The following discussion includes forward-looking statements. Please refer to
the Cautionary Information about Forward-Looking Statements section of this
report for important information about these types of statements. Additionally,
the following discussion includes sequential quarterly comparison to financial
information presented in our Quarterly Report on   Form 10-Q for the quarter
ended June 30, 2021  , filed with the SEC on July 30, 2021. Throughout the
following discussion, we explain changes between the three months ended
September 30, 2021, compared with the three months ended June 30, 2021
("sequential quarterly" or "sequentially"), as well as the year-to-date ("YTD")
change between the nine months ended September 30, 2021, compared with the same
period in 2020 ("YTD 2021-over-YTD 2020").
Overview of the Company
General Overview
Our purpose is to make people's lives better by responsibly producing energy
supplies, contributing to domestic energy security and prosperity, and having a
positive impact in the communities where we live and work. Our vision is to be a
premier operator of top tier assets and to sustainably grow value for all of our
stakeholders. This includes short-term operational and financial goals of
generating cash flows while strengthening our balance sheet through absolute
debt reduction and improved leverage metrics, and increasing the value of our
capital project inventory through exploration and development optimization. Our
long-term goal is to deliver cash flow growth that is supported by our
high-quality asset base and ability to generate favorable returns. Our asset
portfolio is comprised of oil and gas producing assets in the state of Texas,
specifically in the Midland Basin of West Texas and in the Maverick Basin of
South Texas.
We are committed to exceptional safety, health, and environmental stewardship;
supporting the professional development of a diverse and thriving team of
employees; making a positive impact in the communities where we live and work;
and transparency in reporting on our progress in these areas. The Environmental,
Social and Governance Committee of our Board of Directors oversees, among other
things, the development and implementation of the Company's environmental,
social and governance policies, programs and initiatives, and, together with
management, reports to our Board of Directors regarding such matters. Further
demonstrating our commitment to sustainable operations, compensation for our
executives and eligible employees under our long-term incentive plan, and
compensation for all employees under our short-term incentive plan is calculated
based on certain Company-wide performance-based metrics that include key
financial, operational, and environmental, health, and safety measures.
Areas of Operations
Our Midland Basin assets are comprised of approximately 80,000 net acres located
in the Permian Basin in West Texas ("Midland Basin"). In the third quarter of
2021, drilling and completion activities within our RockStar and Sweetie Peck
positions in the Midland Basin continued to focus primarily on delineating and
developing our Midland Basin position. Our current Midland Basin position
provides substantial future development opportunities within multiple oil-rich
intervals, including the Spraberry and Wolfcamp formations.
Our South Texas assets are comprised of approximately 155,000 net acres located
in the Maverick Basin in Dimmit and Webb Counties, Texas ("South Texas"). For
the nine months ended September 30, 2021, our operations in South Texas were
focused on production from both the Eagle Ford shale formation and Austin Chalk
formation, and further development of the Austin Chalk formation. Our
overlapping acreage position in the Eagle Ford shale and Austin Chalk formations
includes acreage in oil, gas-condensate, and dry gas windows with gas
composition amenable to processing for NGL extraction.
Third Quarter 2021 Overview and Outlook for the Remainder of 2021
During the third quarter of 2021, we remained committed to our goal of reducing
the principal balance of our outstanding debt through cash flow generation. For
the three months ended September 30, 2021, net cash provided by operating
activities exceeded net cash used in investing activities by $153.3 million, and
we reduced the principal balance of our outstanding debt by $118.0 million. We
executed on this goal through strong operational performance and a diligent
focus on cost management. Additionally, we benefited from increased commodity
pricing which has improved from historic lows experienced during the height of
the Pandemic due to increased demand.
The Pandemic remains a global health crisis and continues to evolve, with the
Delta variant becoming the predominant strain of the virus worldwide. Despite
the emergence of the Delta variant, the United States has experienced
substantial improvements in financial markets and public health as a result of
deployment of vaccines to prevent the spread of the COVID-19 virus. The markets
for the commodities produced by our industry strengthened in recent months, but
remain subject to heightened levels of uncertainty related to the Pandemic and
other geopolitical issues. As a result, we are unable to reasonably estimate the
extent that volatile market conditions could impact our business, results of
operations, financial condition, or the timing of further recovery. Although
demand for the commodities produced by our industry has increased, and
associated prices have improved from historic lows in 2020, with sustained gas
prices reaching their highest average price since 2014, further negative
financial markets and industry-specific impacts
                                       25
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could result from future case surges, outbreaks, COVID-19 virus variants, the
potential that current vaccines may be less effective or ineffective against
future COVID-19 virus variants, and the risk that large groups of the population
may not receive vaccinations against COVID-19, and as a result, may require us
to adjust our business plan. For additional detail, please refer to the Risk
Factors section in Part I, Item 1A of our   2020 Form 10-K  . Despite continuing
impacts of the Pandemic, geopolitical issues, and future uncertainty, we expect
to maintain our ability to sustain strong operational performance and financial
stability while maximizing returns, improving leverage metrics, and increasing
the value of our top tier Midland Basin and South Texas assets.
The safety of our employees, contractors, and the communities where we work
remains our first priority as we continue to operate during the Pandemic. While
our core business operations require certain individuals to be physically
present at well site locations, the vast majority of our office-based employees
have continued working remotely in order to limit physical interactions and to
mitigate the spread of COVID-19. For individuals who are unable to perform their
jobs remotely, we maintain and continually assess procedures designed to limit
the spread of COVID-19, including social distancing and enhanced sanitization
measures, and we continue to communicate to and train all of our employees
regarding best practices for maintaining a healthy and safe work environment. We
believe that we meet or exceed Centers for Disease Control and Prevention and
federal Occupational Safety and Health Act guidelines related to the prevention
of the transmission of COVID-19. Since these measures were initially implemented
in the first quarter of 2020, we have continued to operate without significant
disruptions to our business operations. Our pre-existing control environment and
internal controls have continued to be effective and we have continued to
address new risks directly related to the Pandemic as we identify them.
Our 2021 total capital program budget is between $650.0 million and $675.0
million. Our financial and operational flexibility allows us to continually
monitor the economic environment and adjust our activity level as warranted. Our
2021 capital program remains focused on highly economic oil development projects
in both our Midland Basin assets and South Texas assets. We believe that our
high quality asset portfolio is capable of generating strong returns in the
current macroeconomic environment, enabling us to grow cash flows, improve
leverage metrics, and maintain strong financial flexibility. Please refer to
Overview of Liquidity and Capital Resources below for discussion of how we
expect to fund the remainder of our 2021 capital program.
Financial and Operational Results. Average net daily equivalent production for
the three months ended September 30, 2021, increased 14 percent sequentially to
155.8 MBOE primarily driven by a 19 percent increase in oil volumes. These
increases were the result of our focus on operational execution, strong well
performance, and acceleration of capital activity in the second and third
quarters of 2021.
Strengthening benchmark commodity prices in the third quarter of 2021 resulted
in increased realized prices for oil, gas, and NGLs of six percent, 53 percent,
and 30 percent, respectively, for the three months ended September 30, 2021,
compared with the three months ended June 30, 2021. Total realized price per BOE
increased 17 percent for the three months ended September 30, 2021, compared
with the three months ended June 30, 2021. The increases in benchmark commodity
prices, combined with the increase in production volumes, resulted in oil, gas,
and NGL production revenue of $759.8 million for the three months ended
September 30, 2021, compared with $562.6 million for the three months ended June
30, 2021, which was an increase of 35 percent. Production costs per BOE of $9.47
for the three months ended September 30, 2021, decreased six percent compared
with the three months ended June 30, 2021, primarily as a result of decreases in
transportation costs per BOE and lease operating expense ("LOE") per BOE,
partially offset by increases in production taxes per BOE.
We recorded net derivative losses of $209.1 million and $370.3 million for the
three months ended September 30, 2021, and June 30, 2021, respectively. Included
within these amounts are derivative settlement losses of $213.6 million and
$158.8 million for the three months ended September 30, 2021, and June 30, 2021,
respectively, resulting from increased benchmark commodity prices.
Please refer to Overview of Selected Production and Financial Information,
Including Trends and Comparison of Financial Results and Trends Between the
Three Months Ended September 30, 2021, and June 30, 2021, and Between the Nine
Months Ended September 30, 2021, and 2020 below for additional discussion.
Financial and operational activities during the three months ended September 30,
2021, resulted in the following:
•Net cash provided by operating activities of $328.1 million for the three
months ended September 30, 2021, compared with $296.4 million for the three
months ended June 30, 2021.
•A cash balance of $29.8 million and no outstanding balance on the revolving
credit facility as of September 30, 2021, compared with a revolving credit
facility balance of $52.5 million as of June 30, 2021.
•Net income of $85.6 million, or $0.69 per diluted share, for the three months
ended September 30, 2021, compared with a net loss of $223.0 million, or $1.88
per diluted share, for the three months ended June 30, 2021. Net income for the
three months ended September 30, 2021, was primarily a result of increased
production and pricing. Please refer to Comparison of Financial Results and
Trends Between the Three Months Ended September 30, 2021, and June 30, 2021, and
Between the Nine Months Ended September 30, 2021, and 2020 below for additional
discussion regarding the components of net income (loss) for the periods
presented.
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•Adjusted EBITDAX, a non-GAAP financial measure, for the three months ended
September 30, 2021, was $346.7 million, compared with $256.9 million for the
three months ended June 30, 2021. Please refer to the caption Non-GAAP Financial
Measures below for additional discussion and our definition of adjusted EBITDAX
and reconciliations to net income (loss) and net cash provided by operating
activities.
Operational Activities. In our Midland Basin program, we operated an average of
three drilling rigs and averaged one completion crew during the third quarter of
2021. We drilled 17 gross (14 net) wells and completed 30 gross (24 net) wells
during the third quarter of 2021, and production volumes increased sequentially
by 18 percent to 9.8 MMBOE. Costs incurred in our Midland Basin program during
the three months ended September 30, 2021, totaled $101.5 million, or 59 percent
of our total costs incurred for the period. We anticipate operating two drilling
rigs and one completion crew at times during the remainder of 2021, focused
primarily on developing the Spraberry and Wolfcamp formations within our
RockStar and Sweetie Peck positions in the Midland Basin.
In our South Texas program, we operated an average of two drilling rigs and
averaged one completion crew during the third quarter of 2021. We drilled 10
gross (10 net) wells and completed 11 gross (11 net) wells during the third
quarter of 2021, and production volumes increased sequentially by 10 percent to
4.5 MMBOE. Costs incurred in our South Texas program during the three months
ended September 30, 2021, totaled $59.3 million, or 34 percent of our total
costs incurred for the period. We anticipate operating one drilling rig and one
completion crew during the remainder of 2021, focused primarily on developing
the Austin Chalk formation.
The table below provides a quarterly summary of changes in our drilled but not
completed well count and current year drilling and completion activity in our
operated programs for the three and nine months ended September 30, 2021:
                                         Midland Basin               South Texas (2)                 Total
                                     Gross             Net       Gross              Net        Gross         Net
Wells drilled but not completed at
December 31, 2020                     66                58        31                 28         97           86
Wells drilled                         16                13         5                  5         21           18
Wells completed                      (16)              (14)       (6)                (3)       (22)         (17)
Other (1)                              -                 1         -                  -          -            1
Wells drilled but not completed at
March 31, 2021                        66                58        30                 30         96           88
Wells drilled                         14                11        11                 11         25           22
Wells completed                      (44)              (40)       (5)                (5)       (49)         (45)

Wells drilled but not completed at
June 30, 2021                         36                29        36                 36         72           65
Wells drilled                         17                14        10                 10         27           24
Wells completed                      (30)              (24)      (11)               (11)       (41)         (35)
Other (1)                              -                (1)        -                  -          -           (1)
Wells drilled but not completed at
September 30, 2021                    23                18        35                 35         58           53


____________________________________________


(1)  Includes adjustments related to normal business activities, including
working interest changes for existing drilled but not completed wells. Working
interest changes can result from divestitures, joint development agreements,
farm-outs, and other activities.
(2)  The South Texas drilled but not completed well count as of each period end
presented above includes 13 gross (13 net) wells that are not included in our
five-year development plan, 12 of which are in the Eagle Ford shale.
Costs Incurred. Costs incurred in oil and gas property acquisition, exploration,
and development activities, whether capitalized or expensed, totaled
$172.5 million and $589.7 million for the three and nine months ended
September 30, 2021, respectively, and were primarily incurred in our Midland
Basin and South Texas programs as further detailed in Operational Activities
above.
                                       27
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Production Results. The table below presents our production by product type for
each of our areas of operation for the sequential quarterly periods and the YTD
2021-over-YTD 2020 periods:
                              For the Three Months Ended             For the Nine Months Ended
                             September 30,        June 30,        September 30,       September 30,
                                 2021               2021              2021                2020
Midland Basin Production:
Oil (MMBbl)                           7.2             6.2                 18.5               16.0
Gas (Bcf)                            15.5            12.8                 38.9               34.0
NGLs (MMBbl)                            -               -                    -                  -
Equivalent (MMBOE)                    9.8             8.3                 25.0               21.6
Average net daily
equivalent (MBOE per day)           106.7            91.6                 91.6               79.0
Relative percentage                    69  %           67  %                68  %              62  %

South Texas Production:
Oil (MMBbl)                           0.8             0.5                  1.7                1.3
Gas (Bcf)                            13.6            13.6                 38.2               44.6
NGLs (MMBbl)                          1.4             1.3                  3.8                4.8
Equivalent (MMBOE)                    4.5             4.1                 11.8               13.5
Average net daily
equivalent (MBOE per day)            49.0            44.9                 43.2               49.4
Relative percentage                    31  %           33  %                32  %              38  %

Total Production:
Oil (MMBbl)                           8.1             6.7                 20.2               17.2
Gas (Bcf)                            29.1            26.5                 77.1               78.6
NGLs (MMBbl)                          1.4             1.3                  3.8                4.8
Equivalent (MMBOE)                   14.3            12.4                 36.8               35.2
Average net daily
equivalent (MBOE per day)           155.8           136.5                134.8              128.3

____________________________________________


Note: Amounts may not calculate due to rounding.
Please refer to Overview of Selected Production and Financial Information,
Including Trends and Comparison of Financial Results and Trends Between the
Three Months Ended September 30, 2021, and June 30, 2021, and Between the Nine
Months Ended September 30, 2021, and 2020 below for discussion on production.
Oil, Gas, and NGL Prices
Our financial condition and the results of our operations are significantly
affected by the prices we receive for our oil, gas, and NGL production, which
can fluctuate dramatically. When we refer to realized oil, gas, and NGL prices
below, the disclosed price represents the average price for the respective
period, before the effects of derivative settlements, unless otherwise
indicated. While quoted NYMEX oil and gas and OPIS NGL prices are generally used
as a basis for comparison within our industry, the prices we receive are
affected by quality, energy content, location and transportation differentials,
and contracted pricing benchmarks for these products.
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The following table summarizes commodity price data, as well as the effects of
derivative settlements, for the three months ended September 30, 2021, June 30,
2021, and September 30, 2020:
                                                  For the Three Months Ended
                                                                               September 30,
                                  September 30, 2021      June 30, 2021            2020
Oil (per Bbl):
Average NYMEX contract monthly   $         70.56         $        66.07      $         40.93
price
Realized price, before the       $         69.30         $        65.34      $         37.69
effect of derivative settlements
Effect of oil derivative
settlements                      $        (19.13)        $       (20.11)     $         12.51
Gas:
Average NYMEX monthly settle     $          4.01         $         2.83      $          1.98
price (per MMBtu)
Realized price, before the
effect of derivative settlements $          5.12         $         3.34      $          1.90
(per Mcf)
Effect of gas derivative
settlements (per Mcf)            $         (1.23)        $        (0.46)     $          0.03
NGLs (per Bbl):
Average OPIS price (1)           $         40.39         $        31.52      $         19.13
Realized price, before the       $         36.87         $        28.41      $         14.07
effect of derivative settlements
Effect of NGL derivative         $        (16.65)        $        (9.22)     $          0.29
settlements

____________________________________________


(1)  Average OPIS price per barrel of NGL, historical or strip, assumes a
composite barrel product mix of 37% Ethane, 32% Propane, 6% Isobutane, 11%
Normal Butane, and 14% Natural Gasoline for all periods presented. This product
mix represents the industry standard composite barrel and does not necessarily
represent our product mix for NGL production. Realized prices reflect our actual
product mix.
Given the dynamic nature of the Pandemic, we expect future benchmark prices for
oil, gas, and NGLs to remain volatile for the foreseeable future, and we cannot
reasonably predict the timing or likelihood of any future potential negative
impacts of the Pandemic such as infection rate surges or outbreaks. In addition
to supply and demand fundamentals, as a global commodity, the price of oil is
affected by real or perceived geopolitical risks in various regions of the world
as well as the relative strength of the United States dollar compared to other
currencies. Our realized prices at local sales points may also be affected by
infrastructure capacity in the area of our operations and beyond. Please refer
to Third Quarter 2021 Overview and Outlook for the Remainder of 2021 above for
additional discussion of factors impacting pricing.
The following table summarizes 12-month strip prices for NYMEX WTI oil, NYMEX
Henry Hub gas, and OPIS NGLs as of October 21, 2021, and September 30, 2021:
                                  As of October 21, 2021       As of September 30, 2021
NYMEX WTI oil (per Bbl)          $                 77.90      $                   72.54
NYMEX Henry Hub gas (per MMBtu)  $                  4.53      $                    4.88
OPIS NGLs (per Bbl)              $                 42.31      $                   41.74


We use financial derivative instruments as part of our financial risk management
program. We have a financial risk management policy governing our use of
derivatives, and decisions regarding entering into commodity derivative
contracts are overseen by a financial risk management committee consisting of
certain of our senior executive officers and finance personnel. We make
decisions about the amount of our expected production that we cover by
derivatives based on the amount of debt on our balance sheet, the level of
capital commitments and long-term obligations we have in place, and our ability
to enter into favorable commodity derivative contracts. With our current
commodity derivative contracts, we believe we have partially reduced our
exposure to volatility in commodity prices and basis differentials in the near
term. Our use of costless collars for a portion of our derivatives allows us to
participate in some of the upward movements in oil and gas prices while also
setting a price floor for a portion of our oil and gas production. Please refer
to Note 10 - Derivative Financial Instruments in Part I, Item 1 of this report
and to Commodity Price Risk in Overview of Liquidity and Capital Resources below
for additional information regarding our oil, gas, and NGL derivatives.
                                       29

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Financial Results of Operations and Additional Comparative Data
The tables below provide information regarding selected production and financial
information for the three months ended September 30, 2021, and the preceding
three quarters.

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