UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2022
OR
For the transition period from to
Commission file number 001-37697
(Exact Name of Registrant as Specified in its Charter)
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||
(Registrant’s telephone number, including area code): (432 ) 695-4222
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
| Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company | |||||||||||||||||||||||
☒ | ☐ | ☐ | ||||||||||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2022, there were 288,500,539 shares of Class A Common Stock, par value $0.0001 per share and 269,300,000 shares of Class C Common Stock, par value $0.0001 per share, outstanding.
TABLE OF CONTENTS
| Page | |||||||||||
GLOSSARY OF UNITS OF MEASUREMENTS AND INDUSTRY TERMS
The following are abbreviations and definitions of certain terms used in this Quarterly Report on Form 10-Q, which are commonly used in the oil and natural gas industry:
Bbl. One stock tank barrel of 42 U.S. gallons liquid volume used herein in reference to crude oil, condensate or NGLs.
Bbl/d. One Bbl per day.
Boe. One barrel of oil equivalent, calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Bbl of oil. This is an energy content correlation and does not reflect a value or price relationship between the commodities.
Boe/d. One Boe per day.
Btu. One British thermal unit, which is the quantity of heat required to raise the temperature of a one-pound mass of water by one-degree Fahrenheit.
Completion. The process of preparing an oil and gas wellbore for production through the installation of permanent production equipment, as well as perforation and fracture stimulation to initiate production.
Development well. A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
Differential. An adjustment to the price of oil or natural gas from an established spot market price to reflect differences in the quality and/or location of oil or natural gas.
Exploratory well. A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir.
Extension Well. A well drilled to extend the limits of a known reservoir.
FERC. The Federal Energy Regulatory Commission.
Field. An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.
Formation. A layer of rock which has distinct characteristics that differs from nearby rock.
Horizontal drilling. A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at a right angle within a specified interval.
MBbl. One thousand barrels of crude oil, condensate or NGLs.
MBoe. One thousand Boe.
Mcf. One thousand cubic feet of natural gas.
Mcf/d. One Mcf per day.
MMBtu. One million British thermal units.
MMcf. One million cubic feet of natural gas.
NEOs. Named executive officers, which term refers to the principal executive officer, the principal financial officer, and the next three most highly paid executive officers of a company as of the end of the most recently completed fiscal year, based on total compensation as determined under Rule 402 of Regulation S-K.
NGL. Natural gas liquids. These are naturally occurring substances found in natural gas, including ethane, butane, isobutane, propane and natural gasoline, that can be collectively removed from produced natural gas, separated into these substances and sold.
3
NYMEX. The New York Mercantile Exchange.
Operator. The individual or company responsible for the development and/or production of an oil or natural gas well or lease.
Proved developed reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well.
Proved reserves. The estimated quantities of oil, NGLs and natural gas that geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.
Proved undeveloped reserves or PUD. Proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for completion.
Realized price. The cash market price less differentials.
Reserves. Estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to market and all permits and financing required to implement the project.
Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
Royalty interest. An interest in an oil or gas property entitling the owner to shares of the production free of costs of exploration, development and production operations.
SOFR. Secured Overnight Funding Rate.
Spot market price. The cash market price without reduction for expected quality, location, transportation and demand adjustments.
Unproved reserves. Reserves attributable to unproved properties with no proved reserves.
Wellbore. The hole drilled by a drill bit that is equipped for oil and natural gas production once the well has been completed. Also called well or borehole.
Working interest. The interest in an oil and gas property (typically a leasehold interest) that gives the owner the right to drill, produce and conduct operations on the property and to a share of production, subject to all royalties and other burdens and to all costs of exploration, development and operations and all risks in connection therewith.
Workover. Operations on a producing well to restore or increase production.
WTI. West Texas Intermediate is a grade of crude oil used as a benchmark in oil pricing.
4
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “goal,” “plan,” “target” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on management’s current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under Item 1A. Risk Factors in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”) and the risk factors and other cautionary statements contained in our other filings with the United States Securities and Exchange Commission (“SEC”).
Forward-looking statements may include statements about:
•volatility of oil, natural gas and NGL prices or a prolonged period of low oil, natural gas or NGL prices and the effects of actions by, or disputes among or between, members of the Organization of Petroleum Exporting Countries (“OPEC”), such as Saudi Arabia, and other oil and natural gas producing countries, such as Russia, with respect to production levels or other matters related to the price of oil;
•the effects of excess supply of oil and natural gas resulting from the reduced demand caused by the Coronavirus Disease 2019 (“COVID-19”) pandemic and the actions by certain oil and natural gas producing countries;
•political and economic conditions in or affecting other producing regions or countries, including the Middle East, Russia, Eastern Europe, Africa and South America;
•our ability to realize the anticipated benefits and synergies from the Merger and effectively integrate the assets of CRP and Colgate (as such capitalized terms are defined in Note 1—Basis of Presentation and Summary of Significant Accounting Policies);
•our business strategy and future drilling plans;
•our reserves and our ability to replace the reserves we produce through drilling and property acquisitions;
•our drilling prospects, inventories, projects and programs;
•our financial strategy, return of capital program, leverage, liquidity and capital required for our development program;
•our realized oil, natural gas and NGL prices;
•the timing and amount of our future production of oil, natural gas and NGLs;
•our ability to identify, complete and effectively integrate acquisitions of properties or businesses;
•our hedging strategy and results;
•our competition and government regulations;
•our ability to obtain permits and governmental approvals;
•our pending legal or environmental matters;
•the marketing and transportation of our oil, natural gas and NGLs;
•our leasehold or business acquisitions;
•cost of developing or operating our properties;
•our anticipated rate of return;
•general economic conditions;
•weather conditions in the areas where we operate;
•credit markets;
•uncertainty regarding our future operating results; and
5
•our plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.
We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the development, production, gathering and sale of oil and natural gas. These risks include, but are not limited to commodity price volatility, inflation, lack of availability of drilling and production equipment and services, risks relating to the Merger, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures and the other risks described in “Item 1A. Risk Factors” in this Quarterly Report and our 2021 Annual Report.
Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil and natural gas that are ultimately recovered.
Should one or more of the risks or uncertainties described in this Quarterly Report or our 2021 Annual Report occur, or underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statement in this section, to reflect events or circumstances after the date of this Quarterly Report.
6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PERMIAN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share and per share amounts)
| September 30, 2022 | December 31, 2021 | ||||||||||
ASSETS | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net | |||||||||||
| Derivative instruments | |||||||||||
Prepaid and other current assets | |||||||||||
Total current assets | |||||||||||
Property and Equipment | |||||||||||
Oil and natural gas properties, successful efforts method | |||||||||||
Unproved properties | |||||||||||
Proved properties | |||||||||||
Accumulated depreciation, depletion and amortization | ( | ( | |||||||||
Total oil and natural gas properties, net | |||||||||||
| Other property and equipment, net | |||||||||||
Total property and equipment, net | |||||||||||
Noncurrent assets | |||||||||||
Operating lease right-of-use assets | |||||||||||
Other noncurrent assets | |||||||||||
TOTAL ASSETS | $ | $ | |||||||||
LIABILITIES AND EQUITY | |||||||||||
Current liabilities | |||||||||||
Accounts payable and accrued expenses | $ | $ | |||||||||
| Operating lease liabilities | |||||||||||
| Derivative instruments | |||||||||||
Other current liabilities | |||||||||||
Total current liabilities | |||||||||||
Noncurrent liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Asset retirement obligations | |||||||||||
| Deferred income taxes | |||||||||||
| Operating lease liabilities | |||||||||||
Other noncurrent liabilities | |||||||||||
Total liabilities | |||||||||||
Commitments and contingencies (Note 12) | |||||||||||
| Shareholders’ equity | |||||||||||
Common stock, $ | |||||||||||
Class A: | |||||||||||
Class C (Convertible): | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings (accumulated deficit) | ( | ||||||||||
| Total shareholders' equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total equity | |||||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
PERMIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)
(in thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Operating revenues | |||||||||||||||||||||||
| Oil and gas sales | $ | $ | $ | $ | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Lease operating expenses | |||||||||||||||||||||||
| Severance and ad valorem taxes | |||||||||||||||||||||||
| Gathering, processing and transportation expenses | |||||||||||||||||||||||
| Depreciation, depletion and amortization | |||||||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Merger and integration expense | |||||||||||||||||||||||
| Impairment and abandonment expense | |||||||||||||||||||||||
| Exploration and other expenses | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Net gain (loss) on sale of long-lived assets | ( | ( | ( | ( | |||||||||||||||||||
| Proceeds from terminated sale of assets | |||||||||||||||||||||||
| Income (loss) from operations | |||||||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Gain (loss) on extinguishment of debt | ( | ||||||||||||||||||||||
| Net gain (loss) on derivative instruments | ( | ( | |||||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
Total other income (expense) | ( | ( | ( | ||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Income tax (expense) benefit | ( | ( | |||||||||||||||||||||
| Net income (loss) | ( | ||||||||||||||||||||||
| Less: Net (income) loss attributable to noncontrolling interest | ( | ( | |||||||||||||||||||||
| Net income (loss) attributable to Class A Common Stock | $ | $ | $ | $ | ( | ||||||||||||||||||
| Income (loss) per share of Class A Common Stock: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ( | ||||||||||||||||||
| Diluted | $ | $ | $ | $ | ( | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
8
PERMIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
(in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
Depreciation, depletion and amortization | |||||||||||
Stock-based compensation expense - equity awards | |||||||||||
| Stock-based compensation expense - liability awards | ( | ||||||||||
Impairment and abandonment expense | |||||||||||
Deferred tax expense (benefit) | |||||||||||
| Net (gain) loss on sale of long-lived assets | |||||||||||
| Non-cash portion of derivative (gain) loss | ( | ||||||||||
| Amortization of debt issuance costs and debt discount | |||||||||||
| (Gain) loss on extinguishment of debt | |||||||||||
Changes in operating assets and liabilities: | |||||||||||
| (Increase) decrease in accounts receivable | ( | ( | |||||||||
| (Increase) decrease in prepaid and other assets | ( | ||||||||||
| Increase (decrease) in accounts payable and other liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
Cash flows from investing activities: | |||||||||||
Acquisition of oil and natural gas properties | ( | ( | |||||||||
Drilling and development capital expenditures | ( | ( | |||||||||
| Cash paid for business acquired in the Merger, net of cash acquired | ( | ||||||||||
Purchases of other property and equipment | ( | ( | |||||||||
Proceeds from sales of oil and natural gas properties | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
Cash flows from financing activities: | |||||||||||
Proceeds from borrowings under revolving credit facility | |||||||||||
Repayment of borrowings under revolving credit facility | ( | ( | |||||||||
| Repayment of credit facility acquired in the Merger | ( | ||||||||||
| Proceeds from issuance of senior notes | |||||||||||
Debt issuance costs | ( | ( | |||||||||
| Premiums paid on capped call transactions | ( | ||||||||||
| Redemption of senior secured notes | ( | ||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Class A Common Stock repurchased from employees for taxes due upon share vestings | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
9
PERMIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)
(in thousands)
(in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
Supplemental cash flow information | |||||||||||
Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | |||||||||||
Supplemental non-cash activity | |||||||||||
| Equity issued and long-term debt assumed to acquire oil and gas properties via the Merger | $ | $ | |||||||||
Accrued capital expenditures included in accounts payable and accrued expenses | |||||||||||
Asset retirement obligations incurred, including revisions to estimates | |||||||||||
Reconciliation of cash, cash equivalents and restricted cash presented on the consolidated statements of cash flows for the periods presented:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Restricted cash(1) | |||||||||||
Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
(1) Included in Prepaid and other current assets in the consolidated balance sheet as of September 30, 2022.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
10
PERMIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
(in thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Total Shareholders’ Equity | Non-controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class C | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock issued | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeited | ( | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock used for tax withholding | ( | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock under Employee Stock Purchase Plan | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation - equity awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock issued | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeited | ( | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation - equity awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock issued | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class C Common Stock | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Performance stock issued less stock used for tax withholding | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeited | ( | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock used for tax withholding | ( | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock under Employee Stock Purchase Plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation - equity awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
11
PERMIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited) (continued)
(in thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Total Shareholders’ Equity | Non-controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class C | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeited | ( | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock used for tax withholding | ( | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock under Employee Stock Purchase Plan | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation - equity awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Capped call premiums | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeited | ( | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation - equity awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock issued | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeited | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock used for tax withholding | ( | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock under Employee Stock Purchase Plan | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation - equity awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
12
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
Permian Resources Corporation is an independent oil and natural gas company focused on the responsible acquisition, optimization and development of crude oil and associated liquids-rich natural gas reserves. The Company’s assets are concentrated in the Delaware Basin, a sub-basin of the Permian Basin, and its properties consist of large, contiguous acreage blocks located in West Texas and New Mexico. Unless otherwise specified or the context otherwise requires, all references in these notes to “Permian Resources” or the “Company” are to Permian Resources Corporation and its consolidated subsidiary, Permian Resources Operating, LLC (“OpCo”, which was formerly Centennial Resource Production, LLC or “CRP”).
On September 1, 2022, CRP completed its merger (the “Merger”) with Colgate Energy Partners III, LLC (“Colgate”). Refer to Note 2—Business Combination, for further information regarding the Merger. In connection with the closing of the Merger, the Company changed its name from “Centennial Resource Development, Inc.” to “Permian Resources Corporation” and transferred the listing of its Class A Common Stock to the New York Stock Exchange under the ticker symbol “PR”.
Principles of Consolidation and Basis of Presentation
Use of Estimates
The preparation of the Company’s consolidated financial statements requires the Company’s management to make various assumptions, judgments and estimates to determine the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events, and accordingly, actual results could differ from amounts previously established. Additionally, the prices received for oil, natural gas and NGL production can heavily influence the Company’s assumptions, judgments and estimates and continued volatility of oil and gas prices could have a significant impact on the Company’s estimates.
The more significant areas requiring the use of assumptions, judgments and estimates include: (i) oil and natural gas reserves; (ii) cash flow estimates used in impairment tests for long-lived assets; (iii) impairment expense of unproved properties; (iv) depreciation, depletion and amortization; (v) asset retirement obligations; (vi) determining fair value and allocating purchase price in connection with business combinations and asset acquisitions; (vii) accrued revenues and related receivables; (viii) accrued liabilities; (ix) derivative valuations; (x) deferred income taxes; and (xi) determining the fair values of certain stock-based compensation awards.
13
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Leases
Income Taxes
14
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2—Business Combination
Colgate Merger
On May 19, 2022, the Company entered into a Business Combination Agreement (the “Merger Agreement”) with CRP, Colgate, and Colgate Energy Partners III MidCo, LLC (the “Colgate Unitholder”). The Merger Agreement provided for the combination of CRP and Colgate in a merger of equals transaction, with CRP (which was renamed Permian Resources Operating, LLC or “OpCo” following the Merger) continuing as the surviving legal entity in the Merger and a subsidiary of the Company. Colgate was an independent oil and gas exploration and development company with properties located in the Delaware Basin. Colgate’s assets consisted of approximately 105,000 net leasehold acres and 25,000 net royalty acres located primarily in Reeves and Ward Counties in Texas and Eddy County in New Mexico. The Merger was completed to provide increases to our operational and financial scale, drive accretion across our key financial and operating metrics, and enhance the combined company’s shareholder returns.
On September 1, 2022, the Merger was completed, and all membership interests in CRP issued and outstanding immediately prior to the closing were converted into units of Permian Resources Operating, LLC (“Common Units”) equal to the number of shares of the Company’s Class A Common Stock that were outstanding immediately prior to the closing. All of the Colgate Unitholder’s membership interests in Colgate were exchanged for 269,300,000 shares of Class C Common Stock, 269,300,000 Common Units and $525 million in cash consideration. Following the closing of the Merger, the Colgate Unitholder distributed the merger consideration to its equity holders (the “Colgate Owners”), who collectively continue to own in the aggregate 100 % of the outstanding shares of Class C Common Stock of the Company and approximately 48 % of the outstanding Common Units in OpCo, which represent an approximate 48 % noncontrolling interest in OpCo. This ownership of all the Company’s shares of Class C Common Stock by the Colgate Owners represents approximately 48 % of the Company’s total outstanding shares of Class A Common Stock and Class C Common Stock taken together (the “Common Stock”). Refer to Note 9—Shareholders' Equity and Noncontrolling Interest for additional information on the equity structure of the Company following the Merger.
Purchase Price Allocation
The Merger has been accounted for as a business combination using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, with the Company being identified as the accounting acquirer. Under the acquisition method of accounting, the assets acquired and liabilities assumed are recorded at their respective fair values as of the Merger closing date, which requires judgment and certain assumptions to be made. Oil and natural gas properties were valued using an income based approach which incorporates a discounted cash flow method. The fair value of Colgate’s outstanding senior notes was based on unadjusted quoted prices for these same notes in an active market. The value of derivative instruments was based on Level 2 inputs similar to the Company's other commodity price derivatives. Refer to Note 8—Fair Value Measurements for additional information on fair value measurements.
As of the date of this filing, the merger consideration and purchase price allocation are preliminary. The fair value of merger consideration, assets acquired and liabilities assumed are not complete and adjustments may be made. The Company expects to complete the purchase price allocation during the 12-month period subsequent to the Merger closing date.
15
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| (in thousands, except share and per share data) | Preliminary Merger Consideration | ||||
| Share consideration | |||||
| Shares of Class C Common Stock issued to Colgate Unitholder | |||||
Class C Common Stock per share fair value on September 1, 2022(1) | $ | ||||
| Fair value of noncontrolling interest that resulted from Class C Common Stock issuance | $ | ||||
| Cash consideration | $ | ||||
| Total Merger Consideration | $ | ||||
| Fair value of assets acquired: | Preliminary Purchase Price Allocation | ||||
| Cash and cash equivalents | $ | ||||
| Account receivable, net | |||||
| Derivative instruments | |||||
| Prepaid and other assets | |||||
| Unproved oil and natural gas properties | |||||
| Proved oil and natural gas properties | |||||
| Other property and equipment, net | |||||
| Operating lease right-of-use assets | |||||
| Total assets acquired | $ | ||||
| Fair value of liabilities assumed: | |||||
| Accounts payable and accrued expenses | $ | ||||
| Operating lease liabilities | |||||
| Derivative instruments | |||||
| Long-term debt, net | |||||
| Asset retirement obligations | |||||
| Total liabilities assumed | $ | ||||
| Net assets acquired | $ | ||||
(1) The preliminary fair value ascribed to the Class C Common Stock issued in connection with the Merger was based upon the stock price of the Company’s Class A Common Stock as of the effective time of the Merger.
Post-Acquisition Operating Results
Since the September 1, 2022 closing date of the Merger, the results of operations for Colgate have been included in the Company’s consolidated financial statements. For each of the three and nine months ended September 30, 2022, approximately $125.0 million of operating revenues and $46.6 million of direct operating expenses attributable to Colgate’s business have been included in the consolidated statements of operations.
In connection with the Merger, the Company incurred certain merger-related integration and transaction costs that are expensed as incurred. During the three and nine months ended September 30, 2022, the Company recognized total transaction costs of $59.3 million and $65.0 million, respectively, which are included in Merger and integration expense on the consolidated statements of operations. These costs primarily relate to bankers’ advisory fees, legal, accounting and consultancy fees, as well as severance and related benefits associated with employees that were terminated in connection with the Merger.
16
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Supplemental Unaudited Pro Forma Financial Information
The following supplemental unaudited pro forma financial information (“pro forma information”) for the three and nine months ended September 30, 2022 and 2021 has been prepared from the respective historical consolidated financial statements of the Company and Colgate and has been adjusted to reflect the Merger as if it had occurred on January 1, 2021. The pro forma information reflects transaction accounting adjustments that the Company believes are factually supportable and that are expected to have a continuing impact on the results of operations, with the exception of certain nonrecurring items incurred in connection with the Merger. The pro forma information does not include any cost savings or other synergies that may result from the Merger or any estimated costs that will be incurred by the Company to integrate the Colgate assets.
The pro forma information is not necessarily indicative of the results that might have occurred had the Merger occurred in the past and is not intended to be a projection of future results. Future results may vary significantly from the results reflected in the following pro forma information.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||
| Total Revenue | $ | $ | $ | $ | |||||||||||||
| Net Income (loss) | ( | ( | |||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||
| Diluted | ( | ( | |||||||||||||||
Note 3—Accounts Receivable, Accounts Payable and Accrued Expenses
Accounts receivable are comprised of the following:
(in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
Accrued oil and gas sales receivable, net | $ | $ | |||||||||
Joint interest billings, net | |||||||||||
Accrued derivative settlements receivable | |||||||||||
Other | |||||||||||
Accounts receivable, net | $ | $ | |||||||||
Accounts payable and accrued expenses are comprised of the following:
(in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
Accounts payable | $ | $ | |||||||||
Accrued capital expenditures | |||||||||||
Revenues payable | |||||||||||
Accrued employee compensation and benefits | |||||||||||
Accrued interest | |||||||||||
Accrued derivative settlements payable | |||||||||||
Accrued expenses and other | |||||||||||
Accounts payable and accrued expenses | $ | $ | |||||||||
17
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4—Long-Term Debt
The following table provides information about the Company’s long-term debt as of the dates indicated:
(in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
Credit Facility due 2027 | $ | $ | |||||||||
| Senior Notes | |||||||||||
Unamortized debt issuance costs on Senior Notes | ( | ( | |||||||||
Unamortized debt discount | ( | ( | |||||||||
| Senior Notes, net | |||||||||||
Total long-term debt, net | $ | $ | |||||||||
Credit Agreement
On February 18, 2022, OpCo, the Company’s consolidated subsidiary, entered into an amended and restated five-year secured credit facility (the “Credit Agreement”) with a syndicate of banks, which replaced its previous credit facility that was set to mature in May 2023. The restated Credit Agreement extended its maturity date to February 2027.
On July 15, 2022, OpCo and the Company entered into the first amendment to its Credit Agreement (the “Amendment”). The Amendment, among other things, waived compliance with certain restrictive covenants and provided the lenders’ consent to a planned Pre-Merger Reorganization (as defined within the Amendment) in order to enable the Merger to occur. In addition, the Amendment increased the elected commitments under the Credit Agreement to $1.5 billion from $750 million, increased the borrowing base to $2.5 billion from $1.15 billion, and became effective as of the September 1, 2022 Merger closing date.
As of September 30, 2022, the Company had $550 million borrowings outstanding and $944.2 million in available borrowing capacity, net of $5.8 million in letters of credit outstanding, under its new facility.
The amount available to be borrowed under the Credit Agreement is equal to the lesser of (i) the borrowing base, (ii) aggregate elected commitments, which is set at $1.5 billion, or (iii) $3.0 billion. The borrowing base is redetermined semi-annually in the spring and fall by the lenders in their sole discretion. It also allows for two optional borrowing base redeterminations in between the scheduled redeterminations. The borrowing base depends on, among other things, the quantities of OpCo’s proved oil and natural gas reserves, estimated cash flows from those reserves, and the Company’s commodity hedge positions. Upon a redetermination of the borrowing base, if actual borrowings outstanding exceed the revised borrowing capacity, OpCo could be required to immediately repay a portion of its debt outstanding. Borrowings under the Credit Agreement are guaranteed by certain of OpCo’s subsidiaries, including entities that became subsidiaries of OpCo through the Merger.
Borrowings under the Credit Agreement may be base rate loans or Secured Overnight Financing Rate (“SOFR”) loans. Interest is payable quarterly for base rate loans and at the end of the applicable interest period for SOFR loans. SOFR loans bear interest at SOFR plus an applicable margin ranging from 175 to 275 basis points, depending on the percentage of elected commitments utilized, plus an additional 10 basis point credit spread adjustment. Base rate loans bear interest at a rate per annum equal to the greatest of: (i) the agent bank’s prime rate; (ii) the federal funds effective rate plus 50 basis points; or (iii) the adjusted Term SOFR rate for a one-month interest period plus 100 basis points, plus an applicable margin, ranging from 75 to 175 basis points, depending on the percentage of the borrowing base utilized. OpCo also pays a commitment fee of 37.5 to 50 basis points on unused elected commitment amounts under its facility.
The Credit Agreement contains restrictive covenants that limit our ability to, among other things: (i) incur additional indebtedness; (ii) make investments and loans; (iii) enter into mergers; (iv) make restricted payments; (v) repurchase or redeem junior debt; (vi) enter into commodity hedges exceeding a specified percentage of our expected production; (vii) enter into interest rate hedges exceeding a specified percentage of its outstanding indebtedness; (viii) incur liens; (ix) sell assets; and (x) engage in transactions with affiliates.
The Credit Agreement also requires OpCo to maintain compliance with the following financial ratios:
18
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(i) a current ratio, which is the ratio of OpCo’s consolidated current assets (including an add back of unused commitments under the revolving credit facility and excluding non-cash derivative assets and certain restricted cash) to its consolidated current liabilities (excluding the current portion of long-term debt under the Credit Agreement and non-cash derivative liabilities), of not less than 1.0 to 1.0; and
(ii) a leverage ratio, as defined within the Credit Agreement as the ratio of total funded debt to consolidated EBITDAX (as defined within the Credit Agreement) for the prior four fiscal quarters, of not greater than 3.5 to 1.0.
The Credit Agreement includes fall away covenants, lower interest rates and reduced collateral requirements that OpCo may elect if OpCo is assigned an Investment Grade Rating (as defined within the Credit Agreement).
OpCo was in compliance with the covenants and the applicable financial ratios described above as of September 30, 2022.
Convertible Senior Notes
On March 19, 2021, OpCo issued $150.0 million in aggregate principal amount of 3.25 % senior unsecured convertible notes due 2028 (the “Convertible Senior Notes”). On March 26, 2021, OpCo issued an additional $20.0 million of Convertible Senior Notes pursuant to the exercise of the underwriters’ over-allotment option to purchase additional Convertible Senior Notes. These issuances resulted in aggregate net proceeds to OpCo of $163.6 million, after deducting debt issuance costs of $6.4 million. Interest is payable on the Convertible Senior Notes semi-annually in arrears on each April 1 and October 1, commencing on October 1, 2021.
The Convertible Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Company and each of OpCo’s current subsidiaries.
The Convertible Senior Notes will mature on April 1, 2028 unless earlier repurchased, redeemed or converted. Before January 3, 2028, noteholders have the right to convert their Convertible Senior Notes (i) upon the occurrence of certain events, (ii) if the Company’s share price exceeds 130 % of the conversion price for any 20 trading days during the last 30 consecutive trading days of a calendar quarter, after June 30, 2021, or (iii) if the trading price per $1,000 principal amount of the notes is less than 98 % of the Company’s share price multiplied by the conversion rate, for a 10 consecutive trading day period. In addition, after January 2, 2028, noteholders may convert their Convertible Senior Notes at any time at their election through the second scheduled trading day immediately before the April 1, 2028 maturity date.
OpCo can settle conversions by paying or delivering, as applicable, cash, shares of Class A Common Stock, or a combination of cash and shares of Class A Common Stock, at OpCo’s election. The initial conversion rate is 159.2610 shares of Class A Common Stock per $1,000 principal amount of Convertible Senior Notes, which represents an initial conversion price of approximately $6.28 per share of Class A Common Stock. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events (as defined in the indenture) which, in certain circumstances, will increase the conversion rate for a specified period of time. In the context of this issuance, we refer to the notes as convertible in accordance with ASC 470 - Debt. However, per the terms of the Convertible Senior Notes’ indenture, the Convertible Senior Notes were issued by OpCo and are exchangeable into shares of the Company’s Class A Common Stock.
OpCo has the option to redeem, in whole or in part, all of the Convertible Senior Notes at any time on or after April 7, 2025, at a redemption price equal to 100 % of the principal amount, plus accrued and unpaid interest to the date of redemption, but only if the last reported sale price per share of Class A Common Stock exceeds 130 % of the conversion price (i) for any 20 trading days during the 30 consecutive trading days ending on the day immediately before the date OpCo sends the related redemption notice; and (ii) also on the trading day immediately before the date OpCo sends such notice.
If certain corporate events occur, including certain business combination transactions involving the Company or OpCo or a stock de-listing with respect to the Class A Common Stock, noteholders may require OpCo to repurchase their Convertible Senior Notes at a cash repurchase price equal to the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to the repurchase date.
Upon an Event of Default (as defined in the indenture governing the Convertible Senior Notes), the trustee or the holders of at least 25 % of the aggregate principal amount of then outstanding Convertible Senior Notes may declare the Convertible Senior Notes immediately due and payable. In addition, a default resulting from certain events of bankruptcy or insolvency with respect to the Company, OpCo or any of the subsidiary guarantors will automatically cause all outstanding Convertible Senior Notes to become due and payable.
At issuance, the Company recorded a liability equal to the face value the Convertible Senior Notes, net of unamortized debt issuance costs, in Long-term debt, net in the consolidated balance sheets. As of September 30, 2022, the net liability related to the Convertible Senior Notes was $164.8 million.
19
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Capped Called Transactions
In connection with the issuance of the Convertible Senior Notes in March 2021, OpCo entered into privately negotiated capped call spread transactions with option counterparties (the “Capped Call Transactions”). The Capped Call Transactions cover the aggregate number of shares of Class A Common Stock that initially underlie the Convertible Senior Notes and are expected to (i) generally reduce potential dilution to the Class A Common Stock upon a conversion of the Convertible Senior Notes, and/or (ii) offset any cash payments OpCo is required to make in excess of the principal amount of the Convertible Senior Notes, subject to a cap. The Capped Call Transactions have an initial strike price of $6.28 per share of Class A Common Stock and an initial capped price of $8.4525 per share of Class A Common Stock, each of which are subject to certain customary adjustments upon the occurrence of certain corporate events, as defined in the capped call agreements.
The cost of the Capped Call Transactions was $14.7 million, which was funded from proceeds from the Convertible Senior Note issuance. The cost to purchase the Capped Call Transactions was recorded to Additional paid-in capital in the consolidated balance sheets and will not be subject to remeasurement each reporting period.
Senior Unsecured Notes
On September 1, 2022, in connection with the Merger, the Company entered into supplemental indentures whereby all of Colgate’s outstanding senior notes were assumed and became the senior unsecured debt of OpCo. The senior notes assumed by OpCo included $300 million of 7.75 % senior notes due 2026 (the “2026 Colgate Senior Notes”) and $700 million of 5.875 % senior notes due 2029 (the “2029 Colgate Senior Notes,” and together with the 2026 Colgate Senior Notes, the “Colgate Senior Notes”). The Company recorded the Colgate Senior Notes at their fair values as of the Merger closing date, which were equal to 100 % of par for the 2026 Colgate Senior Notes and 92.96 % of par (a $49.3 million debt discount) for the 2029 Colgate Senior Notes. Interest on the 2026 Colgate Senior Notes is paid semi-annually each February 15 and August 15 and interest on the 2029 Colgate Senior Notes is paid semi-annually each January 1 and July 1.
On March 15, 2019, OpCo issued $500.0 million of 6.875 % senior notes due 2027 (the “2027 Senior Notes”) in a 144A private placement at a price equal to 99.235 % of par that resulted in net proceeds to OpCo of $489.0 million, after deducting the original issuance discount of $3.8 million and debt issuance costs of $7.2 million. Interest is payable on the 2027 Senior Notes semi-annually in arrears each April 1 and October 1, which commenced on October 1, 2019.
On November 30, 2017, OpCo issued at par $400.0 million of 5.375 % senior notes due 2026 (the “2026 Senior Notes” and collectively with the 2027 Senior Notes and the Colgate Senior Notes, the “Senior Unsecured Notes”) in a 144A private placement that resulted in net proceeds to OpCo of $391.0 million, after deducting $9.0 million in debt issuance costs. Interest is payable on the 2026 Senior Notes semi-annually in arrears each January 15 and July 15, which commenced on July 15, 2018.
In May 2020, $110.6 million aggregate principal amount of the 2026 Senior Notes and $143.7 million aggregate principal amount of the 2027 Senior Notes were validly tendered and exchanged by certain eligible bondholders for consideration consisting of $127.1 million aggregate principal amount of 8.00% second lien senior secured notes, which were fully redeemed at par in connection with the Convertible Senior Notes issuance during the second quarter of 2021. As of September 30, 2022, the remaining aggregate principal amount of 2027 Senior Notes and 2026 Senior Notes outstanding was $356.4 million and $289.4 million, respectively.
The Senior Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Company and each of OpCo’s current subsidiaries that guarantee OpCo’s Credit Agreement.
At any time prior to January 15, 2021 (for the 2026 Senior Notes), April 1, 2022 (for the 2027 Senior Notes), February 15, 2024 (for the 2026 Colgate Senior Notes), and July 1, 2024 (for the 2029 Colgate Senior Notes) (the “Optional Redemption Dates,”) OpCo may, on any one or more occasions, redeem up to 35 % of the aggregate principal amount of each series of Senior Unsecured Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings at a redemption price equal to 105.375 % (for the 2026 Senior Notes), 106.875 % (for the 2027 Senior Notes), 107.750 % (for the 2026 Colgate Senior Notes), and 105.875 % (for the 2029 Colgate Senior Notes) of the principal amount of the Senior Unsecured Notes of the applicable series redeemed, plus any accrued and unpaid interest to the date of redemption; provided that at least 65 % of the aggregate principal amount of each such series of Senior Unsecured Notes remains outstanding immediately after such redemption, and the redemption occurs within 180 days of the closing date of such equity offering.
At any time prior to the Optional Redemption Dates, OpCo may, on any one or more occasions, redeem all or a part of the Senior Unsecured Notes at a redemption price equal to 100 % of the principal amount of the Senior Unsecured Notes redeemed, plus a “make-whole” premium, and any accrued and unpaid interest as of the date of redemption. On and after the Optional Redemption Dates, OpCo may redeem the Senior Unsecured Notes, in whole or in part, at redemption prices expressed as percentages of principal amount plus accrued and unpaid interest to the redemption date.
20
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
If OpCo experiences certain defined changes of control (and, in some cases, followed by a ratings decline), each holder of the Senior Unsecured Notes may require OpCo to repurchase all or a portion of its Senior Unsecured Notes for cash at a price equal to 101
The indentures governing the Senior Unsecured Notes contain covenants that, among other things and subject to certain exceptions and qualifications, limit OpCo’s ability and the ability of OpCo’s restricted subsidiaries to: (i) incur or guarantee additional indebtedness or issue certain types of preferred stock; (ii) pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; (iii) transfer or sell assets; (iv) make investments; (v) create certain liens; (vi) enter into agreements that restrict dividends or other payments from their subsidiaries to them; (vii) consolidate, merge or transfer all or substantially all of their assets; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. OpCo was in compliance with these covenants as of September 30, 2022.
Upon an Event of Default (as defined in the indentures governing the Senior Unsecured Notes), the trustee or the holders of at least 25 % (or in the case of the Colgate Senior Notes, 30%) of the aggregate principal amount of then outstanding Senior Unsecured Notes may declare the Senior Unsecured Notes immediately due and payable. In addition, a default resulting from certain events of bankruptcy or insolvency with respect to OpCo, any restricted subsidiary of OpCo that is a significant subsidiary, or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Unsecured Notes to become due and payable.
Note 5—Asset Retirement Obligations
The following table summarizes changes in the Company’s asset retirement obligations (“ARO”) associated with its working interests in oil and gas properties for the nine months ended September 30, 2022:
(in thousands) | |||||
Asset retirement obligations, beginning of period | $ | ||||
Liabilities assumed in the Merger | |||||
Liabilities incurred | |||||
Liabilities divested and settled | ( | ||||
Accretion expense | |||||
Revisions to estimated cash flows | ( | ||||
Asset retirement obligations, end of period | $ | ||||
ARO reflect the present value of the estimated future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and land restoration in accordance with applicable local, state and federal laws. Inherent in the fair value calculation of ARO are numerous estimates and assumptions, including plug and abandonment settlement amounts, inflation factors, credit adjusted discount rates and timing of settlement. To the extent future revisions to these assumptions impact the value of the existing ARO liabilities, a corresponding offsetting adjustment is made to the oil and gas property balance. Changes in the liability due to the passage of time are recognized as an increase in the carrying amount of the liability with an offsetting charge to accretion expense, which is included within depreciation, depletion and amortization.
Note 6—Stock-Based Compensation
On April 27, 2022, the stockholders of the Company approved the second amended and restated 2016 Long Term Incentive Plan (the “LTIP”), which, among other things, increased the number of shares of Class A Common Stock authorized for issuance to employees and directors from 24,750,000 shares to 44,250,000 shares. The LTIP provides for grants of restricted stock, stock options (including incentive stock options and nonqualified stock options), restricted stock units (including performance stock units), stock appreciation rights and other stock or cash-based awards.
Stock-based compensation expense is recognized within both General and administrative expenses and Exploration and other expenses in the consolidated statements of operations. The Company accounts for forfeitures of awards granted under the LTIP as they occur.
21
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes stock-based compensation expense recognized for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Equity Awards | |||||||||||||||||||||||
| Restricted stock | $ | $ | $ | $ | |||||||||||||||||||
| Stock option awards | |||||||||||||||||||||||
| Performance stock units | |||||||||||||||||||||||
Other stock-based compensation expense(1) | |||||||||||||||||||||||
| Total stock-based compensation - equity awards | |||||||||||||||||||||||
| Liability Awards | |||||||||||||||||||||||
| Restricted stock units | ( | ||||||||||||||||||||||
| Performance stock units | ( | ( | |||||||||||||||||||||
| Total stock-based compensation - liability awards | ( | ( | |||||||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
(1) Includes expenses related to the Company’s Employee Stock Purchase Plan (the “ESPP”). In May 2019, an aggregate of 2,000,000 shares were authorized by stockholders for issuance under the ESPP, which became effective on July 1, 2019.
Equity Awards
The Company has restricted stock, stock options and performance stock units (“PSUs”) outstanding that were granted under the LTIP as discussed below. Each award has service-based and, in the case of the PSUs, market-based vesting requirements, and are expected to be settled in shares of Class A Common Stock upon vesting. As a result, these awards are classified as equity-based awards in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC 718”).
In connection with the Merger, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) approved a resolution to extend severance benefits under the Company’s Second Amended and Restated Severance Plan (the “Severance Plan”) to employees that experience a Qualifying Termination (as defined in the Severance Plan) following the Merger. As a result, affected employees of the Company will receive an accelerated vesting of their unvested restricted stock awards and PSUs upon termination, which will change the terms of the vesting conditions and will be treated as modifications in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). During the three months ended September 30, 2022, six employees and two non-employee directors were terminated and received accelerated vesting of their unvested stock awards and PSUs. These modifications resulted in an increase to total stock-based compensation expense of $7.0 million as a result of the change in the fair value of the modified awards. The shares and PSUs that were accelerated are included within the vested line items in the below tables.
Restricted Stock
The following table provides information about restricted stock activity during the nine months ended September 30, 2022:
| Restricted Stock | Weighted Average Fair Value | ||||||||||
| Unvested balance as of December 31, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Unvested balance as of September 30, 2022 | |||||||||||
The Company grants service-based restricted stock to certain officers and employees, which vest ratably over a three-year service period, and to directors, which vest over a one-year service period. Compensation cost for these service-based restricted stock grants is based on the closing market price of the Company’s Class A Common Stock on the grant date, and such costs are recognized ratably over the applicable vesting period. The total fair value of restricted stock that vested during the nine months ended September 30, 2022 and 2021 was $18.3 million and $14.0 million, respectively. Unrecognized compensation cost related to restricted shares that were unvested as of September 30, 2022 was $48.7 million, which the Company expects to recognize over a weighted average period of 2.6 years.
22
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock Options
Stock options that have been granted under the LTIP expire ten years from the grant date and vest ratably over their three-year service period. The exercise price for an option granted under the LTIP is the closing market price of the Company’s Class A Common Stock on the grant date. Compensation cost for stock options is based on the grant-date fair value of the award, which is then recognized ratably over the vesting period of three years .
The following table provides information about stock option awards outstanding during the nine months ended September 30, 2022:
| Options | Weighted Average Exercise Price | Weighted Average Remaining Term (in years) | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
| Outstanding as of December 31, 2021 | $ | ||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | $ | |||||||||||||||||||||
| Forfeited | ( | ||||||||||||||||||||||
| Expired | ( | ||||||||||||||||||||||
| Outstanding as of September 30, 2022 | $ | ||||||||||||||||||||||
| Exercisable as of September 30, 2022 | $ | ||||||||||||||||||||||
The total fair value of stock options that vested during the nine months ended September 30, 2022 and 2021 was $0.3 million and $0.8 million, respectively. The intrinsic value of the stock options exercised was minimal for the nine months ended September 30, 2022 and September 30, 2021. As of September 30, 2022, there was less than $0.1 million of unrecognized compensation cost related to unvested stock options, which the Company expects to recognize on a pro-rata basis over a weighted-average period of 0.4 years.
Performance Stock Units
The Company grants performance stock units (“PSU”) to certain officers that are subject to market-based vesting criteria as well as a service period ranging from three to five years. Vesting at the end of the service period depends on the Company’s absolute annualized total shareholder return (“TSR”) over the service period, as well as the Company’s TSR relative to the TSR of a peer group of companies. These market-based conditions must be met in order for the stock awards to vest, and it is therefore possible that no shares could ultimately vest. However, the Company recognizes compensation expense for the PSUs subject to market conditions regardless of whether it becomes probable that these conditions will be met or not, and compensation expense is not reversed if vesting does not actually occur.
The Company’s performance stock units currently outstanding can be settled in either Class A Common Stock or cash upon vesting at the Company’s discretion. The Company intends to settle all performance stock units in Class A Common Stock and has sufficient shares available under the LTIP to settle the units in Class A Common Stock at the potential future vesting dates. Accordingly, the PSUs have been treated as equity-based awards with their fair values determined as of the grant or modification date, as applicable. The fair values of the awards are estimated using a Monte Carlo valuation model. The Monte Carlo valuation model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Expected volatility was calculated based on the historical volatility of the Company’s Class A Common Stock, and the risk-free interest rate is based on U.S. Treasury yield curve rates with maturities consistent with the vesting periods.
2020 Awards(1) | 2021 Awards(2) | 2022 Awards (Pre-Merger) | 2022 Awards (Post-Merger) | |||||||||||||||||||||||
| Weighted average fair value per share | $ | $ | $ | $ | ||||||||||||||||||||||
| Number of simulations | ||||||||||||||||||||||||||
| Expected implied stock volatility | ||||||||||||||||||||||||||
| Dividend yield | ||||||||||||||||||||||||||
| Risk-free interest rate | ||||||||||||||||||||||||||
23
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) During the nine months ended September 30, 2022, the Company amended the 2020 PSU agreement to allow the units to be settleable in either cash or Class A Common Stock upon vesting at the Company’s discretion. The awards had previously been treated as liability based awards and following the amendment were modified and reclassified to equity as discussed below. As a result, the awards’ fair value was redetermined on the date of modification, August 18, 2022.
(2) The 2021 PSU awards’ fair value was measured on April 27, 2022, which represents the established grant date as sufficient shares become available under the LTIP to settle 2021 awards in Class A Common Stock.
| Awards | Weighted Average Fair Value | ||||||||||
| Unvested balance as of December 31, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Modified awards | |||||||||||
| Vested | ( | ||||||||||
| Cancelled | ( | ||||||||||
| Forfeited | |||||||||||
| Unvested balance as of September 30, 2022 | |||||||||||
The total fair value of performance stock units that vested during the nine months ended September 30, 2022 was $2.7 million. As of September 30, 2022, there was $93.5 million of unrecognized compensation cost related to PSUs that were unvested, which the Company expects to recognize on a pro-rata basis over a weighted average period of 2.3 years.
Liability Awards
The Company had performance stock units that were granted under the LTIP, which were settleable in cash and were classified as liability awards in accordance with ASC 718. The Company also had restricted stock units granted under the LTIP that were settleable in cash and that were classified as liability awards, but all such units were settled in their entirety during the third quarter of 2021. Compensation cost for these liability awards is based on the fair value of the units as of the balance sheet date as further discussed below, and such costs are recognized ratably over the service periods of the awards. As the fair value of liability awards is required to be re-measured each period end, stock compensation expense amounts recognized for these awards will vary. The estimated future cash payments associated with these awards are presented as liabilities within Other long-term liabilities in the consolidated balances sheets.
Restricted Stock Units
The Company granted 5.5 million restricted stock units during the third quarter of 2020 to certain officers (non-NEOs) and employees that were settleable in cash upon vesting. The restricted stock units vested annually in one-third increments over a three-year service period, with the first portion vesting on September 1, 2021. After one year from the grant date, however, the remaining two-thirds of unvested restricted stock units could vest immediately, on an accelerated basis, if they meet certain market-based vesting criteria equal to the maximum return percentage for at least 20 out of any 30 consecutive trading days. Additionally, the restricted stock units included maximum and minimum return amounts equal to 400 % and 25 %, respectively, of the closing market price of the Company’s Class A Common Stock on the grant date.
During the second quarter of 2021, the Company amended these restricted stock unit agreements to (i) allow the units to be settleable in either cash or Class A Common Stock upon vesting at the Company’s discretion and (ii) remove the maximum and minimum return amounts if the units are settled in Class A Common Stock. The amended terms were effective July 1, 2021, and at that time, the Company intended to settle a portion of these restricted stock units in cash. As a result, the awards continued to be classified as liabilities in accordance with ASC 718.
During the third quarter of 2021, the maximum return event (described above) occurred resulting in an immediate vesting of all the outstanding restricted stock units on September 1, 2021. The Company settled 1.8 million of the restricted stock units in cash resulting in a $6.2 million cash payment, and the remaining units were settled in Class A Common Stock. The portion of the units that were settled in Class A Common Stock were recognized as equity instruments on the vesting date, which resulted in $13.6 million of incremental stock compensation expense being recognized during the year ended December 31, 2021. There are no remaining restricted stock units outstanding as of September 30, 2022.
24
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Performance Stock Units
The Company granted 5.5 million PSUs during third quarter of 2020 to certain executive officers that were settleable in cash and subject to market-based vesting criteria as well as a three-year service condition. Vesting at the end of the service period depends on the Company’s TSR relative to the TSR of a peer group of companies.
On August 18, 2022, the Compensation Committee amended the 2020 PSU agreement to allow a portion of the units to be settled in either cash or Class A Common Stock upon vesting at the Company’s discretion. The Company has the ability and currently intends to settle the 4.7 million PSUs that were modified in shares. As a result, these units were reclassified to equity based awards in accordance with ASC 718 and $10.0 million of incremental stock compensation expense was recognized during the third quarter of 2022 associated with the change in the fair value of the units.
The remaining PSUs were accelerated vested during the third quarter of 2022 through Compensation Committee approval and following a qualifying termination as a result of the Merger (discussed above). Both accelerations were paid out in cash and such payouts were based on the actual performance payout level on the vesting dates. As a result, 0.8 million PSUs were settled in a $9.4 million cash payment during the three months ended September 30, 2022. There are no liability classified performance stock units outstanding as of September 30, 2022.
Note 7—Derivative Instruments
The Company is exposed to certain risks relating to its ongoing business operations and may use derivative instruments to manage its exposure to commodity price risk from time to time.
Commodity Derivative Contracts
Historically, prices received for crude oil and natural gas production have been volatile because of supply and demand factors, worldwide political factors, general economic conditions and seasonal weather patterns. The Company may periodically use derivative instruments, such as swaps, costless collars and basis swaps, to mitigate its exposure to declines in commodity prices and to the corresponding negative impacts such declines can have on its cash flows from operations, returns on capital and other financial results. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future revenues from favorable price changes. The Company does not enter into derivative contracts for speculative or trading purposes.
Commodity Swap and Collar Contracts. The Company may use commodity derivative instruments known as fixed price swaps to realize a known price for a specific volume of production, basis swaps to hedge the difference between the index price and a local or future index price, or costless collars to establish fixed price floors and ceilings. All transactions are settled in cash with one party paying the other for the resulting difference in price multiplied by the contract volume.
| Period | Volume (Bbls) | Volume (Bbls/d) | Wtd. Avg. Crude Price ($/Bbl)(1) | ||||||||||||||||||||
Crude oil swaps | October 2022 - December 2022 | $ | |||||||||||||||||||||
| January 2023 - March 2023 | |||||||||||||||||||||||
| April 2023 - June 2023 | |||||||||||||||||||||||
| July 2023 - September 2023 | |||||||||||||||||||||||
| October 2023 - December 2023 | |||||||||||||||||||||||
| January 2024 - March 2024 | |||||||||||||||||||||||
| April 2024 - June 2024 | |||||||||||||||||||||||
| July 2024 - September 2024 | |||||||||||||||||||||||
| October 2024 - December 2024 | |||||||||||||||||||||||
25
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Period | Volume (Bbls) | Volume (Bbls/d) | Wtd. Avg. Collar Price Ranges ($/Bbl)(2) | ||||||||||||||||||||||||||
| Crude oil collars | October 2022 - December 2022 | $ | - | $ | |||||||||||||||||||||||||
| January 2023 - March 2023 | - | ||||||||||||||||||||||||||||
| April 2023 - June 2023 | - | ||||||||||||||||||||||||||||
| July 2023 - September 2023 | - | ||||||||||||||||||||||||||||
| October 2023 - December 2023 | - | ||||||||||||||||||||||||||||
| Period | Volume (Bbls) | Volume (Bbls/d) | Wtd. Avg. Differential ($/Bbl)(3) | ||||||||||||||||||||
Crude oil basis differential swaps | October 2022 - December 2022 | $ | |||||||||||||||||||||
| January 2023 - March 2023 | |||||||||||||||||||||||
| April 2023 - June 2023 | |||||||||||||||||||||||
| July 2023 - September 2023 | |||||||||||||||||||||||
| October 2023 - December 2023 | |||||||||||||||||||||||
| January 2024 - March 2024 | |||||||||||||||||||||||
| April 2024 - June 2024 | |||||||||||||||||||||||
| July 2024 - September 2024 | |||||||||||||||||||||||
| October 2024 - December 2024 | |||||||||||||||||||||||
| Period | Volume (Bbls) | Volume (Bbls/d) | Wtd. Avg. Differential ($/Bbl)(4) | ||||||||||||||||||||
Crude oil roll differential swaps | October 2022 - December 2022 | $ | |||||||||||||||||||||
| January 2023 - March 2023 | |||||||||||||||||||||||
| April 2023 - June 2023 | |||||||||||||||||||||||
| July 2023 - September 2023 | |||||||||||||||||||||||
| October 2023 - December 2023 | |||||||||||||||||||||||
| January 2024 - March 2024 | |||||||||||||||||||||||
| April 2024 - June 2024 | |||||||||||||||||||||||
| July 2024 - September 2024 | |||||||||||||||||||||||
| October 2024 - December 2024 | |||||||||||||||||||||||
(1) These crude oil swap transactions are settled based on the NYMEX WTI index price on each trading day within the specified monthly settlement period versus the contractual swap price for the volumes stipulated.
(2) These crude oil collars are settled based on the NYMEX WTI index price on each trading day within the specified monthly settlement period versus the contractual floor and ceiling prices for the volumes stipulated.
(3) These crude oil basis swap transactions are settled based on the difference between the arithmetic average of ARGUS MIDLAND WTI and ARGUS WTI CUSHING indices, during each applicable monthly settlement period.
(4) These crude oil roll swap transactions are settled based on the difference between the arithmetic average of NYMEX WTI calendar month prices and the physical crude oil delivery month price.
26
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Period | Volume (MMBtu) | Volume (MMBtu/d) | Wtd. Avg. Gas Price ($/MMBtu)(1) | ||||||||||||||||||||
Natural gas swaps | October 2022 - December 2022 | $ | |||||||||||||||||||||
| January 2023 - March 2023 | |||||||||||||||||||||||
| April 2023 - June 2023 | |||||||||||||||||||||||
| July 2023 - September 2023 | |||||||||||||||||||||||
| October 2023 - December 2023 | |||||||||||||||||||||||
| January 2024 - March 2024 | |||||||||||||||||||||||
| April 2024 - June 2024 | |||||||||||||||||||||||
| July 2024 - September 2024 | |||||||||||||||||||||||
| October 2024 - December 2024 | |||||||||||||||||||||||
| Period | Volume (MMBtu) | Volume (MMBtu/d) | Wtd. Avg. Differential ($/MMBtu)(2) | ||||||||||||||||||||
Natural gas basis differential swaps | October 2022 - December 2022 | $( | |||||||||||||||||||||
| January 2023 - March 2023 | ( | ||||||||||||||||||||||
| April 2023 - June 2023 | ( | ||||||||||||||||||||||
| July 2023 - September 2023 | ( | ||||||||||||||||||||||
| October 2023 - December 2023 | ( | ||||||||||||||||||||||
| January 2024 - March 2024 | ( | ||||||||||||||||||||||
| April 2024 - June 2024 | ( | ||||||||||||||||||||||
| July 2024 - September 2024 | ( | ||||||||||||||||||||||
| October 2024 - December 2024 | ( | ||||||||||||||||||||||
| Period | Volume (MMBtu) | Volume (MMBtu/d) | Wtd. Avg. Collar Price Ranges ($/MMBtu)(3) | ||||||||||||||||||||||||||
Natural gas collars | October 2022 - December 2022 | $ | - | $ | |||||||||||||||||||||||||
| January 2023 - March 2023 | - | ||||||||||||||||||||||||||||
| April 2023 - June 2023 | - | ||||||||||||||||||||||||||||
| July 2023 - September 2023 | - | ||||||||||||||||||||||||||||
| October 2023 - December 2023 | - | ||||||||||||||||||||||||||||
| January 2024 - March 2024 | - | ||||||||||||||||||||||||||||
| April 2024 - June 2024 | - | ||||||||||||||||||||||||||||
| July 2024 - September 2024 | - | ||||||||||||||||||||||||||||
| October 2024 - December 2024 | - | ||||||||||||||||||||||||||||
(1) These natural gas swap contracts are settled based on the NYMEX Henry Hub price on each trading day within the specified monthly settlement period versus the contractual swap price for the volumes stipulated.
(2) These natural gas basis swap contracts are settled based on the difference between the Inside FERC’s West Texas WAHA price and the NYMEX price of natural gas, during each applicable monthly settlement period.
(3) These natural gas collars are settled based on the NYMEX Henry Hub price on each trading day within the specified monthly settlement period versus the contractual floor and ceiling prices for the volumes stipulated.
Derivative Instrument Reporting. The Company’s oil and natural gas derivative instruments have not been designated as hedges for accounting purposes. Therefore, all gains and losses are recognized in the Company’s consolidated statements of operations. All derivative instruments are recorded at fair value in the consolidated balance sheets, other than derivative instruments that meet the “normal purchase normal sale” exclusion, and any fair value gains and losses are recognized in current period earnings.
27
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the impact of the Company’s derivative instruments in its consolidated statements of operations for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Net gain (loss) on derivative instruments | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Offsetting of Derivative Assets and Liabilities. The Company’s commodity derivatives are included in the accompanying consolidated balance sheets as derivative assets and liabilities. The Company nets its financial derivative instrument fair value amounts executed with the same counterparty pursuant to ISDA master netting agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract. The tables below summarize the fair value amounts and the classification in the consolidated balance sheets of the Company’s derivative contracts outstanding at the respective balance dates, as well as the gross recognized derivative assets, liabilities and offset amounts:
| Balance Sheet Classification | Gross Fair Value Asset/Liability Amounts | Gross Amounts Offset(1) | Net Recognized Fair Value Assets/Liabilities | ||||||||||||||||||||
(in thousands) | September 30, 2022 | ||||||||||||||||||||||
Derivative Assets | |||||||||||||||||||||||
Commodity contracts | Derivative instruments | $ | $ | ( | $ | ||||||||||||||||||
| Other noncurrent assets | ( | ||||||||||||||||||||||
Derivative Liabilities | |||||||||||||||||||||||
Commodity contracts | Derivative instruments | ( | |||||||||||||||||||||
| Other noncurrent liabilities | ( | ||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
Derivative Assets | |||||||||||||||||||||||
Commodity contracts | Derivative instruments | $ | $ | ( | $ | ||||||||||||||||||
| Other noncurrent assets | $ | ( | |||||||||||||||||||||
Derivative Liabilities | |||||||||||||||||||||||
Commodity contracts | Derivative instruments | $ | $ | ( | $ | ||||||||||||||||||
| Other noncurrent liabilities | ( | ||||||||||||||||||||||
(1) The Company has agreements in place with each of its counterparties that allow for the financial right of offset for derivative assets against derivative liabilities at settlement or in the event of a default under the agreements or if contracts are terminated.
Contingent Features in Financial Derivative Instruments. None of the Company’s derivative instruments contain credit-risk-related contingent features. Counterparties to the Company’s financial derivative contracts are high credit-quality financial institutions that are primarily lenders under OpCo’s Credit Agreement. The Company enters into new hedge arrangements only with participants under its Credit Agreement, since these institutions are secured equally with the holders of any OpCo bank debt, which eliminates the potential need to post collateral when Permian Resources is in a derivative liability position. As a result, the Company is not required to post letters of credit or corporate guarantees for its derivative counterparties in order to secure contract performance obligations.
In addition, the Company is exposed to credit risk associated with its derivative contracts from non-performance by its counterparties. The Company mitigates its exposure to any single counterparty by contracting with a number of financial institutions, each of which has a high credit rating and is a member under OpCo’s Credit Agreement as referenced above.
28
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8—Fair Value Measurements
Recurring Fair Value Measurements
The Company follows ASC Topic 820, Fair Value Measurement and Disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
•Level 1: Quoted Prices in Active Markets for Identical Assets – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2: Significant Other Observable Inputs – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•Level 3: Significant Unobservable Inputs – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The following table presents, for each applicable level within the fair value hierarchy, the Company’s net derivative assets and liabilities, including both current and noncurrent portions, measured at fair value on a recurring basis:
(in thousands) | Level 1 | Level 2 | Level 3 | ||||||||||||||
| September 30, 2022 | |||||||||||||||||
Total assets | $ | $ | $ | ||||||||||||||
Total liabilities | |||||||||||||||||
| December 31, 2021 | |||||||||||||||||
Total assets | $ | $ | $ | ||||||||||||||
Total liabilities | |||||||||||||||||
Both financial and non-financial assets and liabilities are categorized within the above fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The following is a description of the valuation methodologies used by the Company as well as the general classification of such instruments pursuant to the above fair value hierarchy. There were no transfers between any of the fair value levels during any period presented.
Derivatives
The Company uses Level 2 inputs to measure the fair value of its oil and natural gas commodity derivatives. The Company uses industry-standard models that consider various assumptions including current market and contractual prices for the underlying instruments, implied market volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data. The Company utilizes its counterparties’ valuations to assess the reasonableness of its own valuations.
Nonrecurring Fair Value Measurements
The Company applies the provisions of the fair value measurement standard on a nonrecurring basis to its non-financial assets and liabilities, including proved oil and gas properties. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances.
Oil and Gas Property Acquisitions. The fair value measurements of assets acquired and liabilities assumed are measured on the acquisition date using an income valuation technique based on inputs that are not observable in the market and therefore represent Level 3 inputs. Significant inputs to the valuation of acquired oil and gas properties include estimates of: (i) reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices, including price differentials; (v) future cash flows; and (vi) a market participant-based weighted average cost of capital rate. These inputs require significant judgements and estimates by the Company’s management at the time of valuation. Refer to Note 2—Business Combination for additional information on the fair value of assets acquired and liabilities assumed.
29
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Impairment of Oil and Natural Gas Properties. The Company reviews its proved oil and natural gas properties for impairment whenever events and circumstances indicate that the fair value of these assets may be below their carrying value. An impairment loss is indicated if the sum of the expected undiscounted future net cash flows from oil and gas properties is less than the carrying amount of the assets. In this circumstance, the Company then recognizes impairment expense for the amount by which the carrying amount of proved properties exceeds their estimated fair value. The Company reviews its oil and natural gas properties on a field-by-field basis.
The Company calculates the estimated fair values of its oil and natural gas properties using an income approach that is based on inputs that are not observable in the market and therefore represent Level 3 inputs. Significant inputs to the expected future net cash flows used for the impairment review and the related fair value measurement of oil and natural gas proved properties include estimates of: (i) oil and gas reserves; (ii) future production decline rates; (iii) future operating and development costs; (iv) future commodity prices, including price differentials; and (v) a market participant-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Company’s management.
Asset Retirement Obligations. The initial measurement of ARO at fair value is calculated using discounted cash flow techniques and is based on internal estimates of future retirement costs associated with property, plant and equipment. Significant Level 3 inputs used in the calculation of ARO include the estimated future costs to plug and abandon oil and gas properties and reserve lives. Refer to Note 5—Asset Retirement Obligations for additional information on the Company’s ARO.
Other Financial Instruments
The carrying amounts of the Company’s cash, cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair values because of the short-term maturities and/or liquid nature of these assets and liabilities.
The Company’s senior notes and borrowings under its Credit Agreement are accounted for at cost. The following table summarizes the carrying values, principal amounts and fair values of these instruments as of the dates indicated:
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Carrying Value | Principal Amount | Fair Value | Carrying Value | Principal Amount | Fair value | |||||||||||||||||||||||||||||||||
Credit Facility due 2027(1) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1) The carrying values of the amounts outstanding under OpCo’s Credit Agreement approximate fair value because its variable interest rates are tied to current market rates and the applicable credit spreads represent current market rates for the credit risk profile of the Company.
30
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9—Shareholders' Equity and Noncontrolling Interest
Authorized shares of Common Stock
On August 29, 2022, the Company’s stockholders approved the Fourth Amended and Restated Certificate of Incorporation (as amended and restated, the “Charter”) to, among other things, increase the authorized number of shares of Class A Common Stock for issuance from 600,000,000 to 1,000,000,000 and Class C Common Stock for issuance from 20,000,000 to 500,000,000 . The amendment became effective on September 1, 2022.
Class A Common Stock
The Company had 288,482,677 shares of Class A Common Stock outstanding as of September 30, 2022.
Holders of Class A Common Stock are entitled to one vote for each share held on all matters to be voted on by the Company’s stockholders. Holders of the Class A Common Stock and holders of the Class C Common Stock will vote together as a single class on all matters submitted to a vote of the Company’s stockholders, except as required by law.
Unless specified in the Charter (including any certificate of designation of preferred stock) or the Company’s Second Amended and Restated Bylaws, or as required by applicable provisions of the Delaware General Corporation Law or applicable stock exchange rules, the affirmative vote of a majority of the Company’s shares of Common Stock that are voted is required to approve any such matter voted on by the Company’s stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Subject to the rights of the holders of any outstanding series of preferred stock, the holders of the Class A Common Stock are entitled to receive ratable dividends when, as and if declared by the board of directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company, the holders of the Class A Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the Class A Common Stock. The holders of the Class A Common Stock have no preemptive or other subscription rights. There are no sinking fund provisions applicable to the Class A Common Stock.
Class C Common Stock
The Company had 269,300,000 500,000,000 shares of Class C Common Stock issued to the Colgate Unitholder in connection with the Merger.
Holders of Class C Common Stock, together with holders of Class A Common Stock voting as a single class, have the right to vote on all matters properly submitted to a vote of the stockholders. In addition, the holders of Class C Common Stock, voting as a separate class, will be entitled to approve any amendment, alteration or repeal of any provision of the Charter that would alter or change the powers, preferences or relative, participating, optional or other or special rights of the Class C Common Stock. Holders of Class C Common Stock will not be entitled to any dividends from the Company and will not be entitled to receive any of the Company’s assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company’s affairs.
Shares of Class C Common Stock may be issued only to the Colgate Unitholder, its respective successors and assigns, as well as any permitted transferees of the Colgate Unitholder. Following the closing of the Merger, the Colgate Unitholder distributed its shares of Class C Common Stock to Colgate Owners. A holder of Class C Common Stock may transfer shares of Class C Common Stock to any transferee (other than the Company) only if such holder also simultaneously transfers an equal number of such holder’s Common Units representing common membership interests in OpCo to such transferee in compliance with the Sixth Amended and Restated Limited Liability Company Agreement of OpCo. Each holder of Class C Common Stock generally has the right to cause the Company to redeem all or a portion of its Common Units in exchange for, at the Company’s option, an equal number of shares of Class A Common Stock or an equivalent amount of cash. The Company may, however, at its option, effect a direct exchange of cash or Class A Common Stock for such OpCo Common Units in lieu of such a redemption by OpCo. Upon the future redemption or exchange of Common Units held by a holder of Class C Common Stock, a corresponding number of shares of Class C Common Stock held by such holder of Class C Common Stock will be canceled.
The shares of Class C Common Stock and underlying Common Units are not exchangeable until March 1, 2023, subject to certain customary exceptions.
31
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.0001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. At September 30, 2022, there were no shares of preferred stock issued or outstanding.
Stock Repurchase Program
In February 2022, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $350 million of the Company’s outstanding Common Stock (the “Repurchase Program”), which is approved to run through April 1, 2024. In connection with the Merger, the Repurchase Program was increased to $500 million and was extended through December 31, 2024. The Repurchase Program can be used by the Company to reduce its shares of Common Stock outstanding. Repurchases may be made from time to time in the open-market or via privately negotiated transactions at the Company’s discretion and will be subject to market conditions, applicable legal requirements, available liquidity, compliance with the Company’s debt and other agreements and other factors. The Repurchase Program does not require any specific number of shares to be acquired and can be modified or discontinued by the Company’s Board of Directors at any time. There were no shares purchased under the Repurchase Program during the nine months ended September 30, 2022.
Noncontrolling Interest
The noncontrolling interest relates to Common Units in OpCo that were issued to the Colgate Unitholder in connection with the Merger. At the date of the Merger, the noncontrolling interest represented approximately 48 % of the ownership in OpCo. The noncontrolling interest percentage is affected by various equity transactions such as Common Unit and Class C Common Stock exchanges and Class A Common Stock activities.
The Company consolidates the financial position, results of operations and cash flows of OpCo and reflects the portion retained by other holders of Common Units as a noncontrolling interest. Refer to the “Consolidated Statements of Shareholders’ Equity” for a summary of the activity attributable to the noncontrolling interest during the period.
Note 10—Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average shares of Class A Common Stock outstanding during each period. Diluted EPS is calculated by dividing adjusted net income by the weighted average shares of diluted Class A Common Stock outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for the diluted EPS calculation consists of (i) unvested equity-based restricted stock and performance stock units, outstanding stock options, withholding amounts from the employee stock purchase plan and warrants (prior to their expiration in 2021), all using the treasury stock method, and (ii) the Company’s Class C Common Stock and potential shares issuable under our Convertible Senior Notes, both using the “if-converted” method, which is net of tax.
The following table reflects the EPS computations for the periods indicated based on a weighted average number of Class A Common Stock outstanding each period:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net income (loss) attributable to Class A Common Stock | $ | $ | $ | $ | ( | ||||||||||||||||||
| Add: Interest on Convertible Senior Notes, net of tax | |||||||||||||||||||||||
| Adjusted net income (loss) attributable to Class A Common Stock | $ | $ | $ | $ | ( | ||||||||||||||||||
| Basic weighted average shares of Class A Common Stock outstanding | |||||||||||||||||||||||
| Add: Dilutive effects of equity awards and ESPP shares | |||||||||||||||||||||||
| Add: Dilutive effects of Convertible Senior Notes | |||||||||||||||||||||||
| Diluted weighted average shares of Class A Common Stock outstanding | |||||||||||||||||||||||
| Basic net earnings (loss) per share of Class A Common Stock | $ | $ | $ | $ | ( | ||||||||||||||||||
| Diluted net earnings (loss) per share of Class A Common Stock | $ | $ | $ | $ | ( | ||||||||||||||||||
32
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
impact was anti-dilutive:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021(1) | |||||||||||||||||||
| Out-of-the-money stock options | |||||||||||||||||||||||
| Restricted stock | |||||||||||||||||||||||
| Weighted average shares of Class C Common Stock | |||||||||||||||||||||||
| Performance stock units | |||||||||||||||||||||||
| Employee Stock Purchase Plan | |||||||||||||||||||||||
| Convertible Senior Notes | |||||||||||||||||||||||
| Warrants | |||||||||||||||||||||||
(1) The Company recognized a net loss during the nine months ended September 30, 2021, and therefore all potentially dilutive securities were anti-dilutive and excluded from the calculation of diluted net earnings per share.
Note 11—Transactions with Related Parties
Riverstone Investment Group LLC (“Riverstone”), NGP Energy Capital (“NGP”), and Pearl Energy Investments (“Pearl”) and all related affiliates of each entity each beneficially own more than 10% equity interest in the Company. Certain members of OpCo’s management own profit interests at CEP III Holdings, LLC and its affiliates (“Colgate Holdings”). Due to Riverstone, NGP, and Pearl’s beneficial ownership and OpCo’s management interest in Colgate Holdings, these entities are considered related parties to the Company. The Company has (i) a marketing agreement with Lucid Energy Delaware, LLC (“Lucid”), who was an affiliate of Riverstone until the sale of Riverstone’s investment in Lucid in July 2022, (ii) a vendor arrangement with Streamline Innovations Inc (“Streamline”) who was an affiliate of Riverstone beginning in the second quarter of 2022 and an affiliate of Pearl, (iii) a joint operating agreement with Maple Energy Holdings LLC who is an affiliate of Riverstone, and (iv) overriding royalty interests in certain properties operated by the Company that are held by CM Royalties, LP (“CM Royalties”), who is an affiliate of Colgate Holdings. The Company believes that the terms of these arrangements are no less favorable to either party than those held with unaffiliated parties.
The following table summarizes the costs incurred and revenues recognized from such arrangements during the periods they were considered related parties, as discussed above, as included in the consolidated statements of operations for the periods indicated, as well as the related net receivables and payables outstanding as of the balance sheet dates:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Lucid | |||||||||||||||||||||||
| Oil and gas sales | $ | $ | $ | $ | |||||||||||||||||||
| Gathering, processing and transportation expenses | |||||||||||||||||||||||
| Streamline | |||||||||||||||||||||||
| Lease operating expenses | |||||||||||||||||||||||
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
| Accounts receivable, net | |||||||||||
Lucid(1) | $ | ||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Maple Energy Holdings LLC | |||||||||||
| CM Royalties | |||||||||||
| Streamline | |||||||||||
33
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12—Commitments and Contingencies
Commitments
The Company routinely enters into, extends or amends operating agreements in the ordinary course of business. During the nine months ended September 30, 2022, the Company entered into a two-year purchase agreement to buy frac sand used in its well fracture stimulation process. Under the terms of this take-or-pay agreement, the Company is obligated to purchase a minimum volume of frac sand at a fixed price. The obligation is $33.4 million, which represents the minimum financial commitment pursuant to the terms of the contract from September 30, 2022 through March 31, 2024. There have been no other material, non-routine changes in commitments during the nine months ended September 30, 2022. Please refer to Note 13—Commitments and Contingencies included in Part II, Item 8 in the Company’s 2021 Annual Report.
Contingencies
The Company may at times be subject to various commercial or regulatory claims, prior period adjustments from service providers, litigation or other legal proceedings that arise in the ordinary course of business. While the outcome of these lawsuits and claims cannot be predicted with certainty, management believes it is remote that the impact of such matters, other than those discussed below, that are reasonably possible to occur will have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
In February 2021, the Permian Basin was impacted by record-low temperatures and a severe winter storm (“Winter Storm Uri”) that resulted in multi-day electrical outages and shortages, pipeline and infrastructure freezes, transportation disruptions, and regulatory actions in Texas, which led to significant increases in gas prices, gathering, processing and transportation fees and electrical rates during this time. As a result, many oil and gas operators, including upstream producers like the Company, gas processors and purchasers, and transportation providers experienced operational disruptions. During this time, the Company was unable to utilize the entire volume of its reserved capacity on pipelines and as a result has made certain force majeure declarations. One third-party transportation provider has filed a lawsuit against the Company claiming compensation for the full amount of the reserved capacity, both utilized and unutilized. The Company has made a payment for the utilized capacity and filed a separate lawsuit against the transportation provider requesting declaratory relief for the purpose of construing the provisions of the transportation agreement relating to the unutilized capacity. At this time, the Company believes that a loss is reasonably possible in relation to these matters and such amount could range from zero to $7.6 million, and no amount in that range is a better estimate than any other.
Other than the matter above, management is unaware of any pending litigation brought against the Company requiring a contingent liability to be recognized as of the date of these consolidated financial statements.
Note 13—Revenues
Revenue from Contracts with Customers
Crude oil, natural gas and NGL sales are recognized at the point that control of the product is transferred to the customer and collectability is reasonably assured. Virtually all of the Company’s contract pricing provisions are tied to a market index, with certain adjustments based on, among other factors, transportation costs to an active spot market and quality differentials. As a result, the Company’s realized prices of oil, natural gas, and NGLs fluctuate to remain competitive with other available oil, natural gas, and NGLs supplies both globally (in the case of crude oil) and locally.
Oil and gas revenues presented within the consolidated statements of operations relate to the sale of oil, natural gas and NGLs as shown below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Operating revenues (in thousands): | |||||||||||||||||||||||
Oil sales | $ | $ | $ | $ | |||||||||||||||||||
Natural gas sales | |||||||||||||||||||||||
NGL sales | |||||||||||||||||||||||
Oil and gas sales | $ | $ | $ | $ | |||||||||||||||||||
34
PERMIAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Oil sales
The Company’s crude oil sales contracts are generally structured whereby oil is delivered to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes title of the product. This delivery point is usually at the wellhead or at the inlet of a transportation pipeline. Revenue is recognized when control transfers to the purchaser at the delivery point based on the net price received from the purchaser. Any downstream transportation costs incurred by crude purchasers are reflected as a net reduction to oil sales revenues.
Natural gas and NGL sales
Under the Company’s natural gas processing contracts, liquids rich natural gas is delivered to a midstream gathering and processing entity at the agreed upon delivery point at which the purchaser takes title of the product. The midstream processing entity gathers and processes the raw gas and then remits proceeds to the Company. For these contracts, the Company evaluates when control is transferred and revenue should be recognized. Where the Company elects to take its residue gas product “in-kind” at the plant tailgate, fees incurred prior to transfer of control are presented as gathering, processing and transportation expenses (“GP&T”) within the consolidated statements of operations. Any gathering, transportation and fractionation costs incurred subsequent to the point of transfer of control are reflected as a net reduction to natural gas and NGL sales revenues presented in the table above.
Performance obligations
For all commodity products, the Company records revenue in the month production is delivered to the purchaser. Settlement statements for natural gas and NGL sales may not be received for 30 to 90 days after the date production volumes are delivered and for crude oil, generally within 30 days after delivery has occurred. However, payment is unconditional once the performance obligations have been satisfied. At such time, the volumes delivered and sales prices can be reasonably estimated and amounts due from customers are accrued in Accounts receivable, net in the consolidated balance sheets. As of September 30, 2022 and December 31, 2021, such receivable balances were $146.4 million and $57.3 million, respectively.
The Company records any differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. Historically, any identified differences between revenue estimates and actual revenue received have not been significant. For the three and nine months ended September 30, 2022 and 2021, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods were not material.
Transaction price allocated to remaining performance obligations
Note 14—Subsequent Events
On November 8, 2022, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.05 per share of Class A Common Stock and a quarterly cash distribution of $0.05 per common unit of OpCo. The first dividend is payable on November 29, 2022 to shareholders of record as of November 21, 2022.
35
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and related notes. The following discussion and analysis contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, future market prices for oil, natural gas and NGLs, future production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, inflation, regulatory changes, the implementation and actual result of the Merger (defined below), continued and future impacts of COVID-19 and other uncertainties, as well as those factors discussed in “Cautionary Statement Concerning Forward-Looking Statements” and under the heading “Item 1A. Risk Factors” in this Quarterly Report and our 2021 Annual Report all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Overview
Permian Resources Corporation is an independent oil and natural gas company focused on the responsible acquisition, optimization and development of high-return oil and natural gas properties. Our assets are located in the core of the Delaware Basin. Our principal business objective is to increase shareholder value by efficiently developing our oil and natural gas assets in an environmentally and socially responsible way, with an overall objective of improving our rates of return and generating sustainable free cash flow. Unless otherwise specified or the context otherwise requires, all references in these discussions to “Permian Resources,” “we,” “us,” or “our” are to Permian Resources Corporation and its consolidated subsidiary, Permian Resources Operating, LLC (“OpCo”, which was formerly Centennial Resource Production, LLC or “CRP”).
On September 1, 2022, CRP completed the merger (the “Merger”) with Colgate Energy Partners III, LLC (“Colgate”) as discussed below. In connection with the closing of the Merger, we changed our name from “Centennial Resource Development, Inc.” to “Permian Resources Corporation” and transferred the listing of our Class A Common Stock to the New York Stock Exchange under the ticker symbol “PR”.
Market Conditions
The demand for oil and natural gas has been significantly impacted by the worldwide outbreak of COVID-19, specifically regarding the uncertainty surrounding the virus’s impact and because of various governmental actions taken to mitigate the spread of the virus. Concurrently, global oil and natural gas supplies have been disrupted by production curtailment agreements among the Organization of Petroleum Exporting Countries and other oil producing countries (“OPEC+”) and reduced drilling and completion activity from U.S. producers. Both OPEC+ output and U.S. drilling activity has increased since 2020 levels; however, these factors have only led to a gradual increase in oil and gas supply, and global supply has not returned to pre-pandemic levels. Further in the first nine months of 2022, Russia’s invasion of Ukraine and global sanctions placed on Russia in response have created additional downward pressures on the supply of oil and natural gas. Meanwhile, demand for oil and gas has risen steadily throughout 2021 and 2022 due to the availability of COVID-19 vaccinations, fewer government mandated restrictions and the global-wide transition away from coal to natural gas. While governmental actions from several countries to release a portion of their strategic petroleum reserves have increased global inventories, oil supply and demand remain relatively tight due to the lack of additional supply and limited spare capacity. These factors, among others, have aided in the recovery of global commodity prices throughout 2021 and have led to heightened commodity prices in the first nine months of 2022. Specifically, NYMEX WTI spot prices for crude oil reached a high of $123.70 per barrel on March 8, 2022, from a low of negative $37.63 per barrel on April 20, 2020. Similarly, the NYMEX Henry Hub index price for natural gas reached a high of $9.85 per MMBtu on August 23, 2022, from a low of $1.33 per MMBtu on September 22, 2020.
The oil and natural gas industry is cyclical, and it is likely that commodity prices, as well as commodity price differentials, will continue to be volatile due to fluctuations in global supply and demand, inventory levels, the continued effects from COVID-19 and variant strains of the virus, geopolitical events, federal and state government regulations, weather conditions, the global transition to alternative energy sources, supply chain constraints and other factors. The following table highlights the quarterly average NYMEX price trends for crude oil and natural gas since the first quarter of 2020:
| 2020 | 2021 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Crude oil (per Bbl) | $ | 46.19 | $ | 28.00 | $ | 40.93 | $ | 42.66 | $ | 57.84 | $ | 66.06 | $ | 70.56 | $ | 77.09 | $ | 94.40 | $ | 108.34 | $ | 91.56 | |||||||||||||||||||||||||||||||||||||||||||
| Natural gas (per MMBtu) | $ | 1.88 | $ | 1.65 | $ | 1.95 | $ | 2.47 | $ | 3.44 | $ | 2.88 | $ | 4.28 | $ | 4.74 | $ | 4.60 | $ | 7.39 | $ | 7.96 | |||||||||||||||||||||||||||||||||||||||||||
36
Lower commodity prices and lower futures curves for oil and gas prices can result in impairments of our proved oil and natural gas properties or undeveloped acreage and may materially and adversely affect our operating cash flows, liquidity, financial condition, results of operations, future business, and/or our ability to finance planned capital expenditures. Lower realized prices may also reduce the borrowing base under OpCo’s credit agreement, which is determined at the discretion of the lenders and is based on the collateral value of our proved reserves that have been mortgaged to the lenders. Upon a redetermination, if any borrowings in excess of the revised borrowing capacity were outstanding, we could be forced to immediately repay a portion of the debt outstanding under the credit agreement. Additionally, lower prices can affect our operations, which could impact our ability to comply with the covenants under our credit agreement and senior notes.
Due to the cyclical nature of the oil and gas industry, fluctuating demand for oilfield goods and services can put pressure on the pricing structure within our industry. As commodity prices rise, the cost of oilfield goods and services generally also increase, while during periods of commodity price declines, oilfield costs typically lag and do not adjust downward as fast as oil prices do. In addition, the U.S. inflation rate has been steadily increasing during 2021 and 2022. These inflationary pressures may also result in increases to the costs of our oilfield goods, services and personnel, which would in turn cause our capital expenditures and operating costs to rise.
COVID-19 Outbreak
The COVID-19 outbreak and its development into a pandemic in March 2020 have required that we take precautionary measures intended to help minimize the risk to our business, employees, customers, vendors, suppliers and the communities in which we operate. Our operational employees have been and are currently able to work on site, while certain non-operational employees have been working remotely part-time and then also reporting to our offices on a part-time basis. We have taken various precautionary measures with respect to our operational employees, direct contractors and employees who returned to our offices or job sites and have followed the Center of Disease Control (the “CDC”) recommended preventive measures to limit the spread of COVID-19. We have continued to update our safety protocols in alignment with CDC guidance and government mandates. We have not experienced any significant operational disruptions, including disruptions from our suppliers or service providers, as a result of the COVID-19 outbreak.
2022 Highlights and Future Considerations
Colgate Merger
On May 19, 2022, we entered into a Business Combination Agreement (the “Merger Agreement”) with CRP, Colgate, and Colgate Energy Partners III MidCo, LLC (the “Colgate Unitholder”). The Merger Agreement provided for a merger of equals transaction, with CRP (which was renamed Permian Resources Operating, LLC or “OpCo” following the Merger) continuing as the surviving entity in the Merger and a subsidiary of Permian Resources Corporation.
On September 1, 2022, the Merger was completed, and all membership interests in CRP issued and outstanding immediately prior to the closing were converted into units of Permian Resources Operating, LLC (“Common Units”) equal to the number of shares of our Class A Common Stock that were outstanding immediately prior to the closing. All of the Colgate Unitholder’s membership interests in Colgate were exchanged for 269,300,000 shares of Class C Common Stock, 269,300,000 Common Units and $525 million in cash consideration. Following the closing of the Merger, the Colgate Unitholder distributed the merger consideration to its equity holders (the “Colgate Owners”), who collectively continue to own in the aggregate 100% of the outstanding shares of Class C Common Stock of the Company and approximately 48% of the outstanding Common Units in OpCo, which represent an approximate 48% noncontrolling interest in OpCo. This ownership of all our shares of Class C Common Stock by the Colgate Owners represents approximately 48% of the Company’s total outstanding shares of Class A Common Stock and Class C Common Stock taken together (the “Common Stock”).
As a result of the Merger, we acquired approximately 105,000 net leasehold acres and 25,000 net royalty acres located primarily in Reeves and Ward Counties in Texas and Eddy County in New Mexico. We believe that the Merger will provide significant increases to our operational and financial scale, drive accretion across our key financial and operating metrics, and enhance the combined company’s shareholder returns.
Operational Highlights
We operated a two-rig drilling program during the first eight months of 2022, and an eight-rig drilling program after the close of the Merger on September 1, 2022, which enabled us to complete and bring online 58 gross operated wells as of the end of the third quarter, with an average effective lateral length of approximately 9,300 feet. We plan to reduce our operated drilling rig program to seven rigs in November and expect to operate at this level for the remainder of the year.
37
Financing Highlights
On February 18, 2022, we closed on a new five-year revolving credit facility (the “Credit Agreement”), which replaced our previous credit agreement that was set to mature on May 4, 2023. The elected commitments under the new Credit Agreement increased to $750 million from $700 million under our previous facility, and the borrowing base increased to $1.15 billion from $700 million previously. The new Credit Agreement will mature in February 2027.
On July 15, 2022, we entered into the first amendment to our Credit Agreement (the “Amendment”). The Amendment, among other things, waived compliance with certain restrictive covenants and provided the lenders’ consent to a planned Pre-Merger Reorganization (as defined within the Amendment) in order to enable the Merger to occur. In addition, the Amendment increased the elected commitments under our Credit Agreement to $1.5 billion from $750 million, increased the borrowing base to $2.5 billion from $1.15 billion, and became effective as of the September 1, 2022 Merger closing date.
In February 2022, our Board of Directors authorized a stock repurchase program to acquire up to $350 million of our outstanding Common Stock, which program is approved to run through April 1, 2024 (the “Repurchase Program”). In connection with the Merger, the Repurchase Program was increased to $500 million and was extended through December 31, 2024. The Repurchase Program can be used to reduce shares of our Common Stock outstanding. There were no shares purchased under the Repurchase Program during the nine months ended September 30, 2022.
38
Results of Operations
Colgate’s results of operations were included in the Company’s interim consolidated financial statements and results of operations beginning on September 1, 2022.
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The following table provides the components of our net revenues and net production (net of all royalties, overriding royalties and production due to others) for the periods indicated, as well as each period’s average prices and average daily production volumes:
| Three Months Ended September 30, | Increase/(Decrease) | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Net revenues (in thousands): | |||||||||||||||||||||||
| Oil sales | $ | 397,187 | $ | 201,447 | $ | 195,740 | 97 | % | |||||||||||||||
| Natural gas sales | 93,455 | 43,800 | 49,655 | 113 | % | ||||||||||||||||||
| NGL sales | 59,136 | 43,258 | 15,878 | 37 | % | ||||||||||||||||||
| Oil and gas sales | $ | 549,778 | $ | 288,505 | $ | 261,273 | 91 | % | |||||||||||||||
| Average sales prices: | |||||||||||||||||||||||
| Oil (per Bbl) | $ | 89.02 | $ | 65.31 | $ | 23.71 | 36 | % | |||||||||||||||
| Effect of derivative settlements on average price (per Bbl) | (2.71) | (8.37) | 5.66 | 68 | % | ||||||||||||||||||
Oil net of hedging (per Bbl) | $ | 86.31 | $ | 56.94 | $ | 29.37 | 52 | % | |||||||||||||||
| Average NYMEX price for oil (per Bbl) | $ | 91.56 | $ | 70.56 | $ | 21.00 | 30 | % | |||||||||||||||
| Oil differential from NYMEX | (2.54) | (5.25) | 2.71 | 52 | % | ||||||||||||||||||
| Natural gas (per Mcf) | $ | 6.57 | $ | 3.99 | $ | 2.58 | 65 | % | |||||||||||||||
| Effect of derivative settlements on average price (per Mcf) | (1.41) | (0.27) | (1.14) | (422) | % | ||||||||||||||||||
Natural gas net of hedging (per Mcf) | $ | 5.16 | $ | 3.72 | $ | 1.44 | 39 | % | |||||||||||||||
| Average NYMEX price for natural gas (per Mcf) | $ | 7.96 | $ | 4.28 | $ | 3.68 | 86 | % | |||||||||||||||
| Natural gas differential from NYMEX | (1.39) | (0.29) | (1.10) | (379) | % | ||||||||||||||||||
| NGL (per Bbl) | $ | 36.21 | $ | 40.16 | $ | (3.95) | (10) | % | |||||||||||||||
Net production: | |||||||||||||||||||||||
| Oil (MBbls) | 4,462 | 3,085 | 1,377 | 45 | % | ||||||||||||||||||
| Natural gas (MMcf) | 14,216 | 10,977 | 3,239 | 30 | % | ||||||||||||||||||
| NGL (MBbls) | 1,633 | 1,077 | 556 | 52 | % | ||||||||||||||||||
Total (MBoe)(1) | 8,464 | 5,991 | 2,473 | 41 | % | ||||||||||||||||||
Average daily net production: | |||||||||||||||||||||||
| Oil (Bbls/d) | 48,499 | 33,529 | 14,970 | 45 | % | ||||||||||||||||||
| Natural gas (Mcf/d) | 154,520 | 119,311 | 35,209 | 30 | % | ||||||||||||||||||
| NGL (Bbls/d) | 17,751 | 11,707 | 6,044 | 52 | % | ||||||||||||||||||
Total (Boe/d)(1) | 92,003 | 65,121 | 26,882 | 41 | % | ||||||||||||||||||
(1) Calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Boe.
39
Oil, Natural Gas and NGL Sales Revenues. Total net revenues for the three months ended September 30, 2022 were $261.3 million (or 91%) higher than total net revenues for the three months ended September 30, 2021. Revenues are a function of oil, natural gas and NGL volumes sold and average commodity prices realized.
Average realized sales prices for oil and natural gas increased in the third quarter of 2022 compared to the same 2021 period by 36% and 65%, respectively, while the average realized sales price for NGLs decreased 10% period over period. The 36% increase in the average realized oil price was mainly the result of higher (30%) NYMEX crude prices between periods, as well as improved oil differentials ($2.71 per Bbl narrower). The average realized sales price of natural gas increased 65% due to higher (86%) NYMEX gas prices between periods, partially offset by wider gas differentials ($1.10 per Mcf wider). The 10% decrease in average realized NGL prices between periods was primarily attributable to lower Mont Belvieu spot prices for plant products in the third quarter of 2022 as compared to the third quarter of 2021. The market prices for oil and natural gas have been impacted by global supply constraints for oil and gas throughout 2021 and 2022, as well as increasing demand worldwide as global economies emerge from COVID-19 era lockdowns and restrictions, as discussed in the market conditions section above.
Net production volumes for oil, natural gas and NGLs increased 45%, 30% and 52%, respectively, between periods. The increase in oil production resulted from placing 67 wells on production since the third quarter of 2021, which added 1,762 MBbls of net oil production to the three months ended September 30, 2022, as compared to 33 wells brought online since the third quarter of 2020 that added 1,103 MBbls of net oil production to the third quarter of 2021. Oil production also benefited from wells acquired in the Merger with Colgate, which added 942 MBbls of net oil production to the three months ended September 30, 2022. These oil volume increases were partially offset by normal production decline across our existing wells. Natural gas and NGLs are produced concurrently with our crude oil volumes, which typically results in a high correlation between fluctuations in oil quantities sold and natural gas and NGL quantities sold. However, the main processor of our raw gas operated in partial ethane-recovery during the third quarter of 2022, as compared to operating in full ethane-rejection during the 2021 period, and this resulted in a lower percentage of natural gas volumes and a higher percentage of NGLs being recovered from our wet gas stream during the 2022 period.
Operating Expenses. The following table sets forth selected operating expense data for the periods indicated:
| Three Months Ended September 30, | Increase/(Decrease) | ||||||||||||||||||||||
| 2022 | 2021 | Change | % | ||||||||||||||||||||
| Operating costs (in thousands): | |||||||||||||||||||||||
| Lease operating expenses | $ | 40,944 | $ | 28,685 | $ | 12,259 | 43 | % | |||||||||||||||
| Severance and ad valorem taxes | 41,745 | 17,800 | 23,945 | 135 | % | ||||||||||||||||||
| Gathering, processing and transportation expenses | 30,022 | 24,164 | 5,858 | 24 | % | ||||||||||||||||||
| Operating cost metrics: | |||||||||||||||||||||||
| Lease operating expenses (per Boe) | $ | 4.84 | $ | 4.79 | $ | 0.05 | 1 | % | |||||||||||||||
| Severance and ad valorem taxes (% of revenue) | 7.6 | % | 6.2 | % | 1.4 | % | 23 | % | |||||||||||||||
| Gathering, processing and transportation expenses (per Boe) | $ | 3.55 | $ | 4.03 | $ | (0.48) | (12) | % | |||||||||||||||
Lease Operating Expenses. Lease operating expenses (“LOE”) for the three months ended September 30, 2022 increased $12.3 million compared to the three months ended September 30, 2021. Higher LOE for the third quarter of 2022 was primarily related to additional costs associated with the 309 gross operated horizontal wells acquired in the Merger on September 1, 2022.
Severance and Ad Valorem Taxes. Severance and ad valorem taxes for the three months ended September 30, 2022 increased $23.9 million compared to the three months ended September 30, 2021. Severance taxes are based on the market value of our oil and gas production at the wellhead, while ad valorem taxes are generally based on the assessed taxable value of proved developed oil and gas properties and vary across the different counties in which we operate. Severance taxes for the third quarter of 2022 increased $19.2 million compared to the same 2021 period primarily due to higher oil, natural gas and NGL revenues between periods. Ad valorem taxes between periods also increased $4.8 million due to higher tax assessments on our oil and gas reserve values as well as an increase in our oil and gas properties as a result of the Merger.
Severance and ad valorem taxes as a percentage of total net revenues increased to 7.6% for the three months ended September 30, 2022 as compared to 6.2% for the same prior year quarter. This increase in rate was the result of higher ad valorem taxes as discussed above as well as a larger portion of our oil and gas volumes being produced in New Mexico, which levies higher severance tax rates than Texas, during the third quarter of 2022.
40
Gathering, Processing and Transportation Expenses. Gathering, processing and transportation expenses (“GP&T”) for the three months ended September 30, 2022 increased $5.9 million as compared to the three months ended September 30, 2021. This increase was mainly attributable to higher gas plant processing costs, whose variable fee portion is based on natural gas and NGL prices. Natural gas prices increased substantially between periods as discussed above, slightly offset by a decrease in NGL prices. The increase is also attributable to additional expenses incurred as a result of the Merger in the third quarter of 2022.
GP&T decreased on a per Boe basis, however, from $4.03 for the third quarter of 2021 to $3.55 for the third quarter of 2022. This decrease is due to a higher portion of GP&T costs reducing our realized gas and NGL prices, as the majority of gas gathering and processing contracts acquired in the Merger transfer control of our products at delivery points prior to, or at, the inlet of gas processing plants. Refer to Note 13—Revenues for additional information.
Depreciation, Depletion and Amortization. The following table summarizes our depreciation, depletion and amortization (“DD&A”) for the periods indicated:
| Three Months Ended September 30, | |||||||||||
| (in thousands, except per Boe data) | 2022 | 2021 | |||||||||
| Depreciation, depletion and amortization | $ | 109,500 | $ | 76,047 | |||||||
| Depreciation, depletion and amortization per Boe | $ | 12.94 | $ | 12.69 | |||||||
For the three months ended September 30, 2022, DD&A expense amounted to $109.5 million, an increase of $33.5 million over the same 2021 period. The primary factor contributing to higher DD&A expense in 2022 was the increase in our overall production volumes between periods, which increased DD&A expense by $31.4 million, while our overall higher DD&A rate increased DD&A expense by $2.1 million between periods.
Our DD&A rate can fluctuate as a result of finding and development costs incurred, acquisitions, impairments, as well as changes in proved developed and proved undeveloped reserves. DD&A per Boe was $12.94 for the third quarter of 2022 compared to $12.69 for the same period in 2021. This increase in DD&A rate was primarily attributable to downward reserve revisions as a result of changes in future drilling plans.
General and Administrative Expenses. The following table summarizes our general and administrative (“G&A”) expenses for the periods indicated:
| Three Months Ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Cash general and administrative expenses | $ | 15,106 | $ | 12,462 | |||||||
| Stock-based compensation - equity awards | 48,197 | 22,049 | |||||||||
| Stock-based compensation - liability awards | (29,301) | (4,628) | |||||||||
| Stock-based compensation - cash settled awards | 9,385 | 5,865 | |||||||||
| General and administrative expenses | 43,387 | 35,748 | |||||||||
G&A expenses for the three months ended September 30, 2022 were $43.4 million compared to $35.7 million for the three months ended September 30, 2021. Higher G&A in the third quarter of 2022 was mainly the result of a $5.0 million increase in total stock-based compensation expense between periods. This increase in stock-based compensation expense was related to (i) an increase of $6.2 million during the period related to PSUs, mainly due to the modification and reclassification of our 2020 PSU awards from liability to equity; (ii) $3.5 million increase related to cash settled awards between periods; and (iii) a $3.2 million increase in various equity classified awards due to new grants and the mark to market of accelerated vestings. These increases in stock-based compensation are partially offset by a decrease of $7.9 million in expense related to the portion of liability classified restricted stock units that became fully vested following a maximum return event that was triggered in the third quarter of 2021. Refer to Note 6—Stock-Based Compensation for additional information regarding these awards. Cash G&A additionally increased $2.6 million period over period due to higher payroll and other personnel costs as a result of increased headcount associated with the Merger.
Merger and integration expense. Merger and integration expense for the three months ended September 30, 2022 was $59.3 million. These costs primarily relate to (i) $40 million in bankers’ advisory fees, (ii) $10.8 million in severance and related benefits associated with employees that were terminated in connection with the Merger and (iii) legal, accounting and consultancy fees. See Note 2—Business Combination for further details regarding the Merger.
Impairment and Abandonment Expense. During the three months ended September 30, 2022, impairment and abandonment expense was $0.5 million as compared to $7.7 million during the three months ended September 30, 2021. Both periods consist solely of amortization of leasehold expiration costs associated with individually insignificant unproved properties.
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Exploration and Other Expenses. The following table summarizes our exploration and other expenses for the periods indicated:
| Three Months Ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Geological and geophysical costs | $ | 1,768 | $ | 836 | |||||||
| Stock-based compensation - equity awards | 572 | 1,184 | |||||||||
| Stock-based compensation - liability awards | — | (495) | |||||||||
| Stock-based compensation - cash settled awards | — | 314 | |||||||||
| Other expenses | 12 | — | |||||||||
| Exploration and other expenses | $ | 2,352 | $ | 1,839 | |||||||
Exploration and other expenses were $2.4 million for the three months ended September 30, 2022 compared to $1.8 million for the three months ended September 30, 2021. Exploration and other expenses mainly consist of topographical studies, geographical and geophysical (“G&G”) projects, salaries and expenses of G&G personnel and includes other operating costs. The period over period increase was primarily related to higher G&G personnel costs in the third quarter of 2022. This increase is partially offset by a decrease in total stock-based compensation related to certain restricted stock units that became fully vested in the third quarter of 2021 as discussed above.
Interest Expense. The following table summarizes our interest expense for the periods indicated:
| Three Months Ended September 30, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
| Credit facility | $ | 4,068 | $ | 2,668 | |||||||
| 5.375% Senior Notes due 2026 | 3,889 | 3,889 | |||||||||
| 7.75% Senior Notes due 2026 | 1,938 | — | |||||||||
| 6.875% Senior Notes due 2027 | 6,125 | 6,125 | |||||||||
| 3.25% Convertible Senior Notes due 2028 | 1,381 | 1,381 | |||||||||
| 5.875% Senior Notes due 2029 | 3,427 | — | |||||||||
| Amortization of debt issuance costs and debt discount | 8,620 | 1,048 | |||||||||
| Interest capitalized | (641) | (421) | |||||||||
| Total | $ | 28,807 | $ | 14,690 | |||||||
Interest expense increased $14.1 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 primarily due to (i) $7.6 million in additional debt issuance costs amortized during the third quarter of 2022 mainly related to fees incurred for an incremental commitment letter we entered into in connection with the Merger; (ii) $5.4 million in additional interest expense from the senior notes that were assumed in the Merger; and (iii) $1.4 million in higher interest incurred on our Credit Agreement due to higher borrowings outstanding during the 2022 period.
Our weighted average borrowings outstanding under our Credit Agreement were $263.6 million versus $264.8 million for the three months ended September 30, 2022 and 2021, respectively. Our Credit Agreement’s weighted average effective interest rate increased to 4.9% from 3.3% for the three months ended September 30, 2022 and 2021, respectively, due to a higher market based rate between periods.
Net Gain (Loss) on Derivative Instruments. Net gains and losses are a function of (i) changes in derivative fair values associated with fluctuations in the forward price curves for the commodities underlying each of our hedge contracts outstanding and (ii) monthly cash settlements on any closed out hedge positions during the period.
The following table presents gains and losses on our derivative instruments for the periods indicated:
| Three Months Ended September 30, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
Realized cash settlement gains (losses) | $ | (32,195) | $ | (28,796) | |||||||
Non-cash mark-to-market derivative gain (loss) | 213,503 | (15,731) | |||||||||
Total | $ | 181,308 | $ | (44,527) | |||||||
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Income Tax (Expense) Benefit. The following table summarizes our pre-tax income (loss) and income tax (expense) benefit for the periods indicated:
| Three Months Ended September 30, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
Income (loss) before income taxes | $ | 374,673 | $ | 37,124 | |||||||
Income tax (expense) benefit | (31,169) | — | |||||||||
Our provisions for income taxes for the three months ended September 30, 2022 and 2021 differs from the amounts that would be provided by applying the U.S. federal statutory rate of 21% to pre-tax book income (loss) primarily due to (i) permanent differences, (ii) state income taxes, and (iii) any changes during the period in our deferred tax asset valuation allowance.
For the three months ended September 30, 2022, we generated pre-tax net income of $374.7 million and recorded income tax expense of $31.2 million. The primary factors decreasing our income tax expense below the U.S. statutory rate was (i) the portion of pre-tax income that was attributable to our non-controlling interest partners and (ii) the partial release of our deferred tax valuation allowance due to the generation of net income in the current year.
For the three months ended September 30, 2021, we generated pre-tax net income of $37.1 million, which reduced our total net operating losses (“NOLs”) accumulated for the year by this same amount. As a result of the $37.1 million reduction to our 2021 NOL position, we were able to reduce our corresponding deferred tax asset valuation by $11.9 million.
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Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The following table provides the components of our net revenues and net production (net of all royalties, overriding royalties and production due to others) for the periods indicated, as well as each period’s average prices and average daily production volumes:
| Nine Months Ended September 30, | Increase/(Decrease) | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Net revenues (in thousands): | |||||||||||||||||||||||
| Oil sales | $ | 1,009,545 | $ | 512,278 | $ | 497,267 | 97 | % | |||||||||||||||
| Natural gas sales | 200,503 | 106,266 | 94,237 | 89 | % | ||||||||||||||||||
| NGL sales | 159,661 | 94,929 | 64,732 | 68 | % | ||||||||||||||||||
Oil and gas sales | $ | 1,369,709 | $ | 713,473 | $ | 656,236 | 92 | % | |||||||||||||||
| Average sales prices: | |||||||||||||||||||||||
| Oil (per Bbl) | $ | 93.93 | $ | 60.05 | $ | 33.88 | 56 | % | |||||||||||||||
| Effect of derivative settlements on average price (per Bbl) | (9.91) | (10.12) | 0.21 | 2 | % | ||||||||||||||||||
Oil net of hedging (per Bbl) | $ | 84.02 | $ | 49.93 | $ | 34.09 | 68 | % | |||||||||||||||
| Average NYMEX price for oil (per Bbl) | $ | 98.10 | $ | 64.82 | $ | 33.28 | 51 | % | |||||||||||||||
| Oil differential from NYMEX | (4.17) | (4.77) | 0.60 | 13 | % | ||||||||||||||||||
| Natural gas (per Mcf) | $ | 5.72 | $ | 3.44 | $ | 2.28 | 66 | % | |||||||||||||||
| Effect of derivative settlements on average price (per Mcf) | (1.20) | (0.09) | (1.11) | (1,233) | % | ||||||||||||||||||
Natural gas net of hedging (per Mcf) | $ | 4.52 | $ | 3.35 | $ | 1.17 | 35 | % | |||||||||||||||
| Average NYMEX price for natural gas (per Mcf) | $ | 6.65 | $ | 3.53 | $ | 3.12 | 88 | % | |||||||||||||||
| Natural gas differential from NYMEX | (0.93) | (0.09) | (0.84) | (933) | % | ||||||||||||||||||
| NGL (per Bbl) | $ | 42.20 | $ | 33.98 | $ | 8.22 | 24 | % | |||||||||||||||
Net production: | |||||||||||||||||||||||
| Oil (MBbls) | 10,748 | 8,531 | 2,217 | 26 | % | ||||||||||||||||||
| Natural gas (MMcf) | 35,082 | 30,933 | 4,149 | 13 | % | ||||||||||||||||||
| NGL (MBbls) | 3,784 | 2,794 | 990 | 35 | % | ||||||||||||||||||
Total (MBoe)(1) | 20,378 | 16,479 | 3,899 | 24 | % | ||||||||||||||||||
Average daily net production: | |||||||||||||||||||||||
| Oil (Bbls/d) | 39,369 | 31,246 | 8,123 | 26 | % | ||||||||||||||||||
| Natural gas (Mcf/d) | 128,504 | 113,305 | 15,199 | 13 | % | ||||||||||||||||||
| NGLs (Bbls/d) | 13,859 | 10,233 | 3,626 | 35 | % | ||||||||||||||||||
Total (Boe/d)(1) | 74,646 | 60,363 | 14,283 | 24 | % | ||||||||||||||||||
(1) Calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Boe.
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Oil, Natural Gas and NGL Sales Revenues. Total net revenues for the nine months ended September 30, 2022 were $656.2 million, or 92%, higher than total net revenues for the nine months ended September 30, 2021. Revenues are a function of oil, natural gas and NGL volumes sold and average commodity prices realized.
Average realized sales prices for oil, natural gas and NGLs increased for the first nine months of 2022 compared to the same 2021 period by 56%, 66%, and 24%, respectively. The 56% increase in the average realized oil price was mainly the result of higher (51%) NYMEX crude prices between periods, as well as improved oil differentials ($0.60 per Bbl narrower). The average realized sales price of natural gas increased 66% due to higher (88%) average NYMEX gas prices between periods, partially offset by wider gas differentials ($0.84 per Mcf wider). The 24% increase in average realized NGL prices between periods was primarily attributable to higher Mont Belvieu spot prices for plant products for the first nine months of 2022 compared to the first nine months of 2021. The market prices for oil, natural gas and NGLs have all been impacted by global supply constraints for oil and gas throughout 2021 and 2022, as well as increasing demand worldwide as global economies emerge from COVID-19 era lockdowns and restrictions, as discussed in the market conditions section above.
Net production volumes for oil, natural gas, and NGLs increased 26%, 13%, and 35%, respectively, between periods. The oil production volume increase resulted from placing 67 wells on production since the third quarter of 2021, which added 4,614 MBbls of net oil production to the nine months ended September 30, 2022 as compared to 33 wells brought online since the third quarter of 2020 that added 2,078 MBbls of net oil production to the nine months ended September 30, 2021. Oil production also benefited from wells acquired in the Merger with Colgate, which added 942 MBbls of net oil production to the nine months ended September 30, 2022. These oil volume increases were partially offset by normal production decline across our existing wells. Natural gas and NGLs are produced concurrently with our crude oil volumes, typically resulting in a high correlation between fluctuations in oil quantities sold and natural gas and NGL quantities sold. However, the main processor of our raw gas operated in partial ethane-recovery during the first nine months of 2022, as compared to operating in full ethane-rejection during the 2021 period, and this resulted in a lower percentage of natural gas volumes and a higher percentage of NGLs being recovered from our wet gas stream during the 2022 period.
Operating Expenses. The following table summarizes our operating expenses for the periods indicated:
| Nine Months Ended September 30, | Increase/(Decrease) | ||||||||||||||||||||||
| 2022 | 2021 | Change | % | ||||||||||||||||||||
| Operating costs (in thousands): | |||||||||||||||||||||||
| Lease operating expenses | $ | 98,578 | $ | 77,522 | $ | 21,056 | 27 | % | |||||||||||||||
| Severance and ad valorem taxes | 101,491 | 46,167 | 55,324 | 120 | % | ||||||||||||||||||
| Gathering, processing and transportation expenses | 77,669 | 64,283 | 13,386 | 21 | % | ||||||||||||||||||
| Operating cost metrics: | |||||||||||||||||||||||
| Lease operating expenses (per Boe) | $ | 4.84 | $ | 4.70 | $ | 0.14 | 3 | % | |||||||||||||||
| Severance and ad valorem taxes (% of revenue) | 7.4 | % | 6.5 | % | 0.9 | % | 14 | % | |||||||||||||||
| Gathering, processing and transportation expenses (per Boe) | $ | 3.81 | $ | 3.90 | $ | (0.09) | (2) | % | |||||||||||||||
Lease Operating Expenses. LOE for the nine months ended September 30, 2022 increased $21.1 million compared to the nine months ended September 30, 2021. Higher LOE for the first nine months of 2022 was primarily related to higher fixed and semi-variable costs, such as monthly equipment rentals, repair work, labor, and wellhead chemical costs stemming from the production increase between periods as well as additional costs associated with the 309 gross operated horizontal wells acquired in the Merger on September 1, 2022. These increases were partially offset by lower environmental expenses and lower water handling costs, which are associated with our higher level of recycling activity whereby produced water from our operated wells is recycled and then reused in our drilling and completion operations. This process results in significantly lower costs as compared to typical water disposal rates.
Severance and Ad Valorem Taxes. Severance and ad valorem taxes for the nine months ended September 30, 2022 increased $55.3 million compared to the nine months ended September 30, 2021. Severance taxes are based on the market value of our production at the wellhead, while ad valorem taxes are generally based on the assessed taxable value of our proved developed oil and gas properties and vary across the different counties in which we operate. Severance taxes for the first nine months of 2022 increased $48.2 million compared to the same 2021 period primarily due to higher oil, natural gas and NGL revenues between periods. Ad valorem taxes between periods also increased $7.1 million due to higher tax assessments on our oil and gas reserve values as well as an increase in our oil and gas properties as a result of the Merger.
Severance and ad valorem taxes as a percentage of total net revenues increased to 7.4% for the first nine months of 2022 as compared to 6.5% for the same 2021 period. This increase in rate was the result of higher ad valorem taxes as discussed above as well as a larger portion of our oil and gas volumes being produced in New Mexico, which levies higher severance tax rates than Texas, during the first nine months of 2022.
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Gathering, Processing and Transportation Expenses. GP&T for the nine months ended September 30, 2022 increased $13.4 million compared to the nine months ended September 30, 2021. This increase was mainly attributable to higher gas plant processing costs, whose variable fee portion is based on natural gas and NGL prices, both of which increased substantially between periods as discussed above. The increase is also attributable to additional expenses incurred as a result of the Merger in the third quarter of 2022.
GP&T on a per Boe basis, however, decreased from $3.90 for the first nine months of 2021 to $3.81 for the same 2022 period. This decrease is due to a higher portion of GP&T costs reducing our realized gas and NGL prices, as the majority of gas gathering and processing contracts acquired in the Merger transfer control of our product at delivery points prior to, or at, the inlet of gas processing plants. Refer to Note 13—Revenues for additional information.
Depreciation, Depletion and Amortization. The following table summarizes our DD&A for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
| (in thousands, except per Boe data) | 2022 | 2021 | |||||||||
| Depreciation, depletion and amortization | $ | 262,626 | $ | 213,259 | |||||||
| Depreciation, depletion and amortization per Boe | $ | 12.89 | $ | 12.94 | |||||||
For the nine months ended September 30, 2022, DD&A expense amounted to $262.6 million, an increase of $49.4 million over the same 2021 period. The primary factor contributing to higher DD&A expense in 2022 was the increase in our overall production volumes between periods, which increased DD&A expense by $50.5 million during the first nine months of 2022, while lower DD&A rates between periods decreased DD&A expense by $1.1 million for the nine months ended September 30, 2022.
Our DD&A rate can fluctuate as a result of finding and development costs incurred, acquisitions, impairments, as well as changes in proved developed and proved undeveloped reserves. DD&A per Boe was $12.89 for the first nine months of 2022 compared to $12.94 for the same period in 2021. This decrease in the rate was driven by the inclusion of depletion related to the production from the oil and gas properties acquired in the Merger.
General and Administrative Expenses. The following table summarizes our G&A expenses for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Cash general and administrative expenses | $ | 39,309 | $ | 33,220 | |||||||
| Stock-based compensation expense - equity awards | 59,417 | 30,686 | |||||||||
| Stock-based compensation expense - liability awards | (24,174) | 20,040 | |||||||||
| Stock-based compensation expense - cash settled awards | 9,385 | 5,865 | |||||||||
| General and administrative expenses | $ | 83,937 | $ | 89,811 | |||||||
G&A expenses for the nine months ended September 30, 2022 were $83.9 million compared to $89.8 million for the nine months ended September 30, 2021. Lower G&A for the first nine months of 2022 was the result of a $12.0 million decrease in total stock-based compensation expense between periods. This decrease in stock-based compensation expense was related to (i) a decrease of $15.5 million in expense related to the portion of liability classified restricted stock units that became fully vested following a maximum return event that was triggered in the third quarter of 2021 and (ii) a decrease of $3.0 million during the period related to PSUs, mainly due to a portion of the 2020 PSU awards being settled in cash, offset by the reclassification of our 2020 PSU awards from liability to equity. These decreases were slightly offset by a $3.5 million increase related to cash settled awards between periods and a $3.0 million increase in various equity classified awards due to new grants and accelerated vestings. Refer to Note 6—Stock-Based Compensation for additional information regarding these awards. Further offsetting this decrease was higher cash G&A, which increased $6.1 million period over period due to higher payroll and other personnel cost increases as a result of increased headcount associated with the Merger on September 1, 2022.
Merger and integration expense. Merger and integration expense for the nine months ended September 30, 2022 was $65.0 million. These costs primarily relate to (i) $43 million in bankers’ advisory fees(ii) $10.8 million in severance and related benefits associated with employees that were terminated in connection with the Merger and (iii) legal, accounting and consultancy fees. See Note 2—Business Combination for further details regarding the Merger.
Impairment and Abandonment Expense. During the nine months ended September 30, 2022, impairment and abandonment expense was $3.6 million as compared to $26.1 million during the nine months ended September 30, 2021. Both periods consist solely of amortization of leasehold expiration costs associated with individually insignificant unproved properties.
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Exploration and Other Expenses. The following table summarizes our exploration and other expenses for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Geological and geophysical costs | $ | 5,005 | $ | 2,622 | |||||||
| Stock-based compensation - equity awards | 1,554 | 1,613 | |||||||||
| Stock-based compensation - liability awards | — | (89) | |||||||||
| Stock-based compensation - cash settled awards | — | 314 | |||||||||
| Other expenses | 54 | 238 | |||||||||
| Exploration and other expenses | $ | 6,613 | $ | 4,698 | |||||||
Exploration and other expenses were $6.6 million for the nine months ended September 30, 2022 compared to $4.7 million for the same prior year period. Exploration and other expenses mainly consist of topographical studies, G&G projects, salaries and expenses of G&G personnel and includes other operating costs. The period over period increase was primarily related to higher G&G personnel costs during the nine months ended September 30, 2022. This increase is partially offset by a decrease in total stock-based compensation related to certain restricted stock units that became fully vested in the third quarter of 2021 as discussed above.
Other Income and Expenses.
Interest Expense. The following table summarizes our interest expense for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
| Credit facility | $ | 5,717 | $ | 8,745 | |||||||
8.00% Senior Secured Notes due 2025 | — | 2,908 | |||||||||
| 5.375% Senior Notes due 2026 | 11,667 | 11,667 | |||||||||
| 7.75% Senior Notes due 2026 | 1,938 | — | |||||||||
| 6.875% Senior Notes due 2027 | 18,375 | 18,375 | |||||||||
| 3.25% Convertible Senior Notes due 2028 | 4,143 | 2,934 | |||||||||
| 5.875% Senior Notes due 2029 | 3,427 | — | |||||||||
| Amortization of debt issuance costs and debt discount | 12,846 | 3,935 | |||||||||
| Interest capitalized | (1,826) | (1,207) | |||||||||
| Total | $ | 56,287 | $ | 47,357 | |||||||
Interest expense was $8.9 million higher for the nine months ended September 30, 2022 compared to the same 2021 period mainly due to (i) $8.9 million in additional debt issuance costs amortized during the 2022 period mainly related to fees incurred for an incremental commitment letter we entered into in connection with the Merger; (ii) $5.4 million in additional interest expense from the senior notes that were assumed in the Merger; and (iii) interest on our Convertible Senior Notes that was incurred in 2022 but only partially during the 2021 period due to their issuance in March of 2021. These increases were partially offset by (i) $3.0 million in lower interest incurred on our Credit Agreement due to lower borrowings outstanding during the 2022 period, and (ii) $2.9 million in decreased interest expense on our Senior Secured Notes due 2025 that were redeemed in April of 2021.
Our weighted average borrowings outstanding under our Credit Agreement were $99.8 million versus $294.6 million for the first nine months of 2022 and 2021, respectively. Our Credit Agreement’s weighted average effective interest rate was 3.4% and 3.3% for the nine months ended September 30, 2022 and 2021, respectively.
Gain (loss) on extinguishment of debt. During the nine months ended September 30, 2021, we redeemed at par all of our $127.1 million aggregate principal amount of Senior Secured Notes outstanding. In connection with this redemption, we recorded a loss on debt extinguishment of $22.2 million related to the write-off of all unamortized debt issuance costs and debt discounts associated with these notes.
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Net Gain (Loss) on Derivative Instruments. Net gains and losses are a function of (i) changes in derivative fair values associated with fluctuations in the forward price curves for the commodities underlying each of our hedge contracts outstanding and (ii) monthly cash settlements on any closed out hedge positions during the period.
The following table presents gains and losses for derivative instruments for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
Realized cash settlement gains (losses) | $ | (148,721) | $ | (89,195) | |||||||
Non-cash mark-to-market derivative gain (loss) | 166,372 | (61,490) | |||||||||
Total | $ | 17,651 | $ | (150,685) | |||||||
Income Tax (Expense) Benefit. The following table summarizes our pre-tax income (loss) and income tax (expense) benefit for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
Income (loss) before income taxes | $ | 630,564 | $ | (22,576) | |||||||
Income tax (expense) benefit | (79,432) | — | |||||||||
Our provisions for income taxes for the first nine months of 2022 and 2021 differs from the amounts that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax book income (loss) primarily due to (i) permanent differences; (ii) state income taxes; and (iii) any changes during the period in our deferred tax asset valuation allowance.
For the nine months ended September 30, 2022 we generated pre-tax net income of $630.6 million and recorded income tax expense of $79.4 million. The primary factors decreasing our income tax expense below the U.S. statutory rate was (i) the portion of pre-tax income that was attributable to our non-controlling interest partners and (ii) the partial release of our deferred tax valuation allowance due to the generation of net income in the current year.
For the nine months ended September 30, 2021, we recognized deferred tax asset valuation allowances of $8.1 million against NOLs we generated during the period, and such NOLs were estimated at such time as unlikely to be realized in future periods. The increase in our valuation allowance was the primary factor reducing our income tax benefit (based on the U.S. statutory rate) to zero for the first nine months of 2021.
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Liquidity and Capital Resources
Overview
Our drilling and completion activities require us to make significant capital expenditures. Historically, our primary sources of liquidity have been cash flows from operations, borrowings under our revolving credit facility, proceeds from offerings of debt or equity securities, or proceeds from the sale of oil and gas properties. Our future cash flows are subject to a number of variables, including oil and natural gas prices, which have been and will likely continue to be volatile. Lower commodity prices can negatively impact our cash flows and our ability to access debt or equity markets, and sustained low oil and natural gas prices could have a material and adverse effect on our liquidity position. To date, our primary use of capital has been for drilling and development capital expenditures and the acquisition of oil and natural gas properties.
We continually evaluate our capital needs and compare them to our capital resources. We operated a two-rig drilling program during the first eight months of 2022, and an eight-rig drilling program after the Merger closing on September 1, 2022, which is expected to reduce to seven drilling rigs in November and for the remainder of the year. Our total capital expenditures incurred for the nine months ended September 30, 2022 was $454.2 million. We expect our total drilling, completion and facilities capex budget for the fourth quarter of 2022 to be between $300 million to $325 million. We funded our capital expenditures for the nine months ended September 30, 2022 entirely from cash flows from operations, and we expect to fund the remainder of our 2022 capex budget entirely from cash flows from operations as well, given our anticipated level of oil and gas production, current commodity prices and our commodity hedge positions in place.
In May 2022, we announced the Merger with Colgate that was completed on September 1, 2022. As a result of the Merger, our 2022 operational plans and sources and use of capital, among others things, as a combined entity have changed, and such changes include (i) the Company assumed $1.0 billion of Colgate’s senior notes, (ii) the Company refinanced Colgate’s credit facility borrowings outstanding at closing through borrowings under the Company’s Credit Agreement, (iii) borrowings under our Credit Agreement to fund a portion of the $525 million in cash Merger consideration, and (iv) funding of transaction costs incurred related to the Merger.
In February 2022, our Board of Directors authorized the Repurchase Program to acquire up to $350 million of our outstanding Common Stock. In connection with the Merger, the Repurchase Program was increased to $500 million and was extended through December 31, 2024. The Repurchase Program can be used to reduce our shares of Common Stock outstanding. Such repurchases would be made at terms and prices determined by us based upon prevailing market conditions, applicable legal requirements, available liquidity, compliance with our debt and other agreements and other factors. In addition, we may, from time to time, seek to retire or purchase our outstanding senior notes through cash purchases and/or exchanges for debt in open-market purchases, privately negotiated transactions or otherwise.
Because we are the operator of a high percentage of our acreage, we can control the amount and timing of our capital expenditures. We can choose to defer or accelerate a portion of our planned capex depending on a variety of factors, including but not limited to: prevailing and anticipated prices for oil and natural gas; oil storage or transportation constraints; the success of our drilling activities; the availability of necessary equipment, infrastructure and capital; the receipt and timing of required regulatory permits and approvals; seasonal conditions; property or land acquisition costs; and the level of participation by other working interest owners.
We cannot ensure that cash flows from operations or other sources of needed capital will be available on acceptable terms or at all. Further, our ability to access the public or private debt or equity capital markets at economic terms in the future will be affected by general economic conditions, the domestic and global oil and financial markets, our operational and financial performance, the value and performance of our debt or equity securities, prevailing commodity prices and other macroeconomic factors outside of our control.
Analysis of Cash Flow Changes
The following table summarizes our cash flows for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Net cash provided by operating activities | $ | 843,376 | $ | 333,132 | |||||||
| Net cash used in investing activities | (896,438) | (216,318) | |||||||||
| Net cash provided by (used in) financing activities | 89,194 | (117,626) | |||||||||
For the nine months ended September 30, 2022, we generated $843.4 million of cash from operating activities, an increase of $510.2 million from the same period in 2021. Cash provided by operating activities increased primarily due to higher realized prices for all commodities, higher production volumes, and the timing of our supplier payments during the nine months ended September 30, 2022. These increasing factors were partially offset by higher merger and integration expense, severance and ad
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valorem taxes, lease operating expenses, GP&T, and cash G&A expense for the nine months ended September 30, 2022 as compared to the same 2021 period. Refer to “Results of Operations” for more information on the impact of volumes and prices on revenues and on fluctuations in our operating costs between periods.
During the nine months ended September 30, 2022, cash flows from operating activities and net borrowings under our revolving credit facility were used to finance $496.7 million of net cash consideration paid for the Merger, fund $397.9 million of drilling and development cash expenditures and repay $400 million of borrowings outstanding from Colgate’s credit facility that were assumed at closing.
During the nine months ended September 30, 2021, cash flows from operating activities and net proceeds from the issuance of the Convertible Senior Notes (defined below) were used to finance $215.4 million of drilling and development cash expenditures, repay net borrowings of $125.0 million under our credit facility, redeem $127.1 million of our 2025 senior secured notes outstanding and to fund $14.7 million in capped call spread transactions.
Credit Agreement
On February 18, 2022, OpCo entered into an amended and restated five-year secured credit facility with a syndicate of banks, which replaced its previous credit facility that was set to mature in May 2023. The restated Credit Agreement extended its maturity date to February 2027.
On July 15, 2022, OpCo entered into the first amendment to its Credit Agreement. The Amendment, among other things, waived compliance with certain restrictive covenants and provided the lenders’ consent to a planned Pre-Merger Reorganization (as defined within the Amendment) in order to enable the Merger to occur. In addition, the Amendment increased the elected commitments under the Credit Agreement to $1.5 billion from $750 million, increased the borrowing base to $2.5 billion from $1.15 billion, and became effective as of the September 1, 2022 Merger closing date.
The Credit Agreement contains restrictive covenants that limit our ability to, among other things: (i) incur additional indebtedness; (ii) make investments and loans; (iii) enter into mergers; (iv) make restricted payments; (v) repurchase or redeem junior debt; (vi) enter into commodity hedges exceeding a specified percentage of our expected production; (vii) enter into interest rate hedges exceeding a specified percentage of its outstanding indebtedness; (viii) incur liens; (ix) sell assets; and (x) engage in transactions with affiliates.
The Credit Agreement also requires OpCo to maintain compliance with the following financial ratios:
(i) a current ratio, which is the ratio of OpCo’s consolidated current assets (including an add back of unused commitments under the revolving credit facility and excluding non-cash derivative assets and certain restricted cash) to its consolidated current liabilities (excluding the current portion of long-term debt under the Credit Agreement and non-cash derivative liabilities), of not less than 1.0 to 1.0; and
(ii) a leverage ratio, as defined within the Credit Agreement as the ratio of total funded debt to consolidated EBITDAX (as defined within the Credit Agreement) for the prior four fiscal quarters, of not greater than 3.5 to 1.0.
The Credit Agreement includes fall away covenants, lower interest rates and reduced collateral requirements that OpCo may elect if OpCo is assigned an Investment Grade Rating (as defined within the Credit Agreement).
OpCo was in compliance with the covenants and the applicable financial ratios described above as of September 30, 2022 and through the filing of this Quarterly Report.
For further information on the Credit Agreement, refer to Note 4—Long-Term Debt under Part I, Item I of this Quarterly Report.
Convertible Senior Notes
On March 19, 2021, OpCo issued $150.0 million of 3.25% senior unsecured convertible notes due 2028 (the “Convertible Senior Notes”). On March 26, 2021, OpCo issued an additional $20.0 million of Convertible Senior Notes pursuant to the exercise of the underwriters’ over-allotment option to purchase additional notes. These issuances resulted in aggregate net proceeds to OpCo of $163.6 million, which were used to repay borrowings outstanding under the Credit Agreement and to fund the cost of entering into capped call spread transactions of $14.7 million. Subsequently in April 2021, we redeemed at par all of our Senior Secured Notes (defined below), which was the intended use of proceeds from the Convertible Senior Notes offering.
The Convertible Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Company and each of OpCo’s current subsidiaries that guarantee OpCo’s outstanding Senior Unsecured Notes as defined below.
The Convertible Senior Notes bear interest at an annual rate of 3.25% and are due on April 1, 2028 unless earlier repurchased, redeemed or converted. The Convertible Senior Notes may become convertible prior to April 1, 2028, upon the occurrence of certain events or conditions being met as disclosed in Note 4—Long-Term Debt under Part I, Item I of this Quarterly Report. OpCo can settle the Convertible Senior Notes by paying or delivering cash, shares of the Class A Common
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Stock, or a combination of cash and Class A Common Stock, at OpCo’s election.
In connection with the Convertible Senior Notes issuance, OpCo entered into privately negotiated capped call spread transactions (the “Capped Call Transactions”), that are expected to reduce potential dilution to our Class A Common Stock upon a conversion and/or offset any cash payments OpCo is required to make in excess of the principal amount of the Convertible Senior Notes, subject to a cap. The Capped Call Transactions have an initial strike price of $6.28 per share of Class A Common Stock and an initial capped price of $8.4525 per share of Class A Common Stock (each subject to certain customary adjustments per the agreements).
Senior Notes
On September 1, 2022, in connection with the Merger, OpCo entered into supplemental indentures whereby all of Colgate’s outstanding senior notes were assumed at Closing and became the senior unsecured debt of OpCo. The senior notes assumed by OpCo included $300 million of 7.75% senior notes due 2026 (the “2026 Colgate Senior Notes”) and $700 million of 5.875% senior notes due 2029 (the “2029 Colgate Senior Notes,” and together with the 2026 Colgate Senior Notes, the “Colgate Senior Notes”). The Company recorded the Colgate Senior Notes at their fair value as of the Merger closing, which were equal to 100% of par for the 2026 Colgate Senior Notes and 93.68% of par (a $44.3 million debt discount) for the 2029 Colgate Senior Notes.
On November 30, 2017, OpCo issued $400.0 million of 5.375% senior notes due 2026 (the “2026 Senior Notes”) and on March 15, 2019, OpCo issued $500.0 million of 6.875% senior notes due 2027 (the “2027 Senior Notes” and, together with the 2026 Senior Notes and the Colgate Senior Notes, the “Senior Unsecured Notes”) in 144A private placements. In May 2020, $110.6 million aggregate principal amount of the 2026 Senior Notes and $143.7 million aggregate principal amount of the 2027 Senior Notes were validly tendered and exchanged by certain eligible bondholders for consideration consisting of $127.1 million aggregate principal amount of 8.00% second lien senior secured notes (the “Senior Secured Notes”). The Senior Secured Notes were fully redeemed at par in connection with the Convertible Senior Notes issuance during the second quarter of 2021.
The Senior Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by Permian Resources and each of OpCo’s current subsidiaries that guarantee OpCo’s Credit Agreement.
The indentures governing the Senior Unsecured Notes contain covenants that, among other things and subject to certain exceptions and qualifications, limit OpCo’s ability and the ability of OpCo’s restricted subsidiaries to: (i) incur or guarantee additional indebtedness or issue certain types of preferred stock; (ii) pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; (iii) transfer or sell assets; (iv) make investments; (v) create certain liens; (vi) enter into agreements that restrict dividends or other payments from their subsidiaries to them; (vii) consolidate, merge or transfer all or substantially all of their assets; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. OpCo was in compliance with these covenants as of September 30, 2022 and through the filing of this Quarterly Report.
For further information on our Convertible Senior Notes and Senior Unsecured Notes, refer to Note 4—Long-Term Debt under Part I, Item I of this Quarterly Report.
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Contractual Obligations
We routinely enter into or extend operating and transportation agreements, office and equipment leases, drilling rig contracts, among others, in the ordinary course of business. The following table summarizes our obligations and commitments as of September 30, 2022 to make future payments under long-term contracts for the time periods specified below.
| (in thousands) | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | ||||||||||||||||||||||||||||||||||
Operating leases(1) | $ | 7,983 | $ | 31,687 | $ | 19,679 | $ | 5,203 | $ | 4,074 | $ | 20,127 | $ | 88,753 | |||||||||||||||||||||||||||
Purchase obligations(2) | 6,883 | 27,488 | 10,780 | 5,192 | 5,192 | — | 55,535 | ||||||||||||||||||||||||||||||||||
Asset retirement obligations(3) | 178 | 25 | 780 | 9,110 | 3 | 30,046 | 40,142 | ||||||||||||||||||||||||||||||||||
Long term debt obligations(4) | — | — | — | — | 589,448 | 1,776,351 | 2,365,799 | ||||||||||||||||||||||||||||||||||
Cash interest expense on long-term debt obligations(5) | 35,562 | 142,249 | 142,249 | 142,249 | 106,995 | 120,347 | 689,651 | ||||||||||||||||||||||||||||||||||
Cash based severance payments(6) | 9,716 | 11,471 | — | — | — | — | 21,187 | ||||||||||||||||||||||||||||||||||
| Total | $ | 60,322 | $ | 212,920 | $ | 173,488 | $ | 161,754 | $ | 705,712 | $ | 1,946,871 | $ | 3,261,067 | |||||||||||||||||||||||||||
(1) Operating leases consist of our office rental agreements, drilling rig contracts and other wellhead equipment.
(2) Consists of an energy purchase agreement to buy a minimum amount of electricity at a fixed price or pay for underutilization as well as a take-or-pay agreement to purchase a minimum volume of frac sand at a fixed price. The obligations reported above represent our remaining minimum financial commitments pursuant to the terms of these contracts as of September 30, 2022, however actual expenditures may exceed the minimum commitments presented above.
(3) Asset retirement obligations reflect the present value of the estimated future costs associated with the plugging and abandonment of oil and gas wells and the related land restoration in accordance with applicable laws and regulations.
(4) Long-term debt consists of the principal amounts of our senior notes due and borrowings outstanding under the Credit Agreement as of September 30, 2022.
(5) Cash interest expense on our senior notes is estimated assuming no principal repayment until the maturity of the instruments. Cash interest expense on the Credit Agreement includes unused commitment fees and assumes no additional principal borrowings, repayments or changes to commitments under the agreement through the instrument due date.
(6) Long-term severance and related expenses associated with the Merger.
Critical Accounting Policies and Estimates
There have been no material changes, other than those discussed below, during the nine months ended September 30, 2022 to the critical accounting policies as disclosed in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates in our 2021 Annual Report.
Business and Asset Acquisitions
From time to time, we may acquire assets and assume liabilities in transactions accounted for as business combinations, such as the Merger. In connection with the Merger, we allocated the $2.7 billion of purchase price consideration to the assets acquired and liabilities assumed based on estimated fair values as of the Merger closing date.
For business and asset acquisitions, we generally recognize the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their estimated fair values on the acquisition date. Determining fair value requires management’s judgment and involves the use of significant estimates and assumptions with respect to projections of future production volumes, pricing and cash flows, discount rates, expectations regarding customer contracts and relationships, and other management estimates. The judgments made in the determination of the estimated fair value assigned to the assets acquired, liabilities assumed and any noncontrolling interest, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition. Refer to Note 2—Business Combination and Note 8—Fair Value Measurements for additional information.
New Accounting Pronouncements
There were no significant new accounting standards adopted or new accounting pronouncements that would have potential effects to us as of September 30, 2022.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The term “market risk” as it applies to our business refers to the risk of loss arising from adverse changes in oil and natural gas prices and interest rates, and we are exposed to market risk as described below. The primary objective of the following information is to provide quantitative and qualitative information about our potential exposure to market risks. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. All of our market risk sensitive instruments were entered into for purposes other than speculative trading.
Commodity Price Risk
Our primary market risk exposure is in the pricing that we receive for our oil, natural gas and NGL production. Pricing for oil, natural gas and NGLs has been volatile and unpredictable for several years, and we expect this volatility to continue for the foreseeable future. Based on our production for the first nine months of 2022, our oil and gas sales for the nine months ended September 30, 2022 would have moved up or down $101.0 million for each 10% change in oil prices per Bbl, $16.0 million for each 10% change in NGL prices per Bbl, and $20.1 million for each 10% change in natural gas prices per Mcf.
Due to this volatility, we have historically used, and we may elect to continue to selectively use, commodity derivative instruments (such as collars, swaps and basis swaps) to mitigate price risk associated with a portion of our anticipated production. Our derivative instruments allow us to reduce, but not eliminate, the potential effects of the variability in cash flows that can emanate from fluctuations in oil and natural gas prices, and thereby provide increased certainty of cash flows for our drilling program and debt service requirements. These instruments provide only partial price protection against declines in oil and natural gas prices, but alternatively they partially limit our potential gains from future increases in prices. Our Credit Agreement limits our ability to enter into commodity hedges covering greater than 85% of our reasonably anticipated projected production from proved properties.
The table below summarizes the terms of the derivative contracts we had in place as of September 30, 2022 and additional contracts entered into through October 31, 2022. Refer to Note 7—Derivative Instruments in Item 1 of Part I of this Quarterly Report for open derivative positions as of September 30, 2022.
| Period | Volume (Bbls) | Volume (Bbls/d) | Wtd. Avg. Crude Price ($/Bbl)(1) | ||||||||||||||||||||
Crude oil swaps | October 2022 - December 2022 | 2,530,000 | 27,500 | $89.17 | |||||||||||||||||||
| January 2023 - March 2023 | 1,575,000 | 17,500 | 90.58 | ||||||||||||||||||||
| April 2023 - June 2023 | 1,592,500 | 17,500 | 87.64 | ||||||||||||||||||||
| July 2023 - September 2023 | 1,472,000 | 16,000 | 86.36 | ||||||||||||||||||||
| October 2023 - December 2023 | 1,472,000 | 16,000 | 84.11 | ||||||||||||||||||||
| January 2024 - March 2024 | 1,092,000 | 12,000 | 78.46 | ||||||||||||||||||||
| April 2024 - June 2024 | 1,092,000 | 12,000 | 77.30 | ||||||||||||||||||||
| July 2024 - September 2024 | 1,104,000 | 12,000 | 76.21 | ||||||||||||||||||||
| October 2024 - December 2024 | 1,104,000 | 12,000 | 75.27 | ||||||||||||||||||||
| Period | Volume (Bbls) | Volume (Bbls/d) | Wtd. Avg. Collar Price Ranges ($/Bbl)(2) | ||||||||||||||||||||||||||
| Crude oil collars | October 2022 - December 2022 | 644,000 | 7,000 | $80.00 | - | $104.17 | |||||||||||||||||||||||
| January 2023 - March 2023 | 810,000 | 9,000 | 75.56 | - | 91.15 | ||||||||||||||||||||||||
| April 2023 - June 2023 | 819,000 | 9,000 | 75.56 | - | 91.15 | ||||||||||||||||||||||||
| July 2023 - September 2023 | 644,000 | 7,000 | 76.43 | - | 92.70 | ||||||||||||||||||||||||
| October 2023 - December 2023 | 644,000 | 7,000 | 76.43 | - | 92.70 | ||||||||||||||||||||||||
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| Period | Volume (Bbls) | Volume (Bbls/d) | Wtd. Avg. Differential ($/Bbl)(3) | ||||||||||||||||||||
| Crude oil basis differential swaps | October 2022 - December 2022 | 1,848,886 | 20,097 | $0.62 | |||||||||||||||||||
| January 2023 - March 2023 | 729,999 | 8,111 | 0.55 | ||||||||||||||||||||
| April 2023 - June 2023 | 739,499 | 8,126 | 0.55 | ||||||||||||||||||||
| July 2023 - September 2023 | 749,000 | 8,141 | 0.52 | ||||||||||||||||||||
| October 2023 - December 2023 | 749,002 | 8,141 | 0.52 | ||||||||||||||||||||
| January 2024 - March 2024 | 637,000 | 7,000 | 0.43 | ||||||||||||||||||||
| April 2024 - June 2024 | 637,000 | 7,000 | 0.43 | ||||||||||||||||||||
| July 2024 - September 2024 | 644,000 | 7,000 | 0.43 | ||||||||||||||||||||
| October 2024 - December 2024 | 644,000 | 7,000 | 0.43 | ||||||||||||||||||||
| Period | Volume (Bbls) | Volume (Bbls/d) | Wtd. Avg. Differential ($/Bbl)(4) | ||||||||||||||||||||
| Crude oil roll differential swaps | October 2022 - December 2022 | 2,760,000 | 30,000 | $1.85 | |||||||||||||||||||
| January 2023 - March 2023 | 1,350,000 | 15,000 | 1.34 | ||||||||||||||||||||
| April 2023 - June 2023 | 1,365,000 | 15,000 | 1.25 | ||||||||||||||||||||
| July 2023 - September 2023 | 1,380,000 | 15,000 | 1.23 | ||||||||||||||||||||
| October 2023 - December 2023 | 1,380,000 | 15,000 | 1.22 | ||||||||||||||||||||
| January 2024 - March 2024 | 637,000 | 7,000 | 0.75 | ||||||||||||||||||||
| April 2024 - June 2024 | 637,000 | 7,000 | 0.74 | ||||||||||||||||||||
| July 2024 - September 2024 | 644,000 | 7,000 | 0.73 | ||||||||||||||||||||
| October 2024 - December 2024 | 644,000 | 7,000 | 0.72 | ||||||||||||||||||||
(1) These crude oil swap transactions are settled based on the NYMEX WTI index price on each trading day within the specified monthly settlement period versus the contractual swap price for the volumes stipulated.
(2) These crude oil collars are settled based on the NYMEX WTI index price, on each trading day within the specified monthly settlement period versus the contractual floor and ceiling prices for the volumes stipulated.
(3) These crude oil basis swap transactions are settled based on the difference between the arithmetic average of ARGUS MIDLAND WTI and ARGUS WTI CUSHING indices, during each applicable monthly settlement period.
(4) These crude oil roll swap transactions are settled based on the difference between the arithmetic average of NYMEX WTI calendar month prices and the physical crude oil delivery month price.
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| Period | Volume (MMBtu) | Volume (MMBtu/d) | Wtd. Avg. Gas Price ($/MMBtu)(1) | ||||||||||||||||||||
Natural gas swaps | October 2022 - December 2022 | 3,432,715 | 37,312 | $5.86 | |||||||||||||||||||
| January 2023 - March 2023 | 1,670,157 | 18,557 | 7.64 | ||||||||||||||||||||
| April 2023 - June 2023 | 1,572,752 | 17,283 | 4.70 | ||||||||||||||||||||
| July 2023 - September 2023 | 1,486,925 | 16,162 | 4.70 | ||||||||||||||||||||
| October 2023 - December 2023 | 1,413,628 | 15,366 | 4.90 | ||||||||||||||||||||
| January 2024 - March 2024 | 464,919 | 5,109 | 5.01 | ||||||||||||||||||||
| April 2024 - June 2024 | 446,321 | 4,905 | 3.93 | ||||||||||||||||||||
| July 2024 - September 2024 | 429,388 | 4,667 | 4.01 | ||||||||||||||||||||
| October 2024 - December 2024 | 413,899 | 4,499 | 4.32 | ||||||||||||||||||||
| Period | Volume (MMBtu) | Volume (MMBtu/d) | Wtd. Avg. Differential ($/MMBtu)(2) | ||||||||||||||||||||
Natural gas basis differential swaps | October 2022 - December 2022 | 6,900,000 | 75,000 | $(0.72) | |||||||||||||||||||
| January 2023 - March 2023 | 6,075,000 | 67,500 | (1.10) | ||||||||||||||||||||
| April 2023 - June 2023 | 6,142,500 | 67,500 | (1.30) | ||||||||||||||||||||
| July 2023 - September 2023 | 6,210,000 | 67,500 | (1.30) | ||||||||||||||||||||
| October 2023 - December 2023 | 6,210,000 | 67,500 | (1.30) | ||||||||||||||||||||
| January 2024 - March 2024 | 1,820,000 | 20,000 | (0.59) | ||||||||||||||||||||
| April 2024 - June 2024 | 1,820,000 | 20,000 | (0.67) | ||||||||||||||||||||
| July 2024 - September 2024 | 1,840,000 | 20,000 | (0.66) | ||||||||||||||||||||
| October 2024 - December 2024 | 1,840,000 | 20,000 | (0.64) | ||||||||||||||||||||
| Period | Volume (MMBtu) | Volume (MMBtu/d) | Wtd. Avg. Collar Price Ranges ($/MMBtu)(3) | ||||||||||||||||||||||||||
Natural gas collars | October 2022 - December 2022 | 5,617,285 | 61,057 | $5.64 | - | $9.11 | |||||||||||||||||||||||
| January 2023 - March 2023 | 7,104,843 | 78,943 | 4.67 | - | 10.33 | ||||||||||||||||||||||||
| April 2023 - June 2023 | 6,389,748 | 70,217 | 3.64 | - | 7.62 | ||||||||||||||||||||||||
| July 2023 - September 2023 | 6,563,075 | 71,338 | 3.64 | - | 7.52 | ||||||||||||||||||||||||
| October 2023 - December 2023 | 6,636,372 | 72,134 | 3.66 | - | 8.22 | ||||||||||||||||||||||||
| January 2024 - March 2024 | 3,175,081 | 34,891 | 3.36 | - | 9.44 | ||||||||||||||||||||||||
| April 2024 - June 2024 | 1,373,679 | 15,095 | 3.00 | - | 6.45 | ||||||||||||||||||||||||
| July 2024 - September 2024 | 1,410,612 | 15,333 | 3.00 | - | 6.52 | ||||||||||||||||||||||||
| October 2024 - December 2024 | 1,426,101 | 15,501 | 3.25 | - | 7.30 | ||||||||||||||||||||||||
(1) These natural gas swap contracts are settled based on the NYMEX Henry Hub price on each trading day within the specified monthly settlement period versus the contractual swap price for the volumes stipulated.
(2) These natural gas basis swap contracts are settled based on the difference between the Inside FERC’s West Texas WAHA price and the NYMEX price of natural gas, during each applicable monthly settlement period.
(3) These natural gas collars are settled based on the NYMEX Henry Hub price on each trading day within the specified monthly settlement period versus the contractual floor and ceiling prices for the volumes stipulated.
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Changes in the fair value of derivative contracts from December 31, 2021 to September 30, 2022, are presented below:
| (in thousands) | Commodity derivative asset (liability) | |||||||
| Net fair value of oil and gas derivative contracts outstanding as of December 31, 2021 | $ | (34,910) | ||||||
| Commodity hedge contract settlement payments, net of any receipts | 148,721 | |||||||
| Fair value of commodity hedge contracts acquired in the Merger | 71,639 | |||||||
Cash and non-cash mark-to-market gains on commodity hedge contracts(1) | 17,651 | |||||||
| Net fair value of oil and gas derivative contracts outstanding as of September 30, 2022 | $ | 203,101 | ||||||
| c | ||
(1) At inception, new derivative contracts entered into by us have no intrinsic value.
A hypothetical upward or downward shift of 10% per Bbl in the NYMEX forward curve for crude oil as of September 30, 2022 would cause a $110.8 million increase or $111.6 million decrease, respectively, in this fair value position, and a hypothetical upward or downward shift of 10% per Mcf in the NYMEX forward curve for natural gas as of September 30, 2022 would cause a $9.7 million increase or decrease in this same fair value position.
Interest Rate Risk
Our ability to borrow and the rates offered by lenders can be adversely affected by deteriorations in the credit markets and/or downgrades in our credit rating. OpCo’s Credit Agreement interest rate is based on a SOFR spread, which exposes us to interest rate risk to the extent we have borrowings outstanding under this credit facility.
As of September 30, 2022, we had $550.0 million of debt outstanding under our Credit Agreement, with a weighted average interest rate of 5.13%. Assuming no change in the amount outstanding, the impact on interest expense of a 1.0% increase or decrease in the weighted average interest rate would be approximately $5.5 million per year. We do not currently have or intend to enter into any derivative hedge contracts to protect against fluctuations in interest rates applicable to our outstanding indebtedness.
The remaining long-term debt balance of $1.8 billion consists of our senior notes, which have fixed interest rates; therefore, this balance is not affected by interest rate movements. For additional information regarding our debt instruments, see Note 4—Long-Term Debt, in Item 1 of Part I of this Quarterly Report.
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Item 4. Controls and Procedures
Evaluation of Disclosure Control and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Exchange Act, we have evaluated, under the supervision and with the participation of management, including our principal executive officers and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2022. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officers and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officers and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2022 at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in the system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 12—Commitments and Contingencies under Part I, Item 1. of this Quarterly Report for more information regarding our legal proceedings.
Environmental. Due to the nature of the oil and gas industry, we are exposed to environmental risks. We have various policies and procedures to minimize and mitigate the risks from environmental contamination and we conduct periodic reviews to identify changes in our environmental risk profile. Liabilities are recorded when environmental damages resulting from events are probable and the costs can be reasonably estimated. Except as discussed herein, we are not aware of any material environmental claims existing as of September 30, 2022 which have not been provided for or would otherwise have a material impact on our financial statements; however, there can be no assurance that current regulatory requirements will not change or that unknown potential past non-compliance with environmental laws or other environmental liabilities will not be discovered on our properties.
In September 2022, we were provided with a request to settle an air emissions issue previously detected by the U.S. Environmental Protection Agency (the “EPA”). The amount of the penalty is still being negotiated between the Company and the EPA. We do not believe any resulting penalties or expenditures associated with the issue identified will have a material effect on our financial condition or results of operations, but such penalty may exceed $300,000.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in our 2021 Annual Report and the risk factors and other cautionary statements contained in our other SEC filings as well as additional risk factors set forth below. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. Other than with respect to the additional risk factors below, there have been no material changes in our risk factors from those described in our 2021 Annual Report or our SEC filings.
Risks Relating to the Merger
The failure to integrate our businesses and operations with those of Colgate successfully in the expected time frame may adversely affect our future results.
The Merger involved the combination of two companies that previously operated as independent companies. It is possible that the process of integrating the two businesses following the Merger could result in the loss of key employees, the disruption of either or both companies’ ongoing businesses, inconsistencies in standards, controls, procedures and policies, potential unknown liabilities, unforeseen expenses or delays or higher-than-expected integration costs and an overall post-completion integration process that takes longer than originally anticipated.
Combining the businesses of Centennial and Colgate may be more difficult, costly or time-consuming than expected and we may fail to realize the anticipated synergies and other benefits of the Merger, which may adversely affect our business results and negatively affect the value of our Common Stock following the consummation of the Merger.
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The Merger completed through the Business Combination Agreement (the “Merger”) involved the combination of two companies that previously operated as independent companies. The success of the Merger will depend on, among other things, our ability to combine these businesses in a manner that facilitates growth opportunities and realizes expected cost savings.
The following issues, among others, must be addressed in integrating the operations of the two companies in order to realize the anticipated benefits of the Merger:
•combining the companies’ operations and corporate functions;
•combining the businesses of Centennial and Colgate and meeting the capital requirements of the combined company, in a manner that permits the combined company to achieve any cost savings or other synergies anticipated to result from the Merger, the failure of which would result in the anticipated benefits of the Merger not being realized in the time frame currently anticipated or at all;
•integrating personnel from the two companies;
•integrating and unifying our reserves and the development of our new proved undeveloped reserves;
•identifying and eliminating underperforming or uncertain wells;
•harmonizing the companies’ operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes;
•maintaining existing agreements with customers, suppliers, distributors and vendors, avoiding delays in entering into new agreements with prospective customers, suppliers, distributors and vendors, and leveraging relationships with such third parties for the benefit of the combined company;
•addressing possible differences in business backgrounds, corporate cultures and management philosophies;
•consolidating the companies’ administrative and information technology infrastructure;
•coordinating distribution and marketing efforts;
•managing the movement of certain positions to the new headquarters in Midland, Texas; and
•effecting actions that may be required in connection with obtaining regulatory or other governmental approvals.
It is possible that the integration process could result in the loss of key employees, the loss of customers, the disruption of our ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. In addition, the actual integration may result in additional and unforeseen expenses. If we are not able to adequately address integration challenges, we may be unable to successfully integrate operations and the anticipated benefits of the integration plan may not be realized.
An inability to realize the full extent of the anticipated benefits of the Merger, as well as any delays encountered in the integration process, could have an adverse effect upon our revenues, level of expenses and operating results, which may adversely affect the value of our Common Stock following the consummation of the Merger. Moreover, if we are unable to realize the full strategic and financial benefits currently anticipated from the Merger, our shareholders will have experienced substantial dilution of their ownership interests without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent we were able to realize only part of the strategic and financial benefits currently anticipated from the Merger.
Colgate was not a U.S. public reporting company and the obligations associated with integrating it into a public company may require significant resources and management attention.
Prior to the consummation of the Merger, Colgate was a private company that was not subject to reporting requirements and did not have accounting personnel specifically employed to review internal controls over financial reporting. In connection with integrating its business and assets into our public company, the Colgate business will become subject to the rules and regulations established from time to time by the United States Securities and Exchange Commission and New York Stock Exchange. In addition, as a public company, we are required to document and test our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, so that our management can certify as to the effectiveness of our internal control over financial reporting in connection with the annual report. Colgate’s business will be required to be included in the scope of our internal control over financial reporting in the annual report to be filed with the SEC for the fiscal year following the fiscal year in which the Merger are consummated and thereafter, which requires us to make and document significant changes to our internal controls over financial reporting. Bringing Colgate’s business into compliance with these rules and regulations and integrating the Colgate assets into our current compliance and accounting system may increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources.
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Item 5. Other Information
On November 3, 2022, the Board of Directors of the Company adopted the Permian Resources Corporation Third Amended and Restated Severance Plan (the “Amended Plan”). The Amended Plan amends and restates the Centennial Resource Development, Inc. Second Amended and Restated Severance Plan (the “Original Plan”) in its entirety. Capitalized terms used, but not specifically defined in this Item 5, have the meanings given to such terms in the Amended Plan.
Under the Amended Plan, if one of the Company’s named executive officers experiences a CIC Qualifying Termination during the CIC Protection Period, the named executive officer is entitled to cash severance in an amount equal to 275% (or, in the case of the Co-CEOs, 300%) of the executive officer’s Base Salary and CIC Bonus. The Amended Plan makes no changes to the healthcare continuation benefits, outplacement benefits or equity treatment benefits that the named executive officers are entitled to receive following a CIC Qualifying Termination during the CIC Protection Period, which benefits are each described in the Company’s 2021 Proxy Statement.
Under the Amended Plan, if one of the Company’s named executive officers is terminated due to death or Disability, then such named executive officer’s time-based equity awards will immediately vest in full, and such named executive officer’s performance-based equity awards will immediately vest, based on the level of performance achieved through the termination date. Further, if one of the Company’s named executive officers is terminated by the Company without Cause or resigns with Good Reason outside the CIC Protection Period, a prorated amount (based on the number of calendar months that have elapsed during the vesting period) of such named executive officer’s time-based equity awards will immediately vest and such named executive officer’s performance-based equity awards will remain outstanding and be eligible to vest in a prorated amount (based on the number of calendar months that have elapsed during the performance period) based on actual performance at the end of the performance period. Under these qualifying terminations, no cash severance will be provided to the terminated named executive officer, but the named executive officer will generally be entitled to healthcare continuation benefits and outplacement benefits.
The foregoing description of the Amended Plan is not complete and is qualified in its entirety by reference to the full text of the Amended Plan, which is attached as Exhibit 10.6 to this Quarterly Report on Form 10-Q and incorporated into this Item 5 by reference.
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Item 6. Exhibits
Exhibit Number | Description of Exhibit | |||||||
| 2.1 | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 10.6*# | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 31.3* | ||||||||
| 32.1* | ||||||||
| 32.2* | ||||||||
| 101.INS* | Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
# Management contract or compensatory plan or agreement.
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
| PERMIAN RESOURCES CORPORATION | ||||||||
| By: | /s/ GEORGE S. GLYPHIS | |||||||
George S. Glyphis Executive Vice President and Chief Financial Officer | ||||||||
| Date: | November 9, 2022 | |||||||
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