VITAL ENERGY, INC. The following discussion and analysis of our financial condition and results of operations is for the three and nine months endedSeptember 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 ofSeptember 30, 2022 , we had assembled 165,359 net acres in thePermian Basin . We are currently operating two drilling rigs and one completions crew which we expect to maintain for the remainder of 2022. Our planned capital expenditures for fourth-quarter 2022 are expected to be approximately$135.0 million to$145.0 million . However, we will continue to monitor commodity prices and service costs and adjust activity levels in order to proactively manage our cash flows and preserve liquidity. Below is a summary and comparative analysis of our financial and operating performance for the periods presented: 2022 compared to Three months ended September 30, 2021 (in thousands) 2022 2021 Change (#) Change (%) Oil sales volumes (MBbl) 3,219 3,250 (31) (1) % Oil equivalents sales volumes (MBOE) 7,324 7,057 267 4 % Oil, NGL and natural gas sales(1)$ 444,948 $ 311,276 $ 133,672 43 % Net income$ 337,523 $ 136,832 $ 200,691 147 %
Net cash provided by operating activities
$ 84,941 87 % Free Cash Flow (a non-GAAP financial measure)(2)$ 51,361 $ (19,895) $ 71,256 358 % Adjusted EBITDA (a non-GAAP financial measure)(2)$ 222,790 $ 133,441 $ 89,349 67 %
_____________________________________________________________________________
(1)Our oil, NGL and natural gas sales increased as a result of a 38% increase in
average sales price per BOE.
(2)See pages 37-39 for discussion and calculations of these non-GAAP financial
measures.
21--------------------------------------------------------------------------------
Table of Content
2022 compared to
Nine months ended September 30, 2021
(in thousands) 2022 2021 Change (#) Change (%)
Oil sales volumes (MBbl) 10,536 7,840 2,696 34 %
Oil equivalents sales volumes (MBOE) 22,905 21,985 920 4 %
Oil, NGL and natural gas sales(1) $ 1,445,605 $ 746,059 $ 699,546 94 %
Net income (loss) $ 513,288 $ (71,268) $ 584,556 820 %
Net cash provided by operating activities
$ 433,590 151 % Free Cash Flow (a non-GAAP financial measure)(2)$ 183,404 $ (27,585) $ 210,989 765 % Adjusted EBITDA (a non-GAAP financial measure)(2)$ 722,377 $ 323,755 $ 398,622 123 %
_____________________________________________________________________________
(1)Our oil, NGL and natural gas sales increased as a result of a 86% increase in average sales price per BOE and a 34% increase in oil sales volumes. (2)See pages 37-39 for discussion and calculations of these non-GAAP financial measures. Recent developments
Volatility in commodity prices
Commodity prices remained strong during the third quarter of 2022, sustaining levels reached at the end of the first quarter as increased commodity demand has continued to outpace relative supply. While recessionary concerns have placed some downward pressure on commodity prices, causing oil and gas prices to retreat from their earlier highs in 2022, worldwide commodity demand continues to exceed pre-COVID-19 pandemic levels. Although supply has increased, it 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 , as well as a recent announcement by OPEC+ of oil production cuts of two million barrels per day beginning in November of 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
Reversing a trend experienced in 2020 in connection with the impact of COVID-19 and historically low crude oil prices, drilling and completions costs and costs of oilfield services, equipment, and materials began to rise in 2021 and have continued to persist at elevated levels in 2022 in conjunction with the significant increase in commodity prices, labor tightening, supply chain disruptions caused by the COVID-19 pandemic and the resulting limited availability of certain materials and products manufactured using such materials and heightened levels of inflation. In addition to the effect of such inflationary pressures on our operating costs, 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.
See Note 15 to our unaudited consolidated financial statements included
elsewhere in this Quarterly Report for discussion of recent developments that
have occurred subsequent to
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
22--------------------------------------------------------------------------------
Table of Content
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 ofSeptember 30, 2022 were$92.54 for oil,$32.38 for NGL and$4.34 for natural gas. The unamortized cost of evaluated oil and natural gas properties being depleted did not exceed the full cost ceiling as ofSeptember 30, 2022 andSeptember 30, 2021 . As such, no full cost ceiling impairments were recorded during the nine months endingSeptember 30, 2022 andSeptember 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 September 30, 2022 compared to 2021 2022 2021 Change (#) Change (%) Oil sales 67 % 60 % 7 12 % NGL sales 13 % 13 % - - % Natural gas sales 16 % 10 % 6 60 % Midstream service revenues - % - % - - % Sales of purchased oil 4 % 17 % (13) (76) % Total 100 % 100 % Nine months ended September 30, 2022 compared to 2021 2022 2021 Change (#) Change (%) Oil sales 69 % 56 % 13 23 % NGL sales 13 % 14 % (1) (7) % Natural gas sales 11 % 11 % - - % Midstream service revenues - % - % - - % Sales of purchased oil 7 % 19 % (12) (63) % Total 100 % 100 % 23
--------------------------------------------------------------------------------
Table of Content
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
September 30, 2022 compared to 2021
2022 2021 Change (#) Change (%)
Sales volumes:
Oil (MBbl) 3,219 3,250 (31) (1) %
NGL (MBbl) 2,034 1,830 204 11 %
Natural gas (MMcf) 12,430 11,860 570 5 %
Oil equivalents (MBOE)(1)(2) 7,324 7,057 267 4 %
Average daily oil equivalent sales volumes (BOE/D)(2) 79,613 76,703 2,910 4 %
Average daily oil sales volumes (Bbl/D)(2) 34,994 35,329 (335) (1) %
Sales revenues (in thousands):
Oil $ 311,740 $ 229,329 $ 82,411 36 %
NGL 59,377 47,949 11,428 24 %
Natural gas 73,831 33,998 39,833 117 %
Total oil, NGL and natural gas sales revenues $ 444,948 $ 311,276 $ 133,672 43 %
Average sales prices(2):
Oil ($/Bbl)(3) $ 96.83 $ 70.56 $ 26.27 37 %
NGL ($/Bbl)(3) $ 29.20 $ 26.20 $ 3.00 11 %
Natural gas ($/Mcf)(3) $ 5.94 $ 2.87 $ 3.07 107 %
Average sales price ($/BOE)(3) $ 60.75 $ 44.11 $ 16.64 38 %
Oil, with commodity derivatives ($/Bbl)(4) $ 71.09 $ 53.94 $ 17.15 32 %
NGL, with commodity derivatives ($/Bbl)(4) $ 24.47 $ 9.31 $ 15.16 163 %
Natural gas, with commodity derivatives ($/Mcf)(4) $ 3.35 $ 1.45 $ 1.90 131 %
Average sales price, with commodity derivatives ($/BOE)(4) $ 43.74 $ 29.70 $ 14.04 47 %
__________________________________________________________________________
(1)BOE is calculated using a conversion rate of six Mcf per one Bbl. (2)The numbers presented in the three months endedSeptember 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 and an adjustment to reflect premiums incurred previously or upon settlement that are attributable to commodity derivatives that settled during the respective periods. 24
--------------------------------------------------------------------------------
Table of Content
Nine months ended
September 30, 2022 compared to 2021
2022 2021 Change (#) Change (%)
Sales volumes:
Oil (MBbl) 10,536 7,840 2,696 34 %
NGL (MBbl) 6,128 6,702 (574) (9) %
Natural gas (MMcf) 37,447 44,659 (7,212) (16) %
Oil equivalents (MBOE)(1)(2) 22,905 21,985 920 4 %
Average daily oil equivalent sales volumes (BOE/D)(2) 83,901 80,530 3,371 4 %
Average daily oil sales volumes (Bbl/D)(2) 38,594 28,717 9,877 34 %
Sales revenues (in thousands):
Oil $ 1,069,542 $ 514,752 $ 554,790 108 %
NGL 197,037 133,121 63,916 48 %
Natural gas 179,026 98,186 80,840 82 %
Total oil, NGL and natural gas sales revenues $ 1,445,605 $ 746,059 $ 699,546 94 %
Average sales prices(2):
Oil ($/Bbl)(3) $ 101.51 $ 65.66 $ 35.85 55 %
NGL ($/Bbl)(3) $ 32.16 $ 19.86 $ 12.30 62 %
Natural gas ($/Mcf)(3) $ 4.78 $ 2.20 $ 2.58 117 %
Average sales price ($/BOE)(3) $ 63.11 $ 33.94 $ 29.17 86 %
Oil, with commodity derivatives ($/Bbl)(4) $ 71.03 $ 49.33 $ 21.70 44 %
NGL, with commodity derivatives ($/Bbl)(4) $ 25.93 $ 10.40 $ 15.53 149 %
Natural gas, with commodity derivatives ($/Mcf)(4) $ 3.05 $ 1.53 $ 1.52 99 %
Average sales price, with commodity derivatives ($/BOE)(4) $ 44.60 $ 23.86 $ 20.74 87 %
__________________________________________________________________________
(1)BOE is calculated using a conversion rate of six Mcf per one Bbl. (2)The numbers presented in the nine months endedSeptember 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 and an adjustment to reflect premiums incurred previously or upon settlement that are attributable to commodity derivatives that settled during the respective periods. 25
--------------------------------------------------------------------------------
Table of Content
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 September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Net settlements paid for matured commodity
derivatives:
Oil $ (82,862) $ (43,838) $ (39,024) (89) %
NGL (9,618) (30,905) 21,287 69 %
Natural gas (32,131) (16,747) (15,384) (92) %
Total $ (124,611) $ (91,490) $ (33,121) (36) %
Net premiums paid previously or upon
settlement attributable to commodity
derivatives that matured during the respective
period:
Oil $ - $ (10,182) $ 10,182 100 %
Nine months ended September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Net settlements paid for matured commodity
derivatives:
Oil $ (321,106) $ (96,675) $ (224,431) (232) %
NGL (38,152) (63,434) 25,282 40 %
Natural gas (64,694) (30,046) (34,648) (115) %
Total $ (423,952) $ (190,155) $ (233,797) (123) %
Net premiums paid previously or upon
settlement attributable to commodity
derivatives that matured during the respective
period:
Oil $ - $ (31,370) $ 31,370 100 %
Changes in average sales prices and sales volumes caused the following changes
to our oil, NGL and natural gas revenues between the three and nine months ended
September 30, 2022 and 2021:
(in thousands) Oil NGL Natural gas Total
Third-quarter 2021 Revenues $ 229,329 $ 47,949 $ 33,998 $ 311,276
Effect of changes in average sales prices 84,586 6,095 38,199 128,880
Effect of changes in sales volumes (2,175) 5,333 1,634 4,792
Third-quarter 2022 Revenues $ 311,740 $ 59,377 $ 73,831 $ 444,948
Change ($) $ 82,411 $ 11,428 $ 39,833 $ 133,672
Change (%) 36 % 24 % 117 % 43 %
(in thousands) Oil NGL Natural gas Total
Third-quarter year-to-date 2021 Revenues
377,743 75,324 96,696 549,763
Effect of changes in sales volumes 177,047 (11,408) (15,856) 149,783
Third-quarter year-to-date 2022 Revenues $ 1,069,542 $ 197,037 $ 179,026 $ 1,445,605
Change ($) $ 554,790 $ 63,916 $ 80,840 $ 699,546
Change (%) 108 % 48 % 82 % 94 %
The increase in our third-quarter 2022 oil revenues as compared to the same
period in 2021 is primarily due to an increase in oil price. The increase in our
third-quarter year-to-date 2022 oil revenues as compared to the same period 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.
26--------------------------------------------------------------------------------
Table of Content
The increase in our third-quarter 2022 NGL and natural gas revenues as compared to the same period in 2021 is primarily due to increases in NGL and natural gas prices. The increase in our third-quarter year-to-date 2022 NGL and natural gas revenues as compared to the same period in 2021 is primarily due to increases in NGL and natural gas 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. 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 nine months endedSeptember 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 nine months endedSeptember 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.
The following tables present sales of purchased oil for the periods presented and the corresponding changes for such periods:
Three months ended September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Sales of purchased oil $ 18,371 $ 66,235 $ (47,864) (72) %
Nine months ended September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Sales of purchased oil $ 106,030 $ 173,500 $ (67,470) (39) %
27--------------------------------------------------------------------------------
Table of Content
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 September 30, 2022 compared to 2021
(in thousands except for per BOE sold data) 2022 2021 Change ($) Change (%)
Costs and expenses:
Lease operating expenses $ 44,246 $ 29,837 $ 14,409 48 %
Production and ad valorem taxes 29,024 17,937 11,087 62 %
Transportation and marketing expenses 13,285 11,660 1,625 14 %
Midstream service expenses 769 1,014 (245) (24) %
Costs of purchased oil 18,772 68,805 (50,033) (73) %
General and administrative (excluding LTIP) 14,831 11,332 3,499 31 %
General and administrative (LTIP):
LTIP cash (3,782) 2,065 (5,847) (283) %
LTIP non-cash 808 1,611 (803) (50) %
Organizational restructuring expenses 10,420 - 10,420 100 %
Depletion, depreciation and amortization 74,928 62,678 12,250
20 %
Other operating expense, net 1,772 1,798 (26) (1) % Total costs and expenses$ 205,073 $ 208,737 $ (3,664) (2) % Gain on disposal of assets, net 4,282 95,201 (90,919)
(96) % Selected average costs and expenses per BOE sold(1): Lease operating expenses
$ 6.04 $ 4.23 $ 1.81 43 % Production and ad valorem taxes 3.96 2.54 1.42 56 % Transportation and marketing expenses 1.81 1.65 0.16 10 % General and administrative (excluding LTIP) 2.02 1.61 0.41 25 % Total selected operating expenses$ 13.83 $ 10.03 $ 3.80 38 % General and administrative (LTIP): LTIP cash$ (0.52) $ 0.29 $ (0.81) (279) % LTIP non-cash$ 0.11 $ 0.23 $ (0.12) (52) % Depletion, depreciation and amortization$ 10.23 $ 8.88 $ 1.35
15 %
_____________________________________________________________________________
(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.
28--------------------------------------------------------------------------------
Table of Content
Nine months ended September 30, 2022 compared to 2021
(in thousands except for per BOE sold data) 2022 2021 Change ($) Change (%)
Costs and expenses:
Lease operating expenses $ 127,136 $ 68,526 $ 58,610 86 %
Production and ad valorem taxes 89,512 45,957 43,555 95 %
Transportation and marketing expenses 39,022 34,477 4,545 13 %
Midstream service expenses 3,916 2,572 1,344 52 %
Costs of purchased oil 108,516 183,458 (74,942) (41) %
General and administrative (excluding LTIP) 41,729 33,479 8,250 25 %
General and administrative (LTIP):
LTIP cash 3,606 10,905 (7,299) (67) %
LTIP non-cash 5,465 4,798 667 14 %
Organizational restructuring expenses 10,420 9,800 620 6 %
Depletion, depreciation and amortization 226,555 140,763 85,792 61 % Impairment expense - 1,613 (1,613) (100) % Other operating expense, net 2,947 4,099 (1,152) (28) % Total costs and expenses$ 658,824 $ 540,447 $ 118,377 22 % Gain on disposal of assets, net 4,952 93,454 (88,502)
(95) % Selected average costs and expenses per BOE sold(1): Lease operating expenses
$ 5.55 $ 3.12 $ 2.43 78 % Production and ad valorem taxes 3.91 2.09 1.82 87 % Transportation and marketing expenses 1.70 1.57 0.13 8 % General and administrative (excluding LTIP) 1.82 1.52 0.30 20 % Total selected operating expenses$ 12.98 $ 8.30 $ 4.68 56 % General and administrative (LTIP): LTIP cash$ 0.16 $ 0.50 $ (0.34) (68) % LTIP non-cash$ 0.24 $ 0.22 $ 0.02 9 % Depletion, depreciation and amortization$ 9.89 $ 6.40 $ 3.49
55 %
_____________________________________________________________________________
(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 nine months ended September 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 during 2022 due to inflationary pressures
and costs associated with integrating our 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 as total volumes are expected to decline.
Production and ad valorem taxes. Production and ad valorem taxes increased for
the three and nine months ended September 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 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.
29--------------------------------------------------------------------------------
Table of Content
Transportation and marketing expenses. Transportation and marketing expenses increased for the three and nine months endedSeptember 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 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our transportation commitments. Costs of purchased oil. During the three and nine months endedSeptember 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 nine months endedSeptember 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
nine months ended
LTIP cash expense decreased for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. These decreases are primarily due to (i) forfeitures of cash-settled performance unit awards in connection with the departure of our former Senior Vice President and Chief Operating Officer during the third quarter of 2022 and (ii) a decrease in the fair values of our cash-settled LTIP awards during the third quarter of 2022, mainly due to the performance of our stock during the period. LTIP non-cash expense decreased for the three months endedSeptember 30, 2022 , compared to the same period in 2021, mainly due to forfeitures of share-settled LTIP awards in connection with the departure of our former Senior Vice President and Chief Operating Officer during the third quarter of 2022. LTIP non-cash expense increased for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, mainly due to new share-settled LTIP awards granted to our employees during the second half of 2021 and the first half of 2022, and partially offset by forfeitures of share-settled LTIP awards in connection with the departure of our former Senior Vice President and Chief Operating Officer during the third quarter of 2022. See Note 6 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for information regarding our equity-based compensation. Organizational restructuring expenses. Organizational restructuring expenses increased for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. Such expenses were incurred for (i) the departure our former Senior Vice President and Chief Operating Officer during the third quarter of 2022 and (ii) a workforce reduction during the second quarter of 2021. See Note 14 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for information regarding our organizational restructurings. Gain on disposal of assets, net. Gain on disposal of assets, net, decreased for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021, primarily due to the gain recorded in third-quarter 2021 in connection with the Working Interest Sale. See Note 3 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion regarding the gain on the Working Interest Sale. From time to time, we dispose of inventory, midstream service assets and other fixed assets. The associated gain or loss recorded during the period fluctuates depending on the volume of the assets disposed, their associated net book value and, in the case of a disposal by sale, the sale price. 30
--------------------------------------------------------------------------------
Table of Content
Depletion, depreciation and amortization ("DD&A"). The following tables present
depletion expense per BOE sold for the periods presented and the corresponding
changes for such periods:
Three months ended September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Depletion expense per BOE sold $ 9.79 $ 8.40 $ 1.39 17 %
Nine months ended September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Depletion expense per BOE sold $ 9.46 $ 5.94 $ 3.52 59 %
Depletion expense per BOE increased for the three and nine months ended
September 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.
Other operating expense, net. These costs include accretion expense due to the passage of time on our asset retirement obligations. See Note 2 in our 2021 Annual Report for additional information regarding our asset retirement obligations.
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 September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Gain (loss) on derivatives, net $ 100,748 $ (96,240) $ 196,988 205 %
Interest expense (30,967) (30,406) (561) (2) %
Gain extinguishment of debt, net 553 - 553 100 %
Other income, net 98 441 (343) (78) %
Total non-operating expense, net $ 70,432 $ (126,205) $ 196,637 156 %
Nine months ended September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Loss on derivatives, net $ (290,995) $ (467,547) $ 176,552 38 %
Interest expense (96,251) (82,222) (14,029) (17) %
Loss extinguishment of debt, net (245) - (245) (100) %
Other income, net 433 2,236 (1,803) (81) %
Total non-operating expense, net $ (387,058) $ (547,533) $ 160,475 29 %
Gain (loss) on derivatives, net. The following tables present the changes in the
components of gain (loss) on derivatives, net for the periods presented and the
corresponding changes for such periods:
Three months ended September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Non-cash gain (loss) on derivatives, net $ 225,037 $ (3,514) $ 228,551 6,504 %
Settlements paid for matured derivatives,
net (124,289) (92,726) (31,563) (34) %
Gain (loss) on derivatives, net $ 100,748 $ (96,240) $ 196,988 205 %
31--------------------------------------------------------------------------------
Table of Content
Nine months ended September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Non-cash gain (loss) on derivatives, net $ 131,118 $ (285,081) $ 416,199 146 %
Settlements paid for matured derivatives, net (423,668) (191,507) (232,161) (121) %
Settlements received for contingent
consideration 1,555 - 1,555 100 %
Premiums received for commodity derivatives - 9,041 (9,041) (100) %
Loss on derivatives, net $ (290,995) $ (467,547) $ 176,552 38 %
Non-cash gain (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. During the third quarter of 2021, we completed the offering of
the July 2029 Notes, with interest payable semi-annually commencing January 31,
2022 with interest from closing to that date. The increase during the nine
months ended September 30, 2022 reflects a full year-to-date of interest expense
incurred for the July 2029 Notes. See Note 4 to our unaudited consolidated
financial statements included elsewhere in this Quarterly Report for additional
information regarding our long-term debt.
Income tax benefit (expense)
The following tables present income tax benefit (expense) for the periods presented and the corresponding changes for such periods:
Three months ended September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Current $ 960 $ (1,300) $ 2,260 174 %
Deferred $ 2,808 $ (1,377) $ 4,185 304 %
Nine months ended September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%) Current$ (4,771) $ (1,300) $ (3,471) (267) % Deferred$ 2,324 $ 707 $ 1,617 229 % We are subject to federal and state income taxes and theTexas franchise tax. The income tax benefit (expense) for the three and nine months endedSeptember 30, 2022 is attributed toTexas franchise tax, due to a full valuation allowance recorded against the federal andOklahoma deferred tax assets. If we were to experience an "ownership change" as determined under Section 382 of the Internal Revenue Code, our ability to offset taxable income arising after the ownership change with net operating losses arising prior to the ownership change would be limited. As ofSeptember 30, 2022 , no such ownership change has occurred. With the rise in oil prices and the addition of oily, high-margin inventory, we have seen positive indications that we will use our NOLs. We utilized$244.8 million of our NOLs on our 2021 tax return and expect to utilize a comparable amount on our 2022 tax return. However, as ofSeptember 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 32
--------------------------------------------------------------------------------
Table of Content
liabilities recorded as ofSeptember 30, 2022 , and our ability to capitalize intangible drilling costs, rather than expensing these costs and future projections ofOklahoma sourced income. A significant item of objective negative evidence considered was the cumulative historical three-year pre-tax loss and a net deferred tax asset position atSeptember 30, 2022 . We currently believe it is reasonably possible we could achieve a three-year cumulative level of profitability within the next 12 months, which would enhance our ability to conclude that it is more likely than not that the deferred tax assets would be realized and support a release of the valuation allowance. However, the exact timing and amount of the release is unknown at this time. As long as we continue to conclude that the valuation allowance recorded against our net deferred tax assets is necessary, we will not have significant deferred income tax expense or benefit. The valuation allowance does not preclude us from utilizing the tax attributes if we recognize taxable income. OnAugust 16, 2022 , the Inflation Reduction Act of 2022 was signed intoU.S. law. The IRA includes various tax provisions, including a 1% excise tax on stock repurchases made by publicly tradedU.S. corporations, expanded tax credits for clean energy incentives and a 15% corporate alternative minimum tax that applies to certain corporations with adjusted financial statement income in excess of$1.0 billion . The Company is evaluating the IRA and its requirements, as well as the potential impact of the IRA to its business. For additional discussion of our income taxes, see Note 12 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 third 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 4 and 5, 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 4 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 price volatility associated with future sales volumes, 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. As ofSeptember 30, 2022 , we had cash and cash equivalents of$49.9 million and available capacity under the Senior Secured Credit Facility of$960.0 million , resulting in total liquidity of$1.0 billion . As ofNovember 2, 2022 , we had cash and cash equivalents of$53.9 million and full available capacity under the Senior Secured Credit Facility of$1.0 billion , resulting in total liquidity of$1.1 billion . We believe that our operating cash flows and the aforementioned liquidity sources provide us with sufficient liquidity and financial resources to manage our cash needs and contractual obligations, to implement our currently planned capital expenditure budget and, at our discretion, to fund any share repurchases, pay down, repurchase or refinance 33
--------------------------------------------------------------------------------
Table of Content
debt or adjust our planned capital expenditure budget.
Cash requirements for known contractual and other obligations
The following table presents significant cash requirements for known contractual
and other obligations as of
(in thousands) Short-term(1) Long-term
Total
Senior unsecured notes(2)$ 106,495 $ 1,517,430 $ 1,623,925 Senior Secured Credit Facility(3) - 40,000
40,000
Asset retirement obligations(4) 3,183 70,063
73,246
Firm transportation commitments(5) 17,217 60,282
77,499
Performance unit award cash payouts(6) 6,644 7,926 14,570 Lease commitments(7) 18,906 14,762 33,668 Total$ 152,445 $ 1,710,463 $ 1,862,908
_____________________________________________________________________________
(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$298.2 million in principal and interest payments totaling$23.1 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$529.5 million and$326.8 million in principal, respectively, and interest payments totaling$50.3 million and$33.1 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)The$40.0 million principal on our Senior Secured Credit facility is due onJuly 16, 2025 . Amounts presented do not include future loan advances, repayments, commitment fees or other fees on our Senior Secured Credit Facility as we cannot determine with accuracy the timing of such items. Additionally, amounts presented do not include interest expense as it is a floating rate instrument and we cannot determine with accuracy the future interest rates to be charged. See Notes 4 and 15 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our Senior Secured Credit Facility. (4)Asset retirement obligations represent future costs associated with the retirement of tangible long-lived assets. See Note 2 in our 2021 Annual Report for additional information regarding our asset retirement obligations. (5)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 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our firm transportation commitments. (6)Amounts represent the estimated cash payouts as ofSeptember 30, 2022 for our performance unit awards granted onMarch 5, 2020 andMarch 9, 2021 , utilizing ourSeptember 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. (7)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 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our drilling rig contracts. 34
--------------------------------------------------------------------------------
Table of Content
Cash flows
The following table presents our cash flows for the periods presented and the corresponding changes for such periods:
Nine months ended September 30, 2022 compared to 2021
(in thousands) 2022 2021 Change ($) Change (%)
Net cash provided by operating activities $ 720,702 $ 287,112 $ 433,590 151 %
Net cash used in investing activities (443,475) (517,750) 74,275 14 %
Net cash (used in) provided by financing activities (284,084)
233,277 (517,361) (222) %
Net (decrease) increase in cash and cash
equivalents $ (6,857) $ 2,639 $ (9,496) (360) %
Cash flows from operating activities
Net cash provided by operating activities increased during the nine months endedSeptember 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$699.5 million , (ii) a decrease of$241.2 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$85.7 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 86% increase in average sales price per BOE as well as a 34% 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 decreased for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, mainly due to (i) a decrease in acquisitions of oil and natural gas properties, offset by a decrease in proceeds from the sale of capital assets and (ii) inflationary pressures and an increase in non-operated capital expenditures related to oil and natural gas properties. The following table presents incurred capital expenditures, on an accrual basis, in the acquisition, exploration and development of oil and natural gas properties, with asset retirement obligations included in evaluated property acquisition costs and development costs, for the periods presented: Three months ended September 30, Nine months ended September 30, (in thousands) 2022 2021 2022 2021 Property acquisition costs: Evaluated $ 3,515$ 745,240 $ 8,295$ 745,240 Unevaluated 179 127,505 3,470 127,505 Exploration costs 4,343 8,143 18,700 27,413 Development costs 130,961 127,031 420,468 279,032 Total oil and natural gas properties incurred capital expenditures(1)$ 138,998
______________________________________________________________________________
(1)Total oil and natural gas properties incurred capital expenditures includes certain employee-related costs.
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
35--------------------------------------------------------------------------------
Table of Content
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 nine months endedSeptember 30, 2022 ,$284.1 million of net cash was used in financing activities compared to$233.3 million of net cash that was provided by financing activities for the same period in 2021. In 2022, we began executing our strategy to return cash to shareholders through redemption of our senior secured notes and repurchasing our equity, which consisted of extinguishment of debt on our senior unsecured notes of$182.3 million and share repurchases of$26.6 million during the nine months endedSeptember 30, 2022 . Other notable 2022 activity included (i) borrowings on our Senior Secured Credit Facility of$335.0 million , (ii) payments on our Senior Secured Credit Facility of$400.0 million and (iii) stock exchanged for tax withholding of$7.4 million . For further discussion of our financing activities related to debt instruments and share repurchases, see Notes 4 and 5, respectively, to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
Sources of Liquidity
Senior Secured Credit Facility
As ofSeptember 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 a$40.0 million balance outstanding, and was subject to an interest rate of 5.379%. 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 ofSeptember 30, 2022 . The Senior Secured Credit Facility is fully and unconditionally guaranteed by LMS and GCM. OnAugust 30, 2022 , we entered into the Ninth Amendment to the Senior Secured Credit Facility. The Ninth Amendment, among other things, added additional capacity to making repurchases of the Company's common stock and clarified the conditions to making redemptions of the Company's debt. OnNovember 1, 2022 , we entered into the Tenth Amendment to our Senior Secured Credit Facility. The Tenth Amendment, among other things, (i) increases the borrowing base from$1.25 billion to$1.3 billion , (ii) permits additional senior note buybacks and other restricted payments, subject to certain conditions; and (iii) makes technical changes to permit us to potentially incur term loans, subject to terms to be agreed with lenders making such term loans, in addition to revolving loans, in each case, subject to the terms of the Tenth Amendment and the Senior Secured Credit Facility. See Notes 4 and 15 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of our Senior Secured Credit Facility.
The following table presents principal amounts and applicable interest rates for our outstandingJanuary 2025 Notes,January 2028 Notes andJuly 2029 Notes as ofSeptember 30, 2022 : (in millions, except for interest rates) Principal Interest rate January 2025 Notes$ 529.5 9.500 % January 2028 Notes 326.8 10.125 % July 2029 Notes 298.2 7.750 % Total senior unsecured notes$ 1,154.5 36
--------------------------------------------------------------------------------
Table of Content
During the nine months endedSeptember 30, 2022 , we repurchased a total of$184.5 million in aggregate principal amount of our senior unsecured notes. See Note 4 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of these repurchases.
Supplemental Guarantor information
As ofSeptember 30, 2022 ,$1.2 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 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.
37--------------------------------------------------------------------------------
Table of Content
The following table presents a reconciliation of net cash provided by operating activities (GAAP) to Free Cash Flow (non-GAAP) for the periods presented:
© Edgar Online, source
