mcf)(3) $ 4.20 $ 1.96 $ 2.24 114 %
Average sales price ($/BOE)(3) $ 64.22 $ 29.13 $ 35.09 120 %
Oil, with commodity derivatives ($/Bbl)(4) $ 71.01 $ 46.06 $ 24.95 54 %
NGL, with commodity derivatives ($/Bbl)(4) $ 26.65 $ 10.81 $ 15.84 147 %
Natural gas, with commodity derivatives ($/Mcf)(4) $ 2.90 $ 1.55 $ 1.35 87 %
Average sales price, with commodity derivatives ($/BOE)(4) $ 45.01 $ 21.10 $ 23.91 113 %
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(1)BOE is calculated using a conversion rate of six Mcf per one Bbl.
(2)The numbers presented in the six months endedJune 30, 2022 and 2021 columns are based on actual amounts and are not calculated using the rounded numbers presented in the table above or the table below.
(3)Price reflects the average of actual sales prices received when control passes to the purchaser/customer adjusted for quality, certain transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the delivery point.
(4)Price reflects the after-effects of our commodity derivative transactions on
our average sales prices. Our calculation of such after-effects includes
settlements of matured commodity derivatives during the respective periods in
accordance with GAAP and an adjustment to reflect premiums incurred previously
or upon settlement that are attributable to commodity derivatives that settled
during the respective periods.
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The following tables present net settlements paid for matured commodity
derivatives and net premiums paid previously or upon settlement attributable to
commodity derivatives that matured during the periods utilized in our
calculation of the average sales prices, with commodity derivatives, for the
periods presented and the corresponding changes for such periods:
Three months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Net settlements paid for matured commodity
derivatives:
Oil $ (134,631) $ (34,466) $ (100,165) (291) %
NGL (15,294) (16,953) 1,659 10 %
Natural gas (24,090) (6,126) (17,964) (293) %
Total $ (174,015) $ (57,545) $ (116,470) (202) %
Net premiums paid previously or upon
settlement attributable to commodity
derivatives that matured during the respective
period:
Oil $ - $ (10,183) $ 10,183 100 %
Six months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Net settlements paid for matured commodity
derivatives:
Oil $ (238,244) $ (52,837) $ (185,407) (351) %
NGL (28,533) (32,529) 3,996 12 %
Natural gas (32,564) (13,299) (19,265) (145) %
Total $ (299,341) $ (98,665) $ (200,676) (203) %
Net premiums paid previously or upon
settlement attributable to commodity
derivatives that matured during the respective
period:
Oil $ - $ (21,188) $ 21,188 100 %
Changes in average sales prices and sales volumes caused the following changes
to our oil, NGL and natural gas revenues between the six months ended June 30,
2022 and 2021:
(in thousands) Oil NGL Natural gas Total
Second-quarter 2021 Revenues $ 157,722 $ 43,494 $ 31,110 $ 232,326
Effect of changes in average sales prices 168,450 36,696 43,460 248,606
Effect of changes in sales volumes 84,187 (7,685) (7,964) 68,538
Second-quarter 2022 Revenues $ 410,359 $ 72,505 $ 66,606 $ 549,470
Change ($) $ 252,637 $ 29,011 $ 35,496 $ 317,144
Change (%) 160 % 67 % 114 % 137 %
(in thousands) Oil NGL Natural gas Total
First-half 2021 Revenues $ 285,423 $ 85,172 $ 64,188 $ 434,783
Effect of changes in average sales prices 329,149 61,681 56,236 447,066
Effect of changes in sales volumes 143,230 (9,193) (15,229) 118,808
First-half 2022 Revenues $ 757,802 $ 137,660 $ 105,195 $ 1,000,657
Change ($) $ 472,379 $ 52,488 $ 41,007 $ 565,874
Change (%) 166 % 62 % 64 % 130 %
The increase in our second-quarter and first-half 2022 oil revenues as compared
to the same periods in 2021 is primarily due to (i) an increase in oil price and
(ii) the Sabalo/Shad Acquisition and Pioneer Acquisition, both of which occurred
during the second half of 2021, and the related increase in our oil sales
volumes. The increase in our second-quarter and first-half 2022 NGL and natural
gas revenues as compared to the same periods in 2021 is primarily due to
increases in NGL and natural gas
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prices, partially offset by the Working Interest Sale, which occurred during the
second half of 2021, and the related decrease in our NGL and natural gas sales
volumes.
The following tables present midstream service revenues and sales of purchased
oil for the periods presented and the corresponding changes for such periods:
Three months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Midstream service revenues $ 1,891 $ 1,257 $ 634 50 %
Sales of purchased oil $ 8,795 $ 60,788 $ (51,993) (86) %
Six months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Midstream service revenues $ 4,235 $ 2,553 $ 1,682 66 %
Sales of purchased oil $ 87,659 $ 107,265 $ (19,606) (18) %
Midstream service revenues. Our midstream service revenues increased for the
three and six months ended June 30, 2022 compared to the same period in 2021.
Midstream service revenues are generated by oil throughput fees and services
provided to third parties for (i) integrated oil and natural gas gathering and
transportation systems and related facilities, (ii) natural gas lift, fuel for
drilling and completions activities and centralized compression infrastructure
and (iii) water storage, recycling and transportation infrastructure, and are
recognized over time as the customer benefits from these services when provided.
These revenues vary and will fluctuate due to oil throughput fees and the level
of services provided to third parties.
Sales of purchased oil. Sales of purchased oil are a function of the volumes and
prices of purchased oil sold to customers and are offset by the volumes and
costs of purchased oil. During the three and six months ended June 30, 2022 , we
were a firm shipper on the Gray Oak pipeline and we utilized purchased oil to
fulfill portions of our commitments. In previous periods, we also utilized
purchased oil to fulfill portions of our Bridgetex pipeline commitment, which
ended during the first quarter of 2022. The continuance of this practice in the
future is based upon, among other factors, our pipeline capacity as a firm
shipper and the quantity of our lease production which may contribute to our
pipeline commitments. Sales of purchased oil decreased during the three and six
months ended June 30, 2022 compared to the same periods in 2021 primarily due to
a decrease in the volumes of purchased oil as our Bridgetex pipeline commitment
ended during the first quarter of 2022, partially offset by an increase in sales
prices.
We enter into purchase transactions with third parties and separate sale
transactions. These transactions are presented on a gross basis as we act as the
principal in the transaction by assuming control of the commodities purchased
and the responsibility to deliver the commodities sold. Revenue is recognized
when control transfers to the purchaser/customer at the delivery point based on
the price received. The transportation costs associated with these transactions
are presented as a component of costs of purchased oil. See "-Costs and expenses
- Costs of purchased oil."
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Costs and expenses
The following tables present information regarding costs and expenses and selected average costs and expenses per BOE sold for the periods presented and the corresponding changes for such periods:
Three months ended June 30, 2022 compared to2021
(in thousands except for per BOE sold data) 2022 2021 Change ($) Change (%) Costs and expenses: Lease operating expenses$ 42,014 $ 19,771 $ 22,243 113 % Production and ad valorem taxes 33,001 14,737 18,264 124 % Transportation and marketing expenses 10,994 10,690 304 3 % Midstream service expenses 1,733 700 1,033 148 % Costs of purchased oil 6,780 64,737 (57,957) (90) % General and administrative (excluding LTIP) 13,505 12,512 993 8 % General and administrative (LTIP): LTIP cash 889 7,220 (6,331) (88) % LTIP non-cash 2,605 1,369 1,236 90 % Organizational restructuring expenses - 9,800 (9,800)
(100) %
Depletion, depreciation and amortization 78,135 39,976 38,159 95 % Impairment expense - 1,613 (1,613) (100) % Other operating (income) expense, net (736) 2,899 (3,635) (125) % Total costs and expenses$ 188,920 $ 186,024 $ 2,896
2 % Selected average costs and expenses per BOE sold(1): Lease operating expenses
$ 5.30 $ 2.53 $ 2.77 109 %
Production and ad valorem taxes 4.17 1.88 2.29 122 %
Transportation and marketing expenses 1.39 1.37 0.02 1 %
Midstream service expenses 0.22 0.09 0.13 144 %
General and administrative (excluding LTIP) 1.71 1.60 0.11 7 %
Total selected operating expenses $ 12.79 $ 7.47 $ 5.32 71 %
General and administrative (LTIP):
LTIP cash $ 0.11 $ 0.92 $ (0.81) (88) %
LTIP non-cash $ 0.33 $ 0.18 $ 0.15 83 %
Depletion, depreciation and amortization $ 9.87 $ 5.11 $ 4.76 93 %
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(1)Selected average costs and expenses per BOE sold are based on actual amounts and are not calculated using the rounded numbers presented in the table above.
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Six months ended June 30, 2022 compared to 2021
(in thousands except for per BOE sold data) 2022 2021 Change ($) Change (%) Costs and expenses: Lease operating expenses$ 82,890 $ 38,689 $ 44,201 114 % Production and ad valorem taxes 60,488 28,020 32,468 116 % Transportation and marketing expenses 25,737 22,817 2,920 13 % Midstream service expenses 3,147 1,558 1,589 102 % Costs of purchased oil 89,744 114,653 (24,909) (22) % General and administrative (excluding LTIP) 26,898 22,147 4,751 21 % General and administrative (LTIP): LTIP cash 7,388 8,840 (1,452) (16) % LTIP non-cash 4,657 3,187 1,470 46 % Organizational restructuring expenses - 9,800 (9,800)
(100) %
Depletion, depreciation and amortization 151,627 78,085 73,542 94 % Impairment expense - 1,613 (1,613) (100) % Other operating (income) expense, net 283 4,042 (3,759) (93) % Total costs and expenses$ 452,859 $ 333,451 $ 119,408
36 % Selected average costs and expenses per BOE sold(1): Lease operating expenses
$ 5.32 $ 2.59 $ 2.73 105 %
Production and ad valorem taxes 3.88 1.88 2.00 106 %
Transportation and marketing expenses 1.65 1.53 0.12 8 %
Midstream service expenses 0.20 0.10 0.10 100 %
General and administrative (excluding LTIP) 1.73 1.48 0.25 17 %
Total selected operating expenses $ 12.78 $ 7.58 $ 5.20 69 %
General and administrative (LTIP):
LTIP cash $ 0.47 $ 0.59 $ (0.12) (20) %
LTIP non-cash $ 0.30 $ 0.21 $ 0.09 43 %
Depletion, depreciation and amortization $ 9.73 $ 5.23 $ 4.50 86 %
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(1)Selected average costs and expenses per BOE sold are based on actual amounts and are not calculated using the rounded numbers presented in the table above.
Lease operating expenses ("LOE"). LOE, which includes workover expenses,
increased for the three and six months ended June 30, 2022 , compared to the same
periods in 2021. LOE are daily expenses incurred to bring oil, NGL and natural
gas out of the ground and to market, together with the daily expenses incurred
to maintain our producing properties. Such costs also include maintenance,
repairs and non-routine workover expenses related to our oil and natural gas
properties. LOE increased in the first half of 2022 due to inflationary
pressures and costs associated with integrating our recently acquired assets
from the Sabalo/Shad Acquisition and Pioneer Acquisition, primarily driven by
costs related to artificial lift and flowback management. We continue to focus
on economic efficiencies associated with the usage and procurement of products
and services related to LOE. Total LOE is expected to remain relatively flat for
the remainder of the year, with unit LOE increasing slightly as total volumes
are expected to decline.
Production and ad valorem taxes. Production and ad valorem taxes increased for
the three and six months ended June 30, 2022 , compared to the same periods in
2021, due to increased oil, NGL and natural gas sales revenues. Production taxes
are based on and fluctuate in proportion to our oil, NGL and natural gas sales
revenues, and are established by federal, state or local taxing authorities. We
take full advantage of all credits and exemptions in our various taxing
jurisdictions. Ad valorem taxes are based on and fluctuate in proportion to the
taxable value assessed by the various counties where our oil and natural gas
properties are located.
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Transportation and marketing expenses. Transportation and marketing expenses increased slightly for the three and six months endedJune 30, 2022 , compared to the same periods in 2021. These are expenses incurred for the delivery of produced oil to customers in theU.S. Gulf Coast market via the Gray Oak pipeline and, in previous periods, the Bridgetex pipeline. We ship the majority of our produced oil to theU.S. Gulf Coast , which we believe provides a long-term pricing advantage versus the Midland market. Additionally, firm transportation payments on excess pipeline capacity associated with transportation agreements are included in transportation and marketing expenses. See Note 11 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our transportation commitments. Midstream service expenses. Midstream service expenses increased for the three and six months endedJune 30, 2022 , compared to the same periods in 2021. These are expenses incurred to operate and maintain our (i) integrated oil and natural gas gathering and transportation systems and related facilities, (ii) centralized oil storage tanks, (iii) natural gas lift, fuel for drilling and completion activities and centralized compression infrastructure and (iv) water storage, recycling and transportation facilities. Costs of purchased oil. During the three and six months endedJune 30, 2022 , we were a firm shipper on the Gray Oak pipeline and we utilized purchased oil to fulfill portions of our commitments. In previous periods, we also utilized purchased oil to fulfill portions of our Bridgetex pipeline commitment, which ended during the first quarter of 2022. In the event our long-haul transportation capacity on the Gray Oak pipeline is expected to exceed our net production, consistent with our historic practice, we expect to continue to purchase third-party oil at the trading hubs to satisfy the deficit in our associated long-haul transportation commitments. Costs of purchased oil decreased for the three and six months endedJune 30, 2022 , compared to the same periods in 2021 primarily due to a decrease in the volumes of purchased oil on pipelines as our Bridgetex pipeline commitment ended during the first quarter of 2022, partially offset by an increase in sales prices. General and administrative ("G&A"). G&A, excluding employee compensation expenses from our long-term incentive plan ("LTIP"), increased for the three and six months endedJune 30, 2022 , compared to the same period in 2021, mainly due to (i) increases in workforce and professional expenses and (ii) inflationary pressures. LTIP cash expense decreased for the three and six months endedJune 30, 2022 , compared to the same periods in 2021. The fair values of our cash-settled performance unit awards and phantom unit awards, granted in prior years, decreased significantly during the second quarter of 2022, mainly due to the performance of our stock during the period. LTIP non-cash expense increased for the three and six months endedJune 30, 2022 , compared to the same periods in 2021, mainly due to new restricted stock awards and performance share awards granted to our employees during the second half of 2021 and the first half of 2022. See Note 7 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for information regarding our equity-based compensation.
Organizational restructuring. These expenses represent the one-time charges comprising of compensation, tax, professional, outplacement and insurance related expenses for the workforce reduction that occurred in during the first half of 2021.
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Depletion, depreciation and amortization ("DD&A"). The following tables present
the components of our DD&A and depletion expense per BOE sold for the periods
presented and the corresponding changes for such periods:
Three months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Depletion of evaluated oil and natural gas
properties $ 75,011 $ 36,650 $ 38,361 105 %
Depreciation of midstream service assets 2,205 2,381 (176) (7) %
Depreciation and amortization of other fixed
assets 919 945 (26) (3) %
Total DD&A $ 78,135 $ 39,976 $ 38,159 95 %
Depletion expense per BOE sold $ 9.47 $ 4.69 $ 4.78 102 %
Six months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Depletion of evaluated oil and natural gas
properties $ 144,933 $ 71,375 $ 73,558 103 %
Depreciation of midstream service assets 4,411 4,803 (392) (8) %
Depreciation and amortization of other fixed
assets 2,283 1,907 376 20 %
Total DD&A $ 151,627 $ 78,085 $ 73,542 94 %
Depletion expense per BOE sold $ 9.30 $ 4.78 $ 4.52 95 %
Depletion expense per BOE increased for the three and six months ended June 30,
2022 , compared to the same periods in 2021, primarily due to (i) an increase in
the book value of our oil and natural gas properties as a result of the
Sabalo/Shad Acquisition and Pioneer Acquisition and the associated development
costs and (ii) inflationary pressures. See Note 6 to our consolidated financial
statements included in our 2021 Annual Report and "-Pricing and reserves" for
additional information regarding the full cost method of accounting.
Impairment expense. During the three and six months ended June 30, 2021 , we
recorded inventory impairment expense of $1.6 million . No such impairment
expense was recorded during the three and six months ended June 30, 2022 . See
Note 9 to our unaudited consolidated financial statements included elsewhere in
this Quarterly Report for additional discussion regarding the fair value
measurement of our inventory and long-lived assets.
Other operating (income) expense, net. Notable items include (i) accretion
expense due to the passage of time on our asset retirement obligations, (ii)
transaction expenses which represent incurred costs associated with our Working
Interest Sale in the second half of 2021 and (iii) the gain on sale of pipeline
line-fill during the second quarter of 2022. See Note 2 in our 2021 Annual
report for additional information regarding our asset retirement obligations and
Note 13 to our unaudited consolidated financial statements included elsewhere in
this Quarterly Report.
Non-operating income (expense)
The following tables present the components of non-operating income (expense),
net for the periods presented and the corresponding changes for such periods:
Three months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)Loss on derivatives, net$ (65,927) $ (216,942) $ 151,015 70 % Interest expense (32,807) (25,870) (6,937) (27) % Loss on extinguishment of debt, net (798) - (798) (100) % Gain on disposal of assets, net 38 66 (28) (42) % Other income (expense), net (2,104) 416 (2,520) (606) % Total non-operating expense, net$ (101,598) $ (242,330) $ 140,732 58 % 33
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Six months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Loss on derivatives, net $ (391,743) $ (371,307) $ (20,436) (6) %
Interest expense (65,284) (51,816) (13,468) (26) %
Loss on extinguishment of debt, net (798) - (798) (100) %
Loss on disposal of assets, net (222) (6) (216) (3,600) %
Other income, net 335 1,795 (1,460) (81) %
Total non-operating expense, net $ (457,712) $ (421,334) $ (36,378) (9) %Loss on derivatives, net. The following tables present the changes in the components of loss on derivatives, net for the periods presented and the corresponding changes for such periods:
Three months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Non-cash gain (loss) on derivatives, net $ 106,527 $ (159,335) $ 265,862 167 %
Settlements paid for matured derivatives,
net (172,454) (57,607) (114,847) (199) %
Loss on derivatives, net $ (65,927) $ (216,942) $ 151,015 70 %
Six months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Non-cash loss on derivatives, net $ (93,919) $ (281,567) $ 187,648 67 %
Settlements paid for matured derivatives,
net (297,824) (98,781) (199,043) (201) %
Premiums received for commodity derivatives - 9,041 (9,041) (100) %
Loss on derivatives, net $ (391,743) $ (371,307) $ (20,436) (6) %
Non-cash loss on derivatives, net is the result of (i) new and matured
contracts, including contingent consideration derivatives for the period
subsequent to the initial valuation date and through the end of the contingency
period, and the changing relationship between our outstanding contract prices
and the future market prices in the forward curves, which we use to calculate
the fair value of our derivatives and (ii) matured interest rate swaps and the
changing relationship between the contract interest rate and the LIBOR interest
rate forward curve. In general, if outstanding commodity contracts are held
constant, we experience gains during periods of decreasing market prices and
losses during periods of increasing market prices. Settlements paid or received
for matured derivatives are for our (i) commodity derivative contracts, which
are based on the settlement prices compared to the prices specified in the
derivative contracts, (ii) interest rate derivative and (iii) contingent
consideration derivatives.
See Notes 8 and 9 to our unaudited consolidated financial statements included
elsewhere in this Quarterly Report and "Item 3. Quantitative and Qualitative
Disclosures About Market Risk" for additional information regarding our
derivatives.
Interest expense. Interest expense increased for the three months ended June 30,
2022 , compared to the same period in 2021. See Notes 5 to our unaudited
consolidated financial statements included elsewhere in this Quarterly Report
for additional information regarding our long-term debt.
Income tax (expense) benefit
The following tables present income tax (expense) benefit for the periods presented and the corresponding changes for such periods:
Three months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Current $ (4,513) $ - $ (4,513) (100) %
Deferred $ (2,579) $ 1,322 $ (3,901) (295) %
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Six months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%) Current$ (5,731) $ - $ (5,731) (100) % Deferred $ (484)$ 2,084 $ (2,568) (123) % We are subject to federal and state income taxes and theTexas franchise tax. The income tax expense for the three and six months endedJune 30, 2022 is attributed toTexas franchise tax. With the rise in oil prices and the addition of oily, high- margin inventory, we have recently seen positive indications that we will use a portion of our NOLs. However, as ofJune 30, 2022 , we believe it is more likely than not that a portion of the NOL loss carryforwards are not fully realizable. We continue to consider new evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance is needed. Such consideration includes projected future cash flows from our oil, NGL and natural gas reserves (including the timing of those cash flows), the reversal of deferred tax liabilities recorded as ofJune 30, 2022 , and our ability to capitalize intangible drilling costs, rather than expensing these costs and future projections ofOklahoma sourced income. As ofJune 30, 2022 , a total valuation allowance of$398.2 million has been recorded to offset our federal andOklahoma net deferred tax assets, resulting in a$1.3 million Texas net deferred liability. The effective tax rate for our operations was 2%, due to theTexas franchise tax. Our effective tax rate is affected by changes in valuation allowances, recurring permanent differences and discrete items that may occur in any given year, but are not consistent from year to year. Issuances, sales and/or exchanges of our common stock, taken together with prior transactions with respect to our common stock, could trigger an ownership change and therefore a limitation on our ability to utilize our net operating loss carryforwards which could result in taxable income in future years. For additional discussion of our income taxes, see Note 14 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
Liquidity and capital resources
Historically, our primary sources of liquidity have been cash flows from
operations, proceeds from equity offerings, proceeds from senior unsecured note
offerings, borrowings under our Senior Secured Credit Facility and proceeds from
asset dispositions. Our primary operational uses of capital have been for the
acquisition, exploration and development of oil and natural gas properties and
infrastructure development. During the second quarter of 2022, we have utilized
our cash flows to fund the repurchase of portions of our senior unsecured notes
and our share repurchase program. For additional discussion of the repurchase of
our senior unsecured notes and our share repurchase program, see Notes 5 and 6,
respectively, to our unaudited consolidated financial statements included
elsewhere in this Quarterly Report.
We continually seek to maintain a financial profile that provides operational
flexibility and monitor the markets to consider which financing alternatives,
including debt and equity capital resources, joint ventures and asset sales, are
available to meet our future planned capital expenditures, a significant portion
of which we are able to adjust and manage. We also continually evaluate
opportunities with respect to our capital structure, including issuances of new
securities, as well as transactions involving our outstanding senior notes,
which could take the form of open market or private repurchases, exchange or
tender offers, or other similar transactions, and our common stock, which could
take the form of open market or private repurchases. We may make changes to our
capital structure from time to time, with the goal of maintaining financial
flexibility, preserving or improving liquidity and/or achieving cost efficiency.
Such financing alternatives, or combination of alternatives, if any, will depend
on prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. The amounts involved may be material. We
continuously look for other opportunities to maximize shareholder value. For
further discussion of our financing activities related to debt instruments, see
Notes 5 to our unaudited consolidated financial statements included elsewhere in
this Quarterly Report.
Due to the inherent volatility in the prices of oil, NGL and natural gas and the
sometimes wide pricing differentials between where we produce and sell such
commodities, we engage in commodity derivative transactions to hedge price risk
associated with a portion of our anticipated sales volumes. Due to the inherent
volatility in interest rates, we will, from time to time, enter into interest
rate derivative swaps to hedge interest rate risk associated with our debt under
the Senior Secured Credit Facility. By removing a portion of the (i) price
volatility associated with future sales volumes and (ii) interest rate
volatility associated with anticipated outstanding debt, we expect to mitigate,
but not eliminate, the potential effects of variability in cash flows from
operations. See "Part I. Item 3. Quantitative and Qualitative Disclosures About
Market Risk" below. See Note 9 to our consolidated financial statements included
elsewhere in this Quarterly Report for discussion of our open commodity
positions.
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As ofJune 30, 2022 , we had cash and cash equivalents of$147.5 million and available capacity under the Senior Secured Credit Facility of$1.0 billion , resulting in total liquidity of$1.1 billion . As ofAugust 2, 2022 , we had cash and cash equivalents of$113.9 million and available capacity under the Senior Secured Credit Facility of$1.0 billion , resulting in total liquidity of$1.1 billion . We believe that our operating cash flows and the aforementioned liquidity sources provide us with sufficient liquidity and financial resources to manage our cash needs and contractual obligations, to implement our currently planned capital expenditure budget and, at our discretion, to fund any share repurchases, pay down, repurchase or refinance debt or adjust our planned capital expenditure budget.
Cash requirements for known contractual and other obligations
The following table presents significant cash requirements for known contractual
and other obligations as of
(in thousands) Short-term(1) Long-term Total Senior unsecured notes(2)$ 119,818 $ 1,784,396 $ 1,904,214 Asset retirement obligations(3) 2,972 70,254 73,226 Firm transportation commitments(4) 17,230 64,672 81,902 Performance unit award cash payouts(5) 11,656 11,719 23,375 Lease commitments(6) 22,563 18,451 41,014 Total$ 174,239 $ 1,949,492 $ 2,123,731
_____________________________________________________________________________
(1)We expect to satisfy our short-term contractual and other obligations with cash flows from operations.
(2)Amounts presented include both our principal and interest obligations. TheJuly 2029 Notes consist of$374.2 million principal and interest payments totaling$29.0 million each year with interest payments due semi-annually onJanuary 31 andJuly 31 of each year untilJuly 31, 2029 . TheJanuary 2025 Notes andJanuary 2028 Notes consist of$577.9 million and$354.8 million in principal, respectively, and interest payments totaling$54.9 million and$35.9 million each year, respectively, with interest payments due semi-annually onJanuary 15 andJuly 15 of each year untilJanuary 15, 2025 andJanuary 15, 2028 , respectively.
(3)Asset retirement obligations represent future costs associated with the retirement of tangible long-lived assets. See Note 13 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our asset retirement obligations.
(4)Amounts represent commitments to deliver, for sale or transportation, fixed volumes of product under certain contractual arrangements that specify the delivery of a fixed and determinable quantity. See Note 11 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our firm transportation commitments. (5)Amounts represent the estimated cash payouts as ofJune 30, 2022 for our performance unit awards granted onMarch 5, 2020 andMarch 9, 2021 , utilizing ourJune 30, 2022 closing stock price. See Note 9 to our consolidated financial statements included in our 2021 Annual Report for additional discussion of our performance unit awards. (6)Lease commitment amounts represent our minimum lease payments for our operating lease liabilities. We have committed to drilling rig contracts with third parties to facilitate our drilling plans. Amounts presented include the gross amount we are committed to pay for the drilling rig contract. However, we will record our proportionate share based on our working interest in our consolidated financial statements as incurred. Management does not currently anticipate the early termination of these contracts in 2022. See Note 5 to our consolidated financial statements included in our 2021 Annual Report for additional discussion of our leases and Note 11 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our drilling rig contracts. 36
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Cash flows
The following table presents our cash flows for the periods presented and the corresponding changes for such periods:
Six months ended June 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Net cash provided by operating activities $ 539,007 $ 187,697 $ 351,310 187 %
Net cash used in investing activities (293,540) (168,567) (124,973) (74) %
Net cash (used in) provided by financing activities (154,719) 197,097 (351,816) (178) %
Net increase in cash, cash equivalents and
restricted cash $ 90,748 $ 216,227 $ (125,479) (58) %
Cash flows from operating activities
Net cash provided by operating activities increased during the six months endedJune 30, 2022 , compared to the same period in 2021. Notable cash changes include (i) an increase in total oil, NGL and natural gas sales revenues of$565.9 million , (ii) a decrease of$208.1 million due to changes in net settlements for matured derivatives, net of premiums, mainly due to increases in commodity prices and (iii) an increase of$74.0 million due to net changes in operating assets and liabilities. Other significant changes include an increase in lease operating expense and production and ad valorem taxes. The increase in total oil, NGL and natural gas sales revenues was due to a 120% increase in average sales price per BOE and a 59% increase in oil volumes sold. For additional information, see "-Results of operations." Our operating cash flows are sensitive to a number of variables, the most significant of which are the volatility of oil, NGL and natural gas prices, mitigated to the extent of our commodity derivatives' exposure, and sales volume levels. Regional and worldwide economic activity, weather, infrastructure, transportation capacity to reach markets, costs of operations, legislation and regulations, including potential government production curtailments, and other variable factors significantly impact the prices of these commodities. For additional information on risks related to our business, see "Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part II. Item 1A. Risk Factors" included elsewhere in this Quarterly Report and "Part I. Item 1A. Risk Factors" in our 2021 Annual Report.
Cash flows from investing activities
Net cash used in investing activities increased for the six months endedJune 30, 2022 , compared to the same period in 2021, mainly due to increases in inflationary pressures and non-operated capital expenditures related to oil and natural gas properties. See Note 4 to our unaudited consolidated financial statements included elsewhere in the Quarterly Report for discussion of our incurred capital expenditures, on an accrual basis, in the exploration and development of oil and natural gas properties. The amount, timing and allocation of capital expenditures are largely discretionary and within management's control. If oil, NGL and natural gas prices are below our acceptable levels, or costs are above our acceptable levels, we may choose to defer a portion of our capital expenditures until later periods to achieve the desired balance between sources and uses of liquidity and prioritize capital projects that we believe have the highest expected returns and potential to generate near-term cash flow. Subject to financing alternatives, we may also increase our capital expenditures significantly to take advantage of opportunities we consider to be attractive. We continually monitor and may adjust our projected capital expenditures in response to world developments, as well as success or lack of success in drilling activities, changes in prices, availability of financing and joint venture opportunities, drilling and acquisition costs, industry conditions, the timing of regulatory approvals, the availability of rigs and supplies, changes in service costs, contractual obligations, internally generated cash flow and other factors both within and outside our control.
Cash flows from financing activities
For the six months endedJune 30, 2022 ,$154.7 million of net cash was used in financing activities compared to$197.1 million of net cash that was provided by financing activities for the same period in 2021. Notable 2022 activity that comprised part of the$351.8 million change included (i) borrowings on our Senior Secured Credit Facility of$135.0 million , (ii) payments on our Senior Secured Credit Facility of$240.0 million , (iii) extinguishment of debt on our senior unsecured notes of$32.3 million , (iv) share repurchases of$9.1 million and (v) stock exchanged for tax withholding of$6.6 million . For further discussion of our financing activities related to debt instruments and share repurchases, see Notes 5 and 6, respectively, to our unaudited consolidated financial statements included elsewhere in this Quarterly Report. 37
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Sources of Liquidity
Senior Secured Credit Facility
As ofJune 30, 2022 , the Senior Secured Credit Facility, which matures onJuly 16, 2025 , had a maximum credit amount of$2.0 billion , a borrowing base and an aggregate elected commitment of$1.25 billion and$1.0 billion , respectively, with no amounts outstanding as of that date. The Senior Secured Credit Facility contains both financial and non-financial covenants, all of which we were in compliance with for all periods presented. Additionally, the Senior Secured Credit Facility provides for the issuance of letters of credit, limited to the lesser of total capacity or$80.0 million . As ofDecember 31, 2021 , we had a$44.1 million letter of credit outstanding under the Senior Secured Credit Facility. There were no outstanding letters of credit as ofJune 30, 2022 . The Senior Secured Credit Facility is fully and unconditionally guaranteed by LMS and GCM. OnApril 13, 2022 , we entered into the Eighth Amendment to our Senior Secured Credit Facility which, among other things, (i) increased the borrowing base and aggregate elected commitment under our Senior Secured Credit Facility to$1.25 billion and$1.0 billion , respectively, (ii) increased, from closing throughDecember 31, 2022 , the$50.0 million bond buyback and distributions baskets to$250.0 million , subject to certain conditions, (iii) added an energy transition and technology commercialization investment basket of$25.0 million , subject to certain conditions, (iv) allowed for the designation of unrestricted subsidiaries and (v) amended certain other provisions relating to certain commercial agreements and the administration of our loans, in each case, subject to the terms of the Eighth Amendment and the Senior Secured Credit Facility. See Note 5 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of our Senior Secured Credit Facility.
The following table presents principal amounts and applicable interest rates for our outstandingJanuary 2025 Notes,January 2028 Notes andJuly 2029 Notes as ofJune 30, 2022 : (in millions, except for interest rates) Principal Interest rate January 2025 Notes$ 577.9 9.500 % January 2028 Notes 354.8 10.125 % July 2029 Notes 374.2 7.750 % Total senior unsecured notes$ 1,306.9 OnJuly 16, 2021 , we closed a private offering and sale of$400.0 million in aggregate principal amount of our 7.750% senior unsecured notes due 2029. See Note 5 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of our senior unsecured notes. During the six months endedJune 30, 2022 , we repurchased$25.8 million and$6.2 million in aggregate principal amount of theJuly 2029 Notes andJanuary 2028 Notes, respectively. In connection with these repurchases, we recognized a loss on extinguishment of$0.8 million , comprised of (i)$0.5 million for the write off of debt issuance costs and (ii)$0.3 million related to the difference between the consideration paid and the net carrying amounts.
Supplemental Guarantor information
As discussed in Note 5 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report, onJanuary 24, 2020 , we issued$600.0 million in aggregate principal amount of theJanuary 2025 Notes and$400.0 million in aggregate principal amount of theJanuary 2028 Notes. OnJuly 16, 2021 , we issued$400.0 million in aggregate principal amount of theJuly 2029 Notes. As ofJune 30, 2022 ,$1.3 billion of our senior unsecured notes remained outstanding. Our wholly owned subsidiaries, LMS and GCM (each, a "Guarantor," and together, the "Guarantors"), jointly and severally, and fully and unconditionally, guarantees theJanuary 2025 Notes,January 2028 Notes andJuly 2029 Notes. The guarantees are senior unsecured obligations of each Guarantor and rank equally in right of payment with other existing and future senior indebtedness of such Guarantor, and senior in right of payment to all existing and future subordinated indebtedness of such Guarantor. The guarantees of the senior unsecured notes by the Guarantors are subject to certain Releases. The obligations of each Guarantor under its note guarantee are limited as necessary to prevent such note guarantee from constituting a fraudulent conveyance under applicable law. Further, the rights of holders of the senior unsecured notes 38
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against the Guarantors may be limited under theU.S. Bankruptcy Code or state fraudulent transfer or conveyance law.Laredo is not restricted from making investments in the Guarantors and the Guarantors are not restricted from making intercompany distributions toLaredo or each other. The assets, liabilities and results of operations of the combined issuer and Guarantors are not materially different than the corresponding amounts presented in our unaudited consolidated financial statements included elsewhere in this Quarterly Report. Accordingly, we have omitted the summarized financial information of the issuer and the Guarantors that would otherwise be required.
Non-GAAP financial measures
The non-GAAP financial measures of Free Cash Flow and Adjusted EBITDA, as defined by us, may not be comparable to similarly titled measures used by other companies. Furthermore, these non-GAAP financial measures should not be considered in isolation or as a substitute for GAAP measures of liquidity or financial performance, but rather should be considered in conjunction with GAAP measures, such as net income or loss, operating income or loss or cash flows from operating activities. Free Cash Flow Free Cash Flow is a non-GAAP financial measure that we define as net cash provided by operating activities (GAAP) before changes in operating assets and liabilities, net, less incurred capital expenditures, excluding non-budgeted acquisition costs. Management believes Free Cash Flow is useful to management and investors in evaluating operating trends in our business that are affected by production, commodity prices, operating costs and other related factors. There are significant limitations to the use of Free Cash Flow as a measure of performance, including the lack of comparability due to the different methods of calculating Free Cash Flow reported by different companies.
The following table presents a reconciliation of net cash provided by operating activities (GAAP) to Free Cash Flow (non-GAAP) for the periods presented:
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