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 endedJune 30, 2021 , filed with theSEC onJuly 30, 2021 . Throughout the following discussion, we explain changes between the three months endedSeptember 30, 2021 , compared with the three months endedJune 30, 2021 ("sequential quarterly" or "sequentially"), as well as the year-to-date ("YTD") change between the nine months endedSeptember 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 ofTexas , specifically in theMidland Basin ofWest Texas and in theMaverick Basin ofSouth 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 OurMidland Basin assets are comprised of approximately 80,000 net acres located in thePermian Basin inWest Texas ("Midland Basin "). In the third quarter of 2021, drilling and completion activities within our RockStar and Sweetie Peck positions in theMidland Basin continued to focus primarily on delineating and developing ourMidland Basin position. Our currentMidland Basin position provides substantial future development opportunities within multiple oil-rich intervals, including the Spraberry and Wolfcamp formations. OurSouth Texas assets are comprised of approximately 155,000 net acres located in theMaverick Basin inDimmit andWebb Counties,Texas ("South Texas"). For the nine months endedSeptember 30, 2021 , our operations inSouth Texas were focused on production from both the Eagle Ford shale formation andAustin Chalk formation, and further development of the Austin Chalk formation. Our overlapping acreage position in the Eagle Ford shale andAustin 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 endedSeptember 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 -------------------------------------------------------------------------------- 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 tierMidland Basin andSouth 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 exceedCenters 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 ourMidland Basin assets andSouth 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 endedSeptember 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 endedSeptember 30, 2021 , compared with the three months endedJune 30, 2021 . Total realized price per BOE increased 17 percent for the three months endedSeptember 30, 2021 , compared with the three months endedJune 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 endedSeptember 30, 2021 , compared with$562.6 million for the three months endedJune 30, 2021 , which was an increase of 35 percent. Production costs per BOE of$9.47 for the three months endedSeptember 30, 2021 , decreased six percent compared with the three months endedJune 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 endedSeptember 30, 2021 , andJune 30, 2021 , respectively. Included within these amounts are derivative settlement losses of$213.6 million and$158.8 million for the three months endedSeptember 30, 2021 , andJune 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 EndedSeptember 30, 2021 , andJune 30, 2021 , and Between the Nine Months EndedSeptember 30, 2021 , and 2020 below for additional discussion. Financial and operational activities during the three months endedSeptember 30, 2021 , resulted in the following: •Net cash provided by operating activities of$328.1 million for the three months endedSeptember 30, 2021 , compared with$296.4 million for the three months endedJune 30, 2021 . •A cash balance of$29.8 million and no outstanding balance on the revolving credit facility as ofSeptember 30, 2021 , compared with a revolving credit facility balance of$52.5 million as ofJune 30, 2021 . •Net income of$85.6 million , or$0.69 per diluted share, for the three months endedSeptember 30, 2021 , compared with a net loss of$223.0 million , or$1.88 per diluted share, for the three months endedJune 30, 2021 . Net income for the three months endedSeptember 30, 2021 , was primarily a result of increased production and pricing. Please refer to Comparison of Financial Results and Trends Between the Three Months EndedSeptember 30, 2021 , andJune 30, 2021 , and Between the Nine Months EndedSeptember 30, 2021 , and 2020 below for additional discussion regarding the components of net income (loss) for the periods presented. 26 -------------------------------------------------------------------------------- •Adjusted EBITDAX, a non-GAAP financial measure, for the three months endedSeptember 30, 2021 , was$346.7 million , compared with$256.9 million for the three months endedJune 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 ourMidland 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 ourMidland Basin program during the three months endedSeptember 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 theMidland Basin . In ourSouth 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 ourSouth Texas program during the three months endedSeptember 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 endedSeptember 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
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(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) TheSouth 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 endedSeptember 30, 2021 , respectively, and were primarily incurred in ourMidland Basin andSouth Texas programs as further detailed in Operational Activities above. 27 -------------------------------------------------------------------------------- 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
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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 EndedSeptember 30, 2021 , andJune 30, 2021 , and Between the Nine Months EndedSeptember 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. 28 -------------------------------------------------------------------------------- The following table summarizes commodity price data, as well as the effects of derivative settlements, for the three months endedSeptember 30, 2021 ,June 30, 2021 , andSeptember 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
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(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 ofthe 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, NYMEXHenry Hub gas, and OPIS NGLs as ofOctober 21, 2021 , andSeptember 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 endedSeptember 30, 2021 , and the preceding three quarters.
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