UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2022
Commission File Number 1-8754
SILVERBOW RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 20-3940661 | ||||
(State of Incorporation) | (I.R.S. Employer Identification No.) | ||||
920 Memorial City Way, Suite 850
Houston, Texas 77024
(281) 874-2700
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, par value $0.01 per share | SBOW | New York Stock Exchange | ||||||
| Preferred Stock Purchase Rights | None | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes | þ | No | o | ||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| Yes | þ | No | o | ||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | o | Accelerated Filer | þ | Non-Accelerated Filer | o | Smaller Reporting Company | þ | |||||||||||||||||||||||||
| Emerging Growth Company | o | |||||||||||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
| o | ||
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | o | No | þ | ||||||||
Indicate the number of shares outstanding of each of the issuer’s classes
of common stock, as of the latest practicable date.
| Common Stock ($.01 Par Value) (Class of Stock) | 22,309,740 Shares outstanding at October 28, 2022 | ||||
2
SILVERBOW RESOURCES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022
INDEX
| Page | ||||||||
| Part I | FINANCIAL INFORMATION | |||||||
| Item 1. | Condensed Consolidated Financial Statements | |||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II | OTHER INFORMATION | |||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
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Forward-Looking Statements
This report includes forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based on current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact included in this report, including those regarding our strategy, future operations, financial position, well expectations and drilling plans, estimated production levels, expected oil and natural gas pricing, estimated oil and natural gas reserves or the present value thereof, reserve increases, service costs, impact of inflation, capital expenditures, budget, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “will,” “could,” “believe,” “anticipate,” “intend,” “estimate,” “budgeted,” “guidance,” “expect,” “may,” “continue,” “predict,” “potential,” “plan,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following risks and uncertainties:
• the severity and duration of world health events, including the COVID-19 pandemic, related economic repercussions, including disruptions in the oil and gas industry, supply chain disruptions, and operational challenges including remote work arrangements and protecting the health and well-being of our employees;
• further actions by the members of the Organization of the Petroleum Exporting Countries, Russia and other allied producing countries with respect to oil production levels and announcements of potential changes in such levels;
• risks related to the recently completed transactions with SandPoint Operating, LLC, a subsidiary of SandPoint Resources, LLC (collectively, “SandPoint”) and Sundance Energy, Inc. and its affiliated entities (collectively, “Sundance”);
• volatility in natural gas, oil and natural gas liquids prices;
• future cash flows and their adequacy to maintain our ongoing operations;
• liquidity, including our ability to satisfy our short- or long-term liquidity needs;
• our borrowing capacity, future covenant compliance, cash flow and liquidity;
• operating results;
• asset disposition efforts or the timing or outcome thereof;
• ongoing and prospective joint ventures, their structures and substance, and the likelihood of their finalization or the timing thereof;
• the amount, nature and timing of capital expenditures, including future development costs;
• timing, cost and amount of future production of oil and natural gas;
• availability of drilling and production equipment or availability of oil field labor;
• availability, cost and terms of capital;
• timing and successful drilling and completion of wells;
• availability and cost for transportation of oil and natural gas;
• costs of exploiting and developing our properties and conducting other operations;
• competition in the oil and natural gas industry;
• general economic and political conditions, including inflationary pressures, further increases in interest rates, a general economic slowdown or recession, political tensions and war (including future developments in the ongoing Russia-Ukraine conflict);
• opportunities to monetize assets;
• our ability to execute on strategic initiatives;
• effectiveness of our risk management activities including hedging strategy;
• environmental liabilities;
• counterparty credit risk;
• actions by third parties, including customers, service providers and shareholders;
• governmental regulation and taxation of the oil and natural gas industry;
• developments in world oil and natural gas markets and in oil and natural gas-producing countries;
4
• uncertainty regarding our future operating results; and
• other risks and uncertainties described in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2021 and our other filings with the Securities and Exchange Commission (“SEC”).
Many of the foregoing risks and uncertainties, as well as risks and uncertainties that are currently unknown to us, are, and may be, exacerbated by the ongoing Russia-Ukraine conflict, increasing economic uncertainty and inflationary pressures and the COVID-19 pandemic and any consequent worsening of the global business and economic environment. New factors emerge from time to time, and it is not possible for us to predict all such factors. Should one or more of the risks or uncertainties described in this quarterly report, our annual report on Form 10-K for the year ended December 31, 2021 or other filings with the SEC, occur or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements speak only as of the date they are made. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 and in subsequent Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and our other filings with the SEC. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law.
5
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets (Unaudited)
SilverBow Resources, Inc. and Subsidiary (in thousands, except share amounts)
6
Condensed Consolidated Statements of Operations (Unaudited)
SilverBow Resources, Inc. and Subsidiary (in thousands, except per-share amounts)
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||
| Revenues: | |||||||||||
| Oil and gas sales | $ | 242,181 | $ | 99,249 | |||||||
| Operating Expenses: | |||||||||||
| General and administrative, net | 4,343 | 5,257 | |||||||||
| Depreciation, depletion, and amortization | 41,501 | 16,054 | |||||||||
| Accretion of asset retirement obligations | 166 | 77 | |||||||||
| Lease operating expenses | 17,701 | 6,978 | |||||||||
| Workovers | 284 | 423 | |||||||||
| Transportation and gas processing | 9,662 | 5,913 | |||||||||
| Severance and other taxes | 12,581 | 4,908 | |||||||||
| Total Operating Expenses | 86,238 | 39,610 | |||||||||
| Operating Income | 155,943 | 59,639 | |||||||||
| Non-Operating Income (Expense) | |||||||||||
| Gain (loss) on commodity derivatives, net | 4,832 | (88,554) | |||||||||
| Interest expense, net | (12,173) | (7,433) | |||||||||
| Other income (expense), net | 5 | (3) | |||||||||
| Income (Loss) Before Income Taxes | 148,607 | (36,351) | |||||||||
| Provision (Benefit) for Income Taxes | 6,066 | (408) | |||||||||
| Net Income (Loss) | $ | 142,541 | $ | (35,943) | |||||||
| Per Share Amounts: | |||||||||||
| Basic Earnings (Loss) Per Share | $ | 6.39 | $ | (2.85) | |||||||
| Diluted Earnings (Loss) Per Share | $ | 6.29 | $ | (2.85) | |||||||
| Weighted-Average Shares Outstanding - Basic | 22,308 | 12,629 | |||||||||
| Weighted-Average Shares Outstanding - Diluted | 22,669 | 12,629 | |||||||||
| See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||
7
Condensed Consolidated Statements of Operations (Unaudited)
SilverBow Resources, Inc. and Subsidiary (in thousands, except per-share amounts)
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||
| Revenues: | |||||||||||
| Oil and gas sales | $ | 554,442 | $ | 255,850 | |||||||
| Operating Expenses: | |||||||||||
| General and administrative, net | 14,840 | 14,872 | |||||||||
| Depreciation, depletion, and amortization | 89,096 | 45,485 | |||||||||
| Accretion of asset retirement obligations | 366 | 226 | |||||||||
| Lease operating expenses | 37,095 | 18,767 | |||||||||
| Workovers | 933 | 512 | |||||||||
| Transportation and gas processing | 22,784 | 17,175 | |||||||||
| Severance and other taxes | 30,183 | 11,974 | |||||||||
| Total Operating Expenses | 195,297 | 109,011 | |||||||||
| Operating Income | 359,145 | 146,839 | |||||||||
| Non-Operating Income (Expense) | |||||||||||
| Gain (loss) on commodity derivatives, net | (157,816) | (152,879) | |||||||||
| Interest expense, net | (26,632) | (21,888) | |||||||||
| Other income (expense), net | 57 | 6 | |||||||||
| Income (Loss) Before Income Taxes | 174,754 | (27,922) | |||||||||
| Provision (Benefit) for Income Taxes | 7,678 | (408) | |||||||||
| Net Income (Loss) | $ | 167,076 | $ | (27,514) | |||||||
| Per Share Amounts: | |||||||||||
| Basic Earnings (Loss) Per Share | $ | 8.85 | $ | (2.24) | |||||||
| Diluted Earnings (Loss) Per Share | $ | 8.69 | $ | (2.24) | |||||||
| Weighted-Average Shares Outstanding - Basic | 18,885 | 12,283 | |||||||||
| Weighted-Average Shares Outstanding - Diluted | 19,237 | 12,283 | |||||||||
| See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||
8
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
SilverBow Resources, Inc. and Subsidiary (in thousands, except share amounts)
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings (Accumulated Deficit) | Total | |||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 121 | $ | 297,712 | $ | (2,372) | $ | (204,428) | $ | 91,033 | |||||||||||||||||||
Purchase of treasury shares (60,177 shares) | — | — | (488) | — | (488) | ||||||||||||||||||||||||
Vesting of share-based compensation (283,113 shares) | 2 | (2) | — | — | — | ||||||||||||||||||||||||
| Share-based compensation | — | 1,131 | — | — | 1,131 | ||||||||||||||||||||||||
| Net Income | — | — | — | 28,380 | 28,380 | ||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | 123 | $ | 298,841 | $ | (2,860) | $ | (176,048) | $ | 120,056 | |||||||||||||||||||
Purchase of treasury shares (13,969 shares) | — | — | (115) | — | (115) | ||||||||||||||||||||||||
Vesting of share-based compensation (51,332 shares) | 1 | (1) | — | — | — | ||||||||||||||||||||||||
| Share-based compensation | — | 1,248 | — | — | 1,248 | ||||||||||||||||||||||||
| Net Loss | — | — | — | (19,951) | (19,951) | ||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | 124 | $ | 300,088 | $ | (2,975) | $ | (195,999) | $ | 101,238 | |||||||||||||||||||
Purchase of treasury shares (440 shares) | — | — | (9) | — | (9) | ||||||||||||||||||||||||
Vesting of share-based compensation (1,802 shares) | — | — | — | — | — | ||||||||||||||||||||||||
Issuance of common stock (669,600 shares) | 7 | 12,749 | — | — | 12,756 | ||||||||||||||||||||||||
Issuance pursuant to acquisition (516,675 shares) | 5 | 10,018 | — | — | 10,023 | ||||||||||||||||||||||||
| Share-based compensation | — | 1,251 | — | — | 1,251 | ||||||||||||||||||||||||
| Net Loss | — | — | — | (35,943) | (35,943) | ||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | 136 | $ | 324,106 | $ | (2,984) | $ | (231,942) | $ | 89,316 | |||||||||||||||||||
| Balance, December 31, 2021 | $ | 168 | $ | 413,017 | $ | (2,984) | $ | (117,669) | $ | 292,532 | |||||||||||||||||||
Purchase of treasury shares (96,012 shares) | — | — | (2,462) | — | (2,462) | ||||||||||||||||||||||||
Treasury shares pursuant to purchase price adjustment (41,191 shares) | — | — | (1,146) | — | (1,146) | ||||||||||||||||||||||||
Vesting of share-based compensation (318,390 shares) | 3 | (3) | — | — | — | ||||||||||||||||||||||||
Issuance pursuant to acquisition (489 shares) | — | 12 | — | — | 12 | ||||||||||||||||||||||||
| Share-based compensation | — | 1,101 | — | — | 1,101 | ||||||||||||||||||||||||
| Net Loss | — | — | — | (64,255) | (64,255) | ||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | 171 | $ | 414,127 | $ | (6,592) | $ | (181,924) | $ | 225,782 | |||||||||||||||||||
Stock options exercised (4,497 shares) | — | 39 | — | — | 39 | ||||||||||||||||||||||||
Purchase of treasury shares (16,485 shares) | — | — | (503) | — | (503) | ||||||||||||||||||||||||
Vesting of share-based compensation (57,355 shares) | 1 | (1) | — | — | — | ||||||||||||||||||||||||
Issuance pursuant to acquisitions (5,448,472 shares) | 55 | 157,338 | — | — | 157,393 | ||||||||||||||||||||||||
| Share-based compensation | — | 1,756 | — | — | 1,756 | ||||||||||||||||||||||||
| Net Income | — | — | — | 88,790 | 88,790 | ||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | 227 | $ | 573,259 | $ | (7,095) | $ | (93,134) | $ | 473,257 | |||||||||||||||||||
Stock options exercised (11,087 shares) | — | 387 | — | — | 387 | ||||||||||||||||||||||||
Purchase of treasury shares (7,853 shares) | — | — | (432) | — | (432) | ||||||||||||||||||||||||
Treasury shares pursuant to purchase price adjustment (184 shares) | — | — | (7) | — | (7) | ||||||||||||||||||||||||
| Share-based compensation | — | 1,239 | — | — | 1,239 | ||||||||||||||||||||||||
| Net Income | — | — | — | 142,541 | 142,541 | ||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | 227 | $ | 574,885 | $ | (7,534) | $ | 49,407 | $ | 616,985 | |||||||||||||||||||
| See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||||||||||||||||||||
9
Condensed Consolidated Statements of Cash Flows (Unaudited)
SilverBow Resources, Inc. and Subsidiary (in thousands)
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income (loss) | $ | 167,076 | $ | (27,514) | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | |||||||||||
| Depreciation, depletion, and amortization | 89,096 | 45,485 | |||||||||
| Accretion of asset retirement obligations | 366 | 226 | |||||||||
| Deferred income taxes | 7,496 | — | |||||||||
| Share-based compensation | 3,901 | 3,450 | |||||||||
| (Gain) Loss on derivatives, net | 157,816 | 152,879 | |||||||||
| Cash settlement (paid) received on derivatives | (182,058) | (28,976) | |||||||||
| Settlements of asset retirement obligations | (47) | (151) | |||||||||
| Write down of debt issuance cost | 350 | 229 | |||||||||
| Other | (6,425) | 1,883 | |||||||||
| Change in operating assets and liabilities: | |||||||||||
| (Increase) decrease in accounts receivable and other current assets | (47,320) | (20,941) | |||||||||
| Increase (decrease) in accounts payable and accrued liabilities | 20,260 | 7,215 | |||||||||
| Increase (decrease) in income taxes payable | (21) | — | |||||||||
| Increase (decrease) in accrued interest | 1,688 | (137) | |||||||||
| Net Cash Provided by (Used in) Operating Activities | 212,178 | 133,648 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Additions to property and equipment | (163,567) | (98,219) | |||||||||
| Acquisition of oil and gas properties, net of purchase price adjustments | (293,880) | (13,219) | |||||||||
| Proceeds from the sale of property and equipment | 4,415 | — | |||||||||
| Payments on property sale obligations | (750) | (1,084) | |||||||||
| Net Cash Provided by (Used in) Investing Activities | (453,782) | (112,522) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Proceeds from bank borrowings | 679,000 | 195,000 | |||||||||
| Payments of bank borrowings | (426,000) | (227,000) | |||||||||
| Net proceeds from issuances of common stock | — | 12,756 | |||||||||
| Net proceeds from stock options exercised | 39 | — | |||||||||
| Purchase of treasury shares | (3,404) | (612) | |||||||||
| Payments of debt issuance costs | (7,228) | (2,400) | |||||||||
| Net Cash Provided by (Used in) Financing Activities | 242,407 | (22,256) | |||||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 803 | (1,130) | |||||||||
| Cash and Cash Equivalents at Beginning of Period | 1,121 | 2,118 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 1,924 | $ | 988 | |||||||
| Supplemental Disclosures of Cash Flow Information: | |||||||||||
| Cash paid during period for interest, net of amounts capitalized | $ | 22,701 | $ | 20,277 | |||||||
| Non-cash Investing and Financing Activities: | |||||||||||
| Changes in capital accounts payable and capital accruals | $ | 60,595 | $ | 11,393 | |||||||
| Non-cash equity consideration for acquisitions | $ | (156,259) | $ | (10,023) | |||||||
| See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||
10
Notes to Condensed Consolidated Financial Statements (Unaudited)
SilverBow Resources, Inc. and Subsidiary
(1) General Information
SilverBow Resources, Inc. (“SilverBow,” the “Company,” or “we”) is an independent oil and gas company headquartered in Houston, Texas. The Company's strategy is focused on acquiring and developing assets in the Eagle Ford and Austin Chalk located in South Texas. Being a committed and long-term operator in South Texas, the Company possesses a significant understanding of the reservoirs in the region. We leverage this competitive understanding to assemble high quality drilling inventory while continuously enhancing our operations to maximize returns on capital invested.
The condensed consolidated financial statements included herein are unaudited and certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. We believe that the disclosures presented are adequate to allow the information presented not to be misleading. The condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
(2) Summary of Significant Accounting Policies
Basis of Presentation. The condensed consolidated financial statements included herein reflect necessary adjustments, all of which were of a recurring nature unless otherwise disclosed herein, and are in the opinion of our management necessary for a fair presentation.
Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of SilverBow and its wholly owned subsidiary, SilverBow Resources Operating LLC, which are engaged in the exploration, development, acquisition, and operation of oil and gas properties, with a focus on oil and natural gas reserves in the Eagle Ford trend in Texas. Our undivided interests in oil and gas properties are accounted for using the proportionate consolidation method, whereby our proportionate share of the assets, liabilities, revenues, and expenses are included in the appropriate classifications in the accompanying condensed consolidated financial statements. Intercompany balances and transactions have been eliminated in preparing the accompanying condensed consolidated financial statements.
Stockholder Rights Agreement. On September 20, 2022, the Board adopted a stockholder rights agreement (the “Rights Agreement”) and declared a dividend distribution of one right (each, a “Right” and together with all such rights distributed or issued pursuant to the Rights Agreement, dated as of September 20, 2022, by and between the Company and American Stock Transfer & Trust Company, LLC, as rights agent, the “Rights”) for each outstanding share of Company common stock to holders of record on October 5, 2022. In the event that a person or group acquires beneficial ownership of 15% or more of the Company’s then-outstanding common stock, subject to certain exceptions, each Right would entitle its holder (other than such person or members of such group) to purchase additional shares of Company common stock at a substantial discount to the public market price. In addition, at any time after a person or group acquires beneficial ownership of 15% or more of the outstanding common stock, subject to certain exceptions, the Board may direct the Company to exchange the Rights (other than Rights owned by such person or certain related parties, which will have become null and void), in whole or in part, at an exchange ratio of one share of common stock per Right (subject to adjustment). While in effect, the Rights Agreement could make it more difficult for a third party to acquire control of the Company or a large block of the common stock of the Company without the approval of the Board. The Rights Agreement will expire on the earliest of (a) 5:00 p.m., New York City time, on the first business day after the 2023 annual stockholders’ meeting, (b) 5:00 p.m., New York City time, on June 30, 2023, (c) the time at which the Rights are redeemed and (d) the time at which the Rights are exchanged in full.
Subsequent Events. We have evaluated subsequent events requiring potential accrual or disclosure in our condensed consolidated financial statements.
On October 31, 2022, the Company closed a transaction to acquire Eagle Ford and Austin Chalk oil and gas assets in DeWitt and Gonzales counties. After consideration of closing adjustments, SilverBow paid $79.3 million for the assets. The acquisition is subject to further customary post-closing adjustments. As of September 30, 2022, the Company paid an $8.7 million deposit associated with this acquisition which is recorded in “Other long-term assets” in the accompanying condensed consolidated balance sheet. The company did not incur any significant third party transaction costs associated with this acquisition.
11
Through October 31, 2022, the Company entered into additional derivative contracts. The following tables summarize the weighted-average prices as well as future production volumes for our future derivative contracts entered into after September 30, 2022:
| Natural Gas Derivative Contracts (NYMEX Henry Hub Settlements) | Total Volumes (MMBtu) | Weighted-Average Collar Floor Price | Weighted-Average Collar Call Price | |||||||||||||||||
| Collar Contracts | ||||||||||||||||||||
| 2023 Contracts | ||||||||||||||||||||
| 1Q23 | 900,000 | $ | 5.00 | $ | 7.55 | |||||||||||||||
| 2Q23 | 910,000 | $ | 4.00 | $ | 5.20 | |||||||||||||||
| 3Q23 | 920,000 | $ | 4.00 | $ | 5.52 | |||||||||||||||
| 4Q23 | 920,000 | $ | 4.50 | $ | 6.08 | |||||||||||||||
| 2024 Contracts | ||||||||||||||||||||
| 1Q24 | 910,000 | $ | 4.75 | $ | 6.25 | |||||||||||||||
| 2Q24 | 910,000 | $ | 3.75 | $ | 4.45 | |||||||||||||||
| 3Q24 | 920,000 | $ | 3.75 | $ | 4.70 | |||||||||||||||
| 4Q24 | 920,000 | $ | 4.00 | $ | 5.42 | |||||||||||||||
| Natural Gas Basis Derivative Swaps (East Texas Houston Ship Channel vs. NYMEX Settlements) | Total Volumes (MMBtu) | Weighted-Average Price | ||||||||||||
| 2023 Contracts | ||||||||||||||
| 1Q23 | 3,600,000 | $ | (0.03) | |||||||||||
| 2Q23 | 3,640,000 | $ | (0.24) | |||||||||||
| 3Q23 | 3,680,000 | $ | (0.21) | |||||||||||
| 4Q23 | 3,680,000 | $ | (0.28) | |||||||||||
| NGL Swaps (Mont Belvieu) | Total Volumes (Bbls) | Weighted-Average Price | ||||||||||||
| 2023 Contracts | ||||||||||||||
| 1Q23 | 45,000 | $ | 27.09 | |||||||||||
| 2Q23 | 45,500 | $ | 27.09 | |||||||||||
| 3Q23 | 46,000 | $ | 27.09 | |||||||||||
| 4Q23 | 46,000 | $ | 27.09 | |||||||||||
There were no other material subsequent events requiring additional disclosure in these condensed consolidated financial statements.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the reported amounts of certain revenues and expenses during each reporting period. Such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates. Significant estimates and assumptions underlying these financial statements include:
•the estimated quantities of proved oil and natural gas reserves used to compute depletion of oil and natural gas properties, the related present value of estimated future net cash flows therefrom, and the Ceiling Test impairment calculation,
•estimates related to the collectability of accounts receivable and the creditworthiness of our customers,
•estimates of the counterparty bank risk related to letters of credit that our customers may have issued on our behalf,
•estimates of future costs to develop and produce reserves,
•accruals related to oil and gas sales, capital expenditures and lease operating expenses,
•estimates in the calculation of share-based compensation expense,
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•estimates of our ownership in properties prior to final division of interest determination,
•the estimated future cost and timing of asset retirement obligations,
•estimates made in our income tax calculations, including the valuation of our deferred tax assets,
•estimates in the calculation of the fair value of commodity derivative assets and liabilities,
•estimates in the assessment of current litigation claims against the Company,
•estimates used in the assessment of business combinations and asset purchases,
•estimates in amounts due with respect to open state regulatory audits, and
•estimates on future lease obligations.
While we are not currently aware of any material revisions to any of our estimates, there will likely be future revisions to our estimates resulting from matters such as new accounting pronouncements, changes in ownership interests, payouts, joint venture audits, reallocations by purchasers or pipelines, or other corrections and adjustments common in the oil and gas industry, many of which relate to prior periods. These types of adjustments cannot be currently estimated and are expected to be recorded in the period during which the adjustments are known.
We are subject to legal proceedings, claims, liabilities and environmental matters that arise in the ordinary course of business. We accrue for losses when such losses are considered probable and the amounts can be reasonably estimated.
Property and Equipment. We follow the “full-cost” method of accounting for oil and natural gas property and equipment costs. Under this method of accounting, all productive and nonproductive costs incurred in the exploration, development, and acquisition of oil and natural gas reserves are capitalized. Such costs may be incurred both prior to and after the acquisition of a property and include lease acquisitions, geological and geophysical services, drilling, completion, and equipment. Internal costs incurred that are directly identified with exploration, development, and acquisition activities undertaken by us for our own account, and which are not related to production, general corporate overhead, or similar activities, are also capitalized. For the three months ended September 30, 2022 and 2021, such internal costs when capitalized totaled $1.1 million and $1.2 million, respectively. For the nine months ended September 30, 2022 and 2021, such internal costs when capitalized totaled $3.3 million and $3.5 million, respectively. Interest costs are also capitalized to unproved oil and natural gas properties. There was no capitalized interest on our unproved properties for the three months ended September 30, 2022 and 2021 and the nine months ended September 30, 2022 and 2021.
The “Property and Equipment” balances on the accompanying condensed consolidated balance sheets are summarized for presentation purposes. The following is a detailed breakout of our “Property and Equipment” balances (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Property and Equipment | |||||||||||
| Proved oil and gas properties | $ | 2,321,809 | $ | 1,588,978 | |||||||
| Unproved oil and gas properties | 17,478 | 17,090 | |||||||||
| Furniture, fixtures and other equipment | 6,030 | 5,885 | |||||||||
| Less – Accumulated depreciation, depletion, amortization & impairment | (959,139) | (869,985) | |||||||||
| Property and Equipment, Net | $ | 1,386,178 | $ | 741,968 | |||||||
No gains or losses are recognized upon the sale or disposition of oil and natural gas properties, except in transactions involving a significant amount of reserves or where the proceeds from the sale of oil and natural gas properties would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a cost center. Internal costs associated with selling properties are expensed as incurred.
We compute the provision for depreciation, depletion and amortization (“DD&A”) of oil and natural gas properties using the unit-of-production method. Under this method, we compute the provision by multiplying the total unamortized costs of oil and natural gas properties, including future development costs, gas processing facilities, and both capitalized asset retirement obligations and undiscounted abandonment costs of wells to be drilled, net of salvage values, but excluding costs of unproved properties, by an overall rate determined by dividing the physical units of oil and natural gas produced (which excludes natural gas consumed in operations) during the period by the total estimated units of proved oil and natural gas reserves (which excludes natural gas consumed in operations) at the beginning of the period. Future development costs are estimated on a property-by-property basis based on current economic conditions. The period over which we will amortize these properties is dependent on our production from these properties in future years. Furniture, fixtures and other equipment are
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recorded at cost and are depreciated by the straight-line method at rates based on the estimated useful lives of the property, which range between and 20 years. Repairs and maintenance are charged to expense as incurred.
Geological and geophysical (“G&G”) costs incurred on developed properties are recorded in “Proved oil and gas properties” and therefore subject to amortization. G&G costs incurred that are associated with unproved properties are capitalized in “Unproved oil and gas properties” and evaluated as part of the total capitalized costs associated with a prospect. The cost of unproved properties not being amortized is assessed quarterly, on a property-by-property basis, to determine whether such properties have been impaired. In determining whether such costs should be impaired, we evaluate current drilling results, lease expiration dates, current oil and gas industry conditions, economic conditions, capital availability and available geological and geophysical information. Any impairment assessed is added to the cost of proved properties being amortized.
Full-Cost Ceiling Test. At the end of each quarterly reporting period, the unamortized cost of oil and natural gas properties (including natural gas processing facilities, capitalized asset retirement obligations, net of related salvage values and deferred income taxes) is limited to the sum of the estimated future net revenues from proved properties (excluding cash outflows from recognized asset retirement obligations, including future development and abandonment costs of wells to be drilled, using the preceding 12-months’ average price based on closing prices on the first day of each month, adjusted for price differentials, discounted at 10% and the lower of cost or fair value of unproved properties) adjusted for related income tax effects (“Ceiling Test”).
The quarterly calculations of the Ceiling Test and provision for DD&A are based on estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production, timing and plan of development. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing, and production subsequent to the date of the estimate may justify revision of such estimates. Accordingly, reserves estimates are often different from the quantities of oil and natural gas that are ultimately recovered. There was no impairment for the three months ended September 30, 2022 and 2021 and the nine months ended September 30, 2022 and 2021.
If future capital expenditures outpace future discounted net cash flows in our reserve calculations, if we have significant declines in our oil and natural gas reserves volumes (which also reduces our estimate of discounted future net cash flows from proved oil and natural gas reserves) or if oil or natural gas prices decline, it is possible that non-cash write-downs of our oil and natural gas properties will occur again in the future. We cannot control and cannot predict what future prices for oil and natural gas will be; therefore, we cannot estimate the amount of any potential future non-cash write-down of our oil and natural gas properties due to decreases in oil or natural gas prices. However, it is reasonably possible that we will record additional Ceiling Test write-downs in future periods.
Accounts Receivable, Net. We assess the collectability of accounts receivable, and based on our judgment, we accrue a reserve when we believe a receivable may not be collected. At both September 30, 2022 and December 31, 2021, we had an allowance for doubtful accounts of less than $0.1 million. The allowance for doubtful accounts has been deducted from the total “Accounts receivable, net” balance on the accompanying condensed consolidated balance sheets.
At September 30, 2022, our “Accounts receivable, net” balance included $91.6 million for oil and gas sales, $2.8 million due from joint interest owners, $2.6 million for severance tax credit receivables and $5.6 million for other receivables. At December 31, 2021, our “Accounts receivable, net” balance included $45.3 million for oil and gas sales, $1.9 million due from joint interest owners, $1.0 million for severance tax credit receivables and $1.5 million for other receivables.
Supervision Fees. Consistent with industry practice, we charge a supervision fee to the wells we operate, including our wells, in which we own up to a 100% working interest. Supervision fees are recorded as a reduction to “General and administrative, net,” on the accompanying condensed consolidated statements of operations. The amount of supervision fees charged for each of the nine months ended September 30, 2022 and 2021 did not exceed our actual costs incurred. The total amount of supervision fees charged to the wells we operated was $2.8 million and $1.3 million for the three months ended September 30, 2022 and 2021, respectively, and $6.1 million and $3.6 million for the nine months ended September 30, 2022 and 2021, respectively.
Income Taxes. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, given the provisions of the enacted tax laws. Management has determined that it was not more likely than not that the Company would realize future cash benefits from its remaining federal carryover items and other federal deferred tax assets and, accordingly, has recorded a valuation allowance to offset its net federal deferred tax assets in excess of deferred tax liabilities. The Company maintains a full valuation allowance against its net federal deferred tax assets in excess of deferred tax liabilities, with the exception of a $11.3 million and $5.5 million deferred
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tax liability that was recorded as of September 30, 2022 and December 31, 2021, respectively. We recorded an income tax provision of $6.1 million and $7.7 million for the three and nine months ended September 30, 2022, respectively, which was primarily attributable to a deferred federal income tax expense and state deferred income tax expense. The provision for the three and nine months ended September 30, 2022 is a product of the overall forecasted annual effective tax rate applied to the year to date income. There was $0.4 million income tax benefit for both the three and nine months ended September 30, 2021.
As of the third quarter of 2022, the Company still maintains a full valuation allowance. Management will continue to assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. The amount of the deferred tax asset considered realizable, however, could be adjusted based on changes in subjective estimates of future taxable income or if objectively verifiable positive evidence is deemed to outweigh the objectively verifiable negative evidence. The Company intends to continue to record a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the allowance. However, if current commodity prices are sustained and absent any additional objectively verifiable negative evidence, it is reasonably possible that sufficient objectively verifiable positive evidence will exist within the next 12 months to adjust the current valuation allowance position. Exact timing and amount of the adjustment to the valuation allowance is unknown at this time.
Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a corporation’s ability to utilize its net operating losses (“NOLs”) if it experiences an ownership change. Generally, an “ownership change” occurs if one or more shareholders, each of whom is deemed to own five percent or more in value of a corporation’s stock, increase their aggregate percentage ownership by more than 50 percent over the lowest percentage of stock owned by those shareholders at any time during the preceding three-year period. In the event of an ownership change, utilization of the NOLs would be subject to an annual limitation under Section 382. We believe we had an ownership change in August 2022 and, therefore, are subject to an annual limitation on the usage of our NOLs generated prior to the ownership change. However, we do not expect to have any of our NOLs expire before becoming available to be utilized by the Company. Management will continue to monitor the potential impact of Section 382 with respect to our NOLs.
Our policy is to record interest and penalties relating to uncertain tax positions in income tax expense. At September 30, 2022 and December 31, 2021, we did not have any accrued liability for uncertain tax positions and do not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months.
Revenue Recognition. Our reported oil and gas sales are comprised of revenues from oil, natural gas and natural gas liquids (“NGLs”) sales. Revenues from each product stream are recognized at the point when control of the product is transferred to the customer and collectability is reasonably assured. Prices for our products are either negotiated on a monthly basis or tied to market indices. The Company has determined that these contracts represent performance obligations which are satisfied when control of the commodity transfers to the customer, typically through the delivery of the specified commodity to a designated delivery point. Natural gas revenues are recognized based on the actual volume of natural gas sold to the purchasers.
The following table provides information regarding our oil and gas sales, by product, reported on the Condensed Consolidated Statements of Operations for the three months ended September 30, 2022 and 2021 and the nine months ended September 30, 2022 and 2021 (in thousands):
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| Oil, natural gas and NGLs sales: | |||||||||||||||||||||||
| Oil | $ | 71,811 | $ | 25,230 | $ | 155,566 | $ | 58,587 | |||||||||||||||
| Natural gas | 150,958 | 62,530 | 351,626 | 172,234 | |||||||||||||||||||
| NGLs | 19,412 | 11,489 | 47,250 | 25,029 | |||||||||||||||||||
| Total | $ | 242,181 | $ | 99,249 | $ | 554,442 | $ | 255,850 | |||||||||||||||
Accounts Payable and Accrued Liabilities. The “Accounts payable and accrued liabilities” balances on the accompanying condensed consolidated balance sheets are summarized below (in thousands):
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| September 30, 2022 | December 31, 2021 | ||||||||||
| Trade accounts payable | $ | 21,154 | $ | 9,688 | |||||||
| Accrued operating expenses | 10,175 | 4,192 | |||||||||
| Accrued compensation costs | 3,775 | 7,029 | |||||||||
| Asset retirement obligations – current portion | 529 | 524 | |||||||||
| Accrued non-income based taxes | 16,352 | 3,314 | |||||||||
| Accrued corporate and legal fees | 560 | 1,972 | |||||||||
| WTI contingency payouts - current portion | 2,948 | — | |||||||||
| Payable for settled derivatives | 19,463 | 6,371 | |||||||||
| Other payables | 5,151 | 1,944 | |||||||||
| Total accounts payable and accrued liabilities | $ | 80,107 | $ | 35,034 | |||||||
Cash and Cash Equivalents. We consider all highly liquid instruments with an initial maturity of three months or less to be cash equivalents. These amounts do not include cash balances that are contractually restricted. The Company maintains cash and cash equivalent balances with major financial institutions, which at times exceed federally insured limits. The Company monitors the financial condition of the financial institutions and has experienced no losses associated with these accounts.
Treasury Stock. Our treasury stock repurchases are reported at cost and are included in “Treasury stock, held at cost” on the accompanying condensed consolidated balance sheets. For the nine months ended September 30, 2022, we purchased 120,350 treasury shares to satisfy withholding tax obligations arising upon the vesting of restricted shares and received 41,375 shares in conjunction with our post-closing settlement for a previously disclosed acquisition. For the nine months ended September 30, 2021 we purchased 74,586 treasury shares to satisfy withholding tax obligations arising upon the vesting of restricted shares.
New Accounting Pronouncements. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 , Credit Losses - Measurement of Credit Losses on Financial Instruments. The standard changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The new standard replaces the existing incurred loss impairment methodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. The updated guidance is effective for the Company for annual and quarterly reporting periods beginning after December 15, 2022. We are currently reviewing these new requirements and adoption of this guidance is not expected to have a material impact on the Company’s financial statements or disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting followed by ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), issued in January 2021. The guidance provides and clarifies optional expedients and exceptions for applying generally accepted accounting principles to contract modifications, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The amendments within these ASUs were in effect for a limited time beginning March 12, 2020, and an entity may elect to apply the amendments prospectively through December 31, 2022. In April 2022, the FASB proposed to extend the effective date through December 31, 2024; however, a final ruling has not been issued. As of September 30, 2022, the Company has not elected to use the optional guidance and continues to evaluate the options provided by ASU 2020-04 and ASU 2021-01.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The guidance simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Additionally, the amendment requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share (EPS). The guidance is effective the Company for fiscal years beginning after December 15, 2022. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements or disclosures.
(3) Leases
The Company follows the Financial Accounting Standards Board's Accounting Standards Update 2016-02 and elected the package of practical expedients that allows an entity to carry forward historical accounting treatment relating to lease identification and classification for existing leases upon adoption and the practical expedient related to land easements that
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allows an entity to carry forward historical accounting treatment for land easements on existing agreements. The Company has made an accounting policy election to keep leases with an initial term of 12 months or less off the Consolidated Balance Sheets. We have elected to not account for lease and non-lease components separately.
The Company has contractual agreements for its corporate office lease, vehicle fleet, compressors, treating equipment, and for surface use rights. For leases with a primary term of more than 12 months, a right-of-use (“ROU”) asset and the corresponding lease liability is recorded. The Company determines at inception if an arrangement is an operating or financing lease. As of September 30, 2022, all of the Company’s leases were operating leases.
The initial asset and liability balances are recorded at the present value of the payment obligations over the lease term. If lease terms include options to extend the lease and it is reasonably certain that the Company will exercise that option, the lease term used for capitalization includes the expected renewal periods. Most leases do not provide an implicit interest rate. Unless the lease contract contains an implicit interest rate, the Company uses its incremental borrowing rate at the time of lease inception to compute the fair value of the lease payments. The ROU asset balance and current and non-current lease liabilities are reported separately on the accompanying Condensed Consolidated Balance Sheets. Certain leases have payment terms that vary based on the usage of the underlying assets. Variable lease payments are not included in ROU assets and lease liabilities. The Company recognizes lease expense on a straight-line basis over the lease term.
Lease costs represent the straight-line lease expense of ROU assets and short-term leases. The components of lease cost are classified as follows (in thousands):
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| Lease Costs Included in the Asset Additions in the Condensed Consolidated Balance Sheets | |||||||||||||||||||||||
| Property, plant and equipment acquisitions - short-term leases | $ | 5,850 | $ | 1,189 | $ | 9,883 | $ | 3,009 | |||||||||||||||
| Property, plant and equipment acquisitions - operating leases | — | — | — | — | |||||||||||||||||||
| Total lease costs in property, plant and equipment additions | $ | 5,850 | $ | 1,189 | $ | 9,883 | $ | 3,009 | |||||||||||||||
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| Lease Costs Included in the Condensed Consolidated Statements of Operations | |||||||||||||||||||||||
| Lease operating expenses - short-term leases | $ | 1,714 | $ | 314 | $ | 3,677 | $ | 1,399 | |||||||||||||||
| Lease operating expenses - operating leases | 2,163 | 1,504 | 6,118 | 3,774 | |||||||||||||||||||
| General and administrative, net - operating leases | 186 | 303 | 568 | 653 | |||||||||||||||||||
| Total lease cost expensed | $ | 4,063 | $ | 2,121 | $ | 10,363 | $ | 5,826 | |||||||||||||||
The lease term and the discount rate related to the Company's leases are as follows:
| September 30, 2022 | |||||
| Weighted-average remaining lease term (in years) | 2.6 | ||||
| Weighted-average discount rate | 4.4 | % | |||
As of September 30, 2022, the Company's future undiscounted cash payment obligation for its operating lease liabilities are as follows (in thousands):
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| As of September 30, 2022 | |||||
| 2022 (Remaining) | $ | 2,474 | |||
| 2023 | 8,675 | ||||
| 2024 | 1,600 | ||||
| 2025 | 839 | ||||
| 2026 | 699 | ||||
| Thereafter | 524 | ||||
| Total undiscounted lease payments | 14,811 | ||||
| Present value adjustment | (853) | ||||
| Net operating lease liabilities | $ | 13,958 | |||
Supplemental cash flow information related to leases was as follows (in thousands):
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities; | |||||||||||
| Operating cash flows from operating leases | $ | 6,643 | $ | 4,289 | |||||||
| Non-cash Investing and Financing Activities | |||||||||||
| Additions to ROU assets obtained from new operating lease liabilities | $ | 4,453 | $ | 6,541 | |||||||
(4) Share-Based Compensation
Share-Based Compensation Plans
In 2016, the Company adopted the 2016 Equity Incentive Plan (as amended from time to time, the “2016 Plan”). The Company also adopted the Inducement Plan (as amended from time to time, the “Inducement Plan,” and, together with the 2016 Plan, the “Plans”) on December 15, 2016.
The Company computes a deferred tax benefit for restricted stock units (“RSUs”), performance-based stock units (“PSUs”) and stock options expected to generate future tax deductions by applying its effective tax rate to the expense recorded. For RSUs, the Company's actual tax deduction is based on the value of the units at the time of vesting.
The expense for awards issued to both employees and non-employees, which was recorded in “General and administrative, net” in the accompanying condensed consolidated statements of operations was $1.2 million for both the three months ended September 30, 2022 and 2021, and $3.9 million and $3.5 million for the nine months ended September 30, 2022 and 2021, respectively. Capitalized share-based compensation was less than $0.1 million for both the three months ended September 30, 2022 and 2021 and $0.2 million for both the nine months ended September 30, 2022 and 2021.
We view stock option awards and RSUs with graded vesting as single awards with an expected life equal to the average expected life of component awards, and we amortize the awards on a straight-line basis over the life of the awards. The Company accounts for forfeitures in compensation cost when they occur.
Stock Option Awards
The compensation cost related to stock option awards is based on the grant date fair value and is typically expensed over the vesting period (generally to years). We use the Black-Scholes option pricing model to estimate the fair value of stock option awards.
At September 30, 2022, we had no unrecognized compensation cost related to stock option awards. The following table provides information regarding stock option award activity for the nine months ended September 30, 2022:
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| Shares | Wtd. Avg. Exer. Price | ||||||||||
| Options outstanding, beginning of period | 276,009 | $ | 28.12 | ||||||||
| Options expired | (64,263) | $ | 33.48 | ||||||||
| Options exercised | (15,584) | $ | 26.96 | ||||||||
| Options outstanding, end of period | 196,162 | $ | 26.46 | ||||||||
| Options exercisable, end of period | 196,162 | $ | 26.46 | ||||||||
Our outstanding stock option awards had $0.3 million measurable aggregate intrinsic value at September 30, 2022. At September 30, 2022, the weighted-average remaining contract life of stock option awards outstanding was 4.6 years and exercisable was 4.6 years. The total intrinsic value of stock option awards exercisable was $0.3 million as of September 30, 2022.
Restricted Stock Units
The compensation cost related to restricted stock awards is based on the grant date fair value and is typically expensed over the requisite service period (generally to five years).
As of September 30, 2022, we had $3.4 million unrecognized compensation expense related to our RSUs which is expected to be recognized over a weighted-average period of 2.2 years.
The following table provides information regarding RSU activity for the nine months ended September 30, 2022:
| RSUs | Wtd. Avg. Grant Price | ||||||||||
| RSUs outstanding, beginning of period | 344,845 | $ | 8.60 | ||||||||
| RSUs granted | 179,416 | $ | 26.00 | ||||||||
| RSUs forfeited | (8,734) | $ | 21.20 | ||||||||
| RSUs vested | (277,933) | $ | 8.86 | ||||||||
| RSUs outstanding, end of period | 237,594 | $ | 20.97 | ||||||||
Performance-Based Stock Units
On May 21, 2019, the Company granted 99,500 PSUs for which the number of shares earned was based on the total shareholder return (“TSR”) of the Company's common stock relative to the TSR of its selected peers during the performance period from January 1, 2019 to December 31, 2021. The awards contained market conditions which allowed a payout ranging between 0% payout and 200% of the target payout. The fair value as of the grant date was $18.86 per unit or 112.9% of stock price. The awards had a cliff-vesting period of years. In the first quarter of 2022, the Board and its Compensation Committee approved payout of these awards at 117% of target. Accordingly, 97,812 shares were issued on February 23, 2022.
On February 24, 2021, the Company granted 161,389 PSUs for which the number of shares earned is based on the TSR of the Company's common stock relative to the TSR of its selected peers during the performance period from January 1, 2021 to December 31, 2022. The awards contain market conditions which allow a payout ranging between 0% and 200% of the target payout. The fair value as of the grant date was $13.13 per unit or 157.6% of the stock price. The compensation expense for these awards is based on the per unit grant date valuation using a Monte Carlo simulation multiplied by the target payout level. The payout level is calculated based on actual stock price performance achieved during the performance period. The awards have a cliff-vesting period of years. All PSUs granted remain outstanding related to this award as of September 30, 2022.
On February 23, 2022, the Company granted 122,111 PSUs for which the number of shares earned is based on the TSR of the Company's common stock relative to the TSR of its selected peers during the performance period from January 1, 2022 to December 31, 2024. The awards contain market conditions which allow a payout ranging between 0% and 200% of the target payout. The fair value as of the grant date was $36.47 per unit or 150.93% of the stock price. The compensation expense for these awards is based on the per unit grant date valuation using a Monte Carlo simulation multiplied by the target payout level. The payout level is calculated based on actual stock price performance achieved during the performance period. The
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awards have a cliff-vesting period of years. All PSUs granted remain outstanding related to this award as of September 30, 2022.
As of September 30, 2022, we had $3.8 million unrecognized compensation expense related to our PSUs based on the assumption of 100% target payout. The remaining weighted-average performance period is 2.1 years.
The following table provides information regarding performance-based stock unit activity for the nine months ended September 30, 2022:
| PSUs | Wtd. Avg. Grant Price | ||||||||||
| Performance based stock units outstanding, beginning of period | 244,989 | $ | 18.84 | ||||||||
| Performance based stock units granted | 122,111 | $ | 36.47 | ||||||||
| Performance based stock units incremental shares granted | 14,212 | $ | 18.86 | ||||||||
| Performance based stock units vested | (97,812) | $ | 18.86 | ||||||||
| Performance based stock units outstanding, end of period | 283,500 | $ | 23.18 | ||||||||
(5) Earnings Per Share
Basic earnings per share (“Basic EPS”) has been computed using the weighted-average number of common shares outstanding during each period. Diluted earnings per share (“Diluted EPS”) assumes, as of the beginning of the period, exercise of stock options and RSU grants using the treasury stock method. Diluted EPS also assumes conversion of PSUs to common shares based on the number of shares (if any) that would be issuable, according to predetermined performance and market goals, if the end of the reporting period was the end of the performance period. Certain of our stock options and RSU grants that would potentially dilute Basic EPS in the future were also antidilutive for the three and nine months ended September 30, 2022 and 2021 are discussed below.
The following is a reconciliation of the numerators and denominators used in the calculation of Basic EPS and Diluted EPS for the periods indicated below (in thousands, except per share amounts):
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| Net Income (Loss) | Shares | Per Share Amount | Net Income (Loss) | Shares | Per Share Amount | ||||||||||||||||||||||||||||||
| Basic EPS: | |||||||||||||||||||||||||||||||||||
| Net Income (Loss) and Share Amounts | $ | 142,541 | 22,308 | $ | 6.39 | $ | (35,943) | 12,629 | $ | (2.85) | |||||||||||||||||||||||||
| Dilutive Securities: | |||||||||||||||||||||||||||||||||||
| Performance Based Stock Unit Awards | 169 | — | |||||||||||||||||||||||||||||||||
| RSU Awards | 137 | — | |||||||||||||||||||||||||||||||||
| Stock Option Awards | 55 | — | |||||||||||||||||||||||||||||||||
| Diluted EPS: | |||||||||||||||||||||||||||||||||||
| Net Income (Loss) and Assumed Share Conversions | $ | 142,541 | 22,669 | $ | 6.29 | $ | (35,943) | 12,629 | $ | (2.85) | |||||||||||||||||||||||||
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| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| Net Income (Loss) | Shares | Per Share Amount | Net Income (Loss) | Shares | Per Share Amount | ||||||||||||||||||||||||||||||
| Basic EPS: | |||||||||||||||||||||||||||||||||||
| Net Income (Loss) and Share Amounts | $ | 167,076 | 18,885 | $ | 8.85 | $ | (27,514) | 12,283 | $ | (2.24) | |||||||||||||||||||||||||
| Dilutive Securities: | |||||||||||||||||||||||||||||||||||
| Performance Based Stock Unit Awards | 141 | — | |||||||||||||||||||||||||||||||||
| RSU Awards | 171 | — | |||||||||||||||||||||||||||||||||
| Stock Option Awards | 40 | — | |||||||||||||||||||||||||||||||||
| Diluted EPS: | |||||||||||||||||||||||||||||||||||
| Net Income (Loss) and Assumed Share Conversions | $ | 167,076 | 19,237 | $ | 8.69 | $ | (27,514) | 12,283 | $ | (2.24) | |||||||||||||||||||||||||
There were no antidilutive stock options for the three months ended September 30, 2022, while 0.3 million stock options to purchase shares were not included in the computation of Diluted EPS for the three months ended September 30, 2021 because they were antidilutive. Less than 0.1 million and 0.3 million stock options to purchase shares were not included in the computation of Diluted EPS for the nine months ended September 30, 2022 and 2021, respectively, because they were antidilutive.
Less than 0.1 million shares of RSUs were not included in the computation of Diluted EPS for the three months ended September 30, 2022 because they were antidilutive. There were 0.3 million shares of RSUs excluded from Diluted EPS for the three months ended September 30, 2021 because they were antidilutive due to the net loss. Less than 0.1 million shares of RSUs were not included in the computation of Diluted EPS for the nine months ended September 30, 2022 because they were antidilutive, while 0.3 million shares of RSUs were excluded from Diluted EPS for the nine months ended September 30, 2021 because they were antidilutive due to the net loss.
There were no antidilutive shares of PSUs for both the three and nine months ended September 30, 2022. There were 0.1 million and less than 0.1 million shares of PSUs excluded from Diluted EPS for both the three and nine months ended September 30, 2021, respectively, because they were antidilutive due to the net loss.
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(6) Long-Term Debt
The Company's long-term debt consisted of the following (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
Credit Facility Borrowings (1) | $ | 480,000 | $ | 227,000 | |||||||
| Second Lien Notes due 2026 | 150,000 | 150,000 | |||||||||
| 630,000 | 377,000 | ||||||||||
| Unamortized discount on Second Lien Notes due 2026 | (927) | (1,061) | |||||||||
| Unamortized debt issuance cost on Second Lien Notes due 2026 | (2,722) | (3,114) | |||||||||
| Long-Term Debt, net | $ | 626,351 | $ | 372,825 | |||||||
(1) Unamortized debt issuance costs on our Credit Facility borrowings are included in “Other Long-Term Assets” in our consolidated balance sheet. As of September 30, 2022 and December 31, 2021, we had $9.1 million and $3.6 million, respectively, in unamortized debt issuance costs on our Credit Facility borrowings.
Revolving Credit Facility. Amounts outstanding under our Credit Facility (defined below) were $480.0 million and $227.0 million as of September 30, 2022 and December 31, 2021, respectively. The Company is a party to a First Amended and Restated Senior Secured Revolving Credit Agreement with JPMorgan Chase Bank, National Association, as administrative agent, and certain lenders party thereto, as amended (such agreement, the “Credit Agreement” and the borrowing facility provided thereby, the “Credit Facility”). In conjunction with an unscheduled redetermination of the borrowing base requested by SilverBow along with its administrative agent as part of the SandPoint and Sundance transactions in the second quarter of 2022, the Company entered into the Tenth Amendment to the Credit Facility, effective June 22, 2022 (the “Tenth Amendment”), which among other things, increased the borrowing base under the Credit Facility to $775.0 million from $525.0 million, effective upon the closing of the Sundance transaction on June 30, 2022; extended the maturity date for the Credit Agreement to October 19, 2026 (or to the extent earlier, the date that is 91 days prior to the scheduled maturity of the Company's Second Lien notes); increased the maximum credit amounts from $1 billion to $2 billion; decreased the applicable margin used to calculate the interest rate under the Credit Facility by 50 basis points, with the specific applicable margins determined by reference to borrowing base utilization; decreased the mortgage coverage and title requirements from 90% to 85%; amended the restricted payment basket allowing the Company to make dividends or other distribution or return of capital to the extent that the Company's total leverage does not exceed 1.25x and the utilization percentage as of the date of such dividend or distribution is less than 80% after giving effect to such restricted payment; and added two new lenders as parties to the Credit Agreement. Earlier in the second quarter, the Company entered into the Ninth Amendment to the Credit Facility, effective April 12, 2022, as part of the regular, semi-annual redetermination. Prior to the Tenth Amendment, the Ninth Amendment had previously, among other things, increased the borrowing base under the Credit Agreement from $460 million to $525 million.
Effective upon the execution of the Tenth Amendment on June 22, 2022, the Credit Facility matures October 19, 2026 (or to the extent earlier, the date that is 91 days prior to the scheduled maturity of the Company's Second Lien notes), and provides for a maximum credit amount of $2.0 billion, subject to the current borrowing base of $775.0 million. The borrowing base is regularly redetermined in or about May and November of each calendar year and is subject to additional adjustments from time to time, including for asset sales, elimination or reduction of hedge positions and incurrence of other debt. Additionally, the Company and the administrative agent may request an unscheduled redetermination of the borrowing base between scheduled redeterminations. The amount of the borrowing base is determined by the lenders, in their discretion, in accordance with their oil and gas lending criteria at the time of the relevant redetermination. The Company may also request the issuance of letters of credit under the Credit Agreement in an aggregate amount up to $25.0 million, which reduces the amount of available borrowings under the borrowing base in the amount of such issued and outstanding letters of credit. There were no outstanding letters of credit as of September 30, 2022, and no outstanding letters of credit as of December 31, 2021. Maintaining or increasing our borrowing base under our Credit Facility is dependent on many factors, including commodity prices, our hedge positions, changes in our lenders' lending criteria and our ability to raise capital to drill wells to replace produced reserves.
Interest under the Credit Facility accrues at the Company’s option either at an Alternate Base Rate plus the applicable margin (“ABR Loans”), the Adjusted Term Secured Overnight Financing Rate (“SOFR”) plus the applicable margin (“Term Benchmark Loans”) or Adjusted Daily Simple SOFR plus the applicable margin (“RFR Loans”). Effective upon the execution of the Tenth Amendment on June 22, 2022, the applicable margin decreased by 50 basis points and ranged from 1.75% to 2.75% based on borrowing base utilization for ABR Loans and 2.75% to 3.75% based on borrowing base utilization for Term Benchmark Loans and RFR Loans. The Alternate Base Rate and SOFR are defined, and the applicable margins are set forth, in
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the Credit Agreement. Undrawn amounts under the Credit Facility are subject to a 0.5% commitment fee. To the extent that a payment default exists and is continuing, all amounts outstanding under the Credit Facility will bear interest at 2.0% per annum above the rate and margin otherwise applicable thereto. As of September 30, 2022, the Company's weighted average interest rate on Credit Facility borrowings was 6.08%.
The obligations under the Credit Agreement are secured, subject to certain exceptions, by a first priority lien on substantially all assets of the Company and its subsidiary, including a first priority lien on properties attributed with at least 85% of estimated proved reserves of the Company and its subsidiary effective upon the execution of the Tenth Amendment on June 22, 2022.
The Credit Agreement contains the following financial covenants:
•a ratio of total debt to earnings before interest, tax, depreciation and amortization (“EBITDA”), as defined in the Credit Agreement, for the most recently completed four fiscal quarters, not to exceed 3.00 to 1.00 as of the last day of each fiscal quarter; and
•a current ratio, as defined in the Credit Agreement, which includes in the numerator available borrowings undrawn under the borrowing base, of not less than 1.00 to 1.00 as of the last day of each fiscal quarter.
As of September 30, 2022, the Company was in compliance with all financial covenants under the Credit Agreement.
Additionally, the Credit Agreement contains certain representations, warranties and covenants, including but not limited to, limitations on incurring debt and liens, limitations on making certain restricted payments, limitations on investments, limitations on asset sales and hedge unwinds, limitations on transactions with affiliates and limitations on modifying organizational documents and material contracts. The Credit Agreement contains customary events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the Credit Facility to be immediately due and payable.
Total interest expense on the Credit Facility, which includes commitment fees and amortization of debt issuance costs, was $8.3 million and $2.8 million for the three months ended September 30, 2022 and 2021, respectively, and $15.9 million and $8.1 million for the nine months ended September 30, 2022 and 2021, respectively. The amount of commitment fee amortization included in interest expense, net was $0.3 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and $0.9 million and $0.3 million, for the nine months ended September 30, 2022 and 2021, respectively.
Senior Secured Second Lien Notes. On December 15, 2017, the Company entered into a Note Purchase Agreement for Senior Secured Second Lien Notes (as amended, the “Note Purchase Agreement,” and such second lien facility the “Second Lien”) among the Company as issuer, U.S. Bank National Association as agent and collateral agent, and certain holders that are a party thereto, and issued notes in an initial principal amount of $200.0 million, with a $2.0 million discount, for net proceeds of $198.0 million.
Effective November 12, 2021, the Company entered into the Second Amendment to the Note Purchase Agreement, which extended the maturity date from December 15, 2024 to December 15, 2026 subject to paying down the principal amount of the Second Lien from $200.0 million to $150.0 million. The Company made the $50.0 million redemption of the Second Lien Notes on November 29, 2021. The Company accounted for this paydown as a debt modification and incurred approximately $0.1 million in third party fees in connection with the amendment. The unamortized debt issuance cost and discount on the Second Lien Notes will be amortized through the new maturity date of December 15, 2026.
Interest on the Second Lien is payable quarterly and accrues at LIBOR plus 7.5%; provided that if LIBOR ceases to be available, the Second Lien provides for a mechanism to use ABR (an alternate base rate) plus 6.5% as the applicable interest rate. The definitions of LIBOR and ABR are set forth in the Note Purchase Agreement. To the extent that a payment, insolvency, or, at the holders’ election, another default exists and is continuing, all amounts outstanding under the Second Lien will bear interest at 2.0% per annum above the rate and margin otherwise applicable thereto. Additionally, to the extent the Company were to default on the Second Lien, this would potentially trigger a cross-default under our Credit Facility.
The Company has the right, to the extent permitted under the Credit Facility and subject to the terms and conditions of the Second Lien, to optionally prepay the notes, subject to a repayment fee of 1.0% of the principal amount of the Second Lien being prepaid through December 15, 2022; and thereafter, no premium. Additionally, the Second Lien contains customary mandatory prepayment obligations upon asset sales (including hedge terminations), casualty events and incurrences of certain
23
debt, subject to, in certain circumstances, reinvestment periods. Management believes the probability of mandatory prepayment due to default is remote.
The obligations under the Second Lien are secured, subject to certain exceptions and other permitted liens (including the liens created under the Credit Facility), by a perfected security interest, second in priority to the liens securing our Credit Facility, and mortgage lien on substantially all assets of the Company and its subsidiary, including a mortgage lien on oil and gas properties attributed with at least 90% of estimated PV-9 (defined below), of proved reserves of the Company and its subsidiary and 90% of the book value attributed to the PV-9 of the non-proved oil and gas properties of the Company. PV-9 is determined using commodity price assumptions by the administrative agent of the Credit Facility. PV-9 value is the estimated future net revenues to be generated from the production of proved reserves discounted to present value using an annual discount rate of 9%.
The Second Lien contains an Asset Coverage Ratio, which is only tested (i) as a condition to issuance of additional notes and (ii) in connection with certain asset sales in order to determine whether the proceeds of such asset sale must be applied as a prepayment of the notes and includes in the numerator of the PV-10 (defined below), based on forward strip pricing, plus the swap mark-to-market value of the commodity derivative contracts of the Company and its restricted subsidiary and in the denominator the total net indebtedness of the Company and its restricted subsidiary, of not less than 1.25 to 1.0 as of each date of determination (the “Asset Coverage Ratio”). PV-10 value is the estimated future net revenues to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%.
The Second Lien also contains a financial covenant measuring the ratio of total net debt-to-EBITDA, as defined in the Note Purchase Agreement, for the most recently completed four fiscal quarters, not to exceed 3.25 to 1.0 as of the last day of each fiscal quarter. As of September 30, 2022, the Company was in compliance with all financial covenants under the Second Lien.
The Second Lien contains certain customary representations, warranties and covenants, including but not limited to, limitations on incurring debt and liens, limitations on making certain restricted payments, limitations on investments, limitations on asset sales and hedge unwinds, limitations on transactions with affiliates and limitations on modifying organizational documents and material contracts. The Second Lien contains customary events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the Second Lien to be immediately due and payable.
As of September 30, 2022, total net amounts recorded for the Second Lien were $146.4 million, net of unamortized debt discount and debt issuance costs. Interest expense on the Second Lien totaled $3.8 million and $4.6 million for the three months ended September 30, 2022 and 2021, respectively, and $10.7 million and $13.8 million for the nine months ended September 30, 2022 and 2021, respectively.
Debt Issuance Costs. Our policy is to capitalize upfront commitment fees and other direct expenses associated with our line of credit arrangement and then amortize such costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings. During the nine months ended September 30, 2022 and 2021, the Company capitalized $7.2 million and $2.4 million, respectively, for debt issuance costs incurred in connection with the amendments to our Credit Facility. Additionally, the Company wrote-off $0.4 million and $0.2 million in debt issuance costs during the nine months ended September 30, 2022 and 2021, respectively, related to changes under our Credit Facility.
(7) Acquisitions and Dispositions
Bay De Chene Disposition
Effective December 22, 2017, the Company closed a purchase and sale contract to sell the Company's wellbores and facilities in the Bay De Chene field and recorded a $16.3 million obligation related to the funding of certain plugging and abandonment costs. Of the $16.3 million original obligation, $0.8 million and $1.1 million was paid during the nine months ended September 30, 2022 and 2021, respectively. There is no remaining obligation under this contract as of September 30, 2022.
August 2021 Acquisition
On August 3, 2021, the Company acquired the remaining working interest in 12 wells that SilverBow operates and additional acreage in Webb County. The total aggregate consideration was approximately $23.0 million, consisting of $13.0 million in cash and 516,675 shares of common stock valued at approximately $10.0 million based on the Company's share price on the closing date. Management determined that substantially all the fair value of the gross assets acquired were
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concentrated in the proved oil and gas properties and have therefore accounted for this transaction as an asset acquisition and allocated the purchase price based on the relative fair value of the assets acquired and liabilities assumed. As a result, we allocated substantially all of the purchase price to proved oil and gas properties.
October 2021 Acquisition
On October 1, 2021, we closed on an all-stock transaction to acquire oil and gas assets in the Eagle Ford with a seller and its two affiliated entities. The acquired assets include working interests in oil and gas properties across Atascosa, Fayette, Lavaca, McMullen and Live Oak counties. After consideration of closing adjustments, we issued 1,341,990 shares of our common stock valued at approximately $35.6 million, based on the Company's share price on the closing date. The acquisition was subject to further customary post-closing adjustments. We incurred approximately $0.6 million in transaction costs for the year ended December 31, 2021. Management determined that substantially all the fair value of the gross assets acquired were concentrated in the proved oil and gas properties and have therefore accounted for this transaction as an asset acquisition and allocated the purchase price based on the relative fair value of the assets acquired and liabilities assumed. As a result, we allocated substantially all of the purchase price to proved oil and gas properties. As part of the post-closing settlement of this acquisition, during the nine months ended September 30, 2022 we issued 489 new shares and received 41,375 shares back into treasury stock.
November 2021 Acquisition
On November 19, 2021, the Company closed on an acquisition of oil-weighted assets in the Eagle Ford. The acquired assets included wells and acreage in La Salle, McMullen, DeWitt and Lavaca counties. After consideration of closing adjustments, total aggregate consideration was approximately $77.4 million, consisting of $37.6 million in cash, 1,351,961 shares of our common stock valued at approximately $37.9 million based on the Company's share price on the closing date, and contingent consideration with an estimated fair value of $1.9 million. The contingent consideration consists of up to three earn-out payments of $1.6 million per year for each of 2022, 2023 and 2024, contingent upon the average monthly settlement price of WTI exceeding $70 per barrel for such year (the “2021 WTI Contingency Payout”). During the three and nine months ended September 30, 2022, the Company recorded gains of $0.7 million and losses of $0.8 million, respectively, related to the 2021 WTI Contingency Payout recorded in “Gain (loss) on commodity derivatives, net” on the accompanying condensed consolidated statements of operations. For further discussion of the fair value related to the Company's contingent consideration, refer to Note 9 of these Notes to Consolidated Financial Statements. Management determined that substantially all the fair value of the gross assets acquired were concentrated in the proved oil and gas properties and have therefore accounted for this transaction as an asset acquisition and allocated the purchase price based on the relative fair value of the assets acquired and liabilities assumed. As a result, we allocated substantially all of the purchase price to proved oil and gas properties.
May 2022 Acquisition
On May 10, 2022, the Company closed the acquisition of certain oil and gas assets located in La Salle and McMullen Counties, Texas, as well as assumed the seller's commodity derivative contracts in place at the closing date, from SandPoint Operating, LLC, a subsidiary of SandPoint Resources, LLC. After consideration of closing adjustments, total aggregate consideration was approximately $67.5 million, consisting of $27.7 million in cash and 1,300,000 shares of our common stock valued at approximately $39.8 million based on the Company's share price on the closing date. We incurred approximately $0.5 million in transaction costs during the nine months ended September 30, 2022 related to the acquisition. Management determined that substantially all the fair value of the gross assets acquired were concentrated in the proved oil and gas properties and have therefore accounted for this transaction as an asset acquisition and allocated the purchase price based on the relative fair value of the assets acquired and liabilities assumed.
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The following table represents the allocation of the total cost of the acquisition to the assets acquired and liabilities assumed (in thousands):
| Total Cost | ||||||||
| Cash consideration | $ | 27,709 | ||||||
| Equity consideration | 39,767 | |||||||
| Total Consideration | 67,476 | |||||||
| Transaction costs | 466 | |||||||
| Total Cost of Transaction | $ | 67,942 | ||||||
| Allocation of Total Cost | ||||||||
| Assets | ||||||||
| Oil and gas properties | $ | 84,611 | ||||||
| Total assets | 84,611 | |||||||
| Liabilities | ||||||||
| Fair value of commodity derivatives | 16,511 | |||||||
| Asset retirement obligations | 158 | |||||||
| Total Liabilities | $ | 16,669 | ||||||
| Net Assets Acquired | $ | 67,942 | ||||||
June 2022 Acquisition
On June 30, 2022, the Company closed the acquisition of certain oil and gas assets located in Atascosa, La Salle, Live Oak and McMullen Counties, Texas, as well as assumed the seller's commodity derivative contracts in place at the closing date, from Sundance Energy, Inc., and its affiliated entities Armadillo E&P, Inc. and SEA Eagle Ford, LLC. After consideration of closing adjustments, total aggregate consideration was approximately $346.1 million, consisting of $220.9 million in cash, 4,148,472 shares of our common stock valued at approximately $117.7 million based on the Company's share price on the closing date, accrued purchase price adjustments receivable of $1.0 million which is expected to be collected by the end of 2022 and contingent consideration with an estimated fair value of $8.6 million. The contingent consideration consists of up to two earn-out payments of $7.5 million each, contingent upon the average monthly settlement price of NYMEX West Texas Intermediate crude oil exceeding $95 per barrel for the period from April 13, 2022 through December 31, 2022 which would trigger a payment of $7.5 million in 2023 and $85 per barrel for 2023 which would trigger a payment of $7.5 million in 2024 (the “2022 WTI Contingency Payout”). During both the three and nine months ended September 30, 2022, the Company recorded gains of $5.4 million related to the 2022 WTI Contingency Payout recorded in “Gain (loss) on commodity derivatives, net” on the accompanying condensed consolidated statements of operations. For further discussion of the fair value related to the Company's contingent consideration, refer to Note 9 of these Notes to Consolidated Financial Statements. The acquisition is subject to further customary post-closing adjustments. We incurred approximately $6.5 million in transaction costs during the nine months ended September 30, 2022 related to the acquisition. Management determined that substantially all the fair value of the gross assets acquired were concentrated in the proved oil and gas properties and have therefore accounted for this transaction as an asset acquisition and allocated the purchase price based on the relative fair value of the assets acquired and liabilities assumed.
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The following table represents the allocation of the total cost of the acquisition to the assets acquired and liabilities assumed (in thousands):
| Total Cost | ||||||||
| Cash consideration | $ | 220,866 | ||||||
| Equity consideration | 117,651 | |||||||
| Fair value of contingent consideration | 8,566 | |||||||
| Accrued purchase price adjustments receivable | (1,000) | |||||||
| Total Consideration | 346,083 | |||||||
| Transaction costs | 6,545 | |||||||
| Total Cost of Transaction | $ | 352,628 | ||||||
| Allocation of Total Cost | ||||||||
| Assets | ||||||||
| Other current assets | $ | 4,202 | ||||||
| Oil and gas properties | 397,448 | |||||||
| Right of use assets | 890 | |||||||
| Total assets | 402,540 | |||||||
| Liabilities | ||||||||
| Accounts payable and accrued liabilities | 12,811 | |||||||
| Fair value of commodity derivatives | 33,767 | |||||||
| Non-current lease liability | 890 | |||||||
| Asset retirement obligations | 2,444 | |||||||
| Total Liabilities | $ | 49,912 | ||||||
| Net Assets Acquired | $ | 352,628 | ||||||
August 2022 Acquisition
On August 15, 2022, the Company closed the acquisition of certain oil and gas assets in Webb County, Texas. After consideration of closing adjustments, total consideration was approximately $31.8 million. The acquisition is subject to further customary post-closing adjustments. We did not incur any significant transaction costs during the nine months ended September 30, 2022 related to the acquisition. Management determined that substantially all the fair value of the gross assets acquired were concentrated in the proved oil and gas properties and have therefore accounted for this transaction as an asset acquisition and allocated the purchase price based on the relative fair value of the assets acquired and liabilities assumed.
2022 Non-strategic Dispositions
During 2022, the Company closed on multiple dispositions of non-strategic oil and gas assets. After consideration of closing adjustments, total proceeds from the dispositions were approximately $4.4 million. The transactions are subject to further customary post-closing adjustments. There was no gain or loss recognized in connection with the dispositions.
(8) Price-Risk Management Activities
Derivatives are recorded on the consolidated balance sheet at fair value with changes in fair value recognized in earnings. The changes in the fair value of our derivatives are recognized in “Gain (loss) on commodity derivatives, net” on the accompanying condensed consolidated statements of operations. The Company's price-risk management policy is to use derivative instruments to protect against declines in oil and natural gas prices, primarily through the purchase of commodity price swaps and collars as well as basis swaps.
During the three months ended September 30, 2022 and 2021, the Company recorded losses of $1.3 million and $88.6 million, respectively, on its commodity derivatives. During the nine months ended September 30, 2022 and 2021, the Company
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recorded losses of $162.5 million and $152.9 million, respectively, on its commodity derivatives. During the three and nine months ended September 30, 2022, the Company recorded gains of $6.1 million and $4.7 million, respectively, related to valuation changes on the 2021 WTI Contingency Payout and 2022 WTI Contingency Payout. The Company made cash payments of $182.1 million and $29.0 million for settled derivative contracts during the nine months ended September 30, 2022 and 2021, respectively.
At September 30, 2022 and December 31, 2021, there was $4.4 million and $0.9 million, respectively, in receivables for settled derivatives which were included on the accompanying condensed consolidated balance sheet in “Accounts receivable, net” and were subsequently collected in October 2022 and January 2022, respectively. At September 30, 2022 and December 31, 2021, we also had $19.5 million and $6.4 million, respectively, in payables for settled derivatives which were included on the accompanying condensed consolidated balance sheet in “Accounts payable and accrued liabilities” and were subsequently paid in October 2022 and January 2022, respectively.
The fair values of our swap contracts are computed using observable market data whereas our collar contracts are valued using a Black-Scholes pricing model. At September 30, 2022, there was $33.2 million and $27.4 million in current unsettled derivative assets and long-term unsettled derivative assets, respectively, and $108.6 million and $30.0 million in current and long-term unsettled derivative liabilities, respectively. At December 31, 2021, there was $2.8 million and $0.2 million in current and long-term unsettled derivative assets, respectively, and $47.5 million and $8.6 million in current and long-term unsettled derivative liabilities, respectively.
The Company uses an International Swap and Derivatives Association master agreement for our derivative contracts. This is an industry-standardized contract containing the general conditions of our derivative transactions including provisions relating to netting derivative settlement payments under certain circumstances (such as default). For reporting purposes, the Company has elected to not offset the asset and liability fair value amounts of its derivatives on the accompanying condensed consolidated balance sheet. Under the right of set-off, there was a $78.0 million net fair value liability at September 30, 2022, and a $53.0 million net fair value liability at December 31, 2021. For further discussion related to the fair value of the Company's derivatives, refer to Note 9 of these Notes to Condensed Consolidated Financial Statements.
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The following tables summarize the weighted-average prices as well as future production volumes for our future derivative contracts in place as of September 30, 2022:
| Oil Derivative Contracts (NYMEX WTI Settlements) | Total Volumes (Bbls) | Weighted-Average Price | Weighted-Average Collar Sub Floor Price | Weighted-Average Collar Floor Price | Weighted-Average Collar Call Price | |||||||||||||||||||||||||||
| Swap Contracts | ||||||||||||||||||||||||||||||||
| 2022 Contracts | ||||||||||||||||||||||||||||||||
| 4Q22 | 559,876 | $ | 74.00 | |||||||||||||||||||||||||||||
| 2023 Contracts | ||||||||||||||||||||||||||||||||
| 1Q23 | 532,175 | $ | 81.52 | |||||||||||||||||||||||||||||
| 2Q23 | 494,575 | $ | 80.75 | |||||||||||||||||||||||||||||
| 3Q23 | 533,980 | $ | 77.36 | |||||||||||||||||||||||||||||
| 4Q23 | 569,300 | $ | 78.26 | |||||||||||||||||||||||||||||
| 2024 Contracts | ||||||||||||||||||||||||||||||||
| 1Q24 | 227,500 | $ | 80.78 | |||||||||||||||||||||||||||||
| 2Q24 | 249,500 | $ | 80.47 | |||||||||||||||||||||||||||||
| 3Q24 | 229,000 | $ | 78.90 | |||||||||||||||||||||||||||||
| 4Q24 | 217,000 | $ | 77.76 | |||||||||||||||||||||||||||||
| Collar Contracts | ||||||||||||||||||||||||||||||||
| 2022 Contracts | ||||||||||||||||||||||||||||||||
| 4Q22 | 201,304 | $ | 70.58 | $ | 85.50 | |||||||||||||||||||||||||||
| 2023 Contracts | ||||||||||||||||||||||||||||||||
| 1Q23 | 171,707 | $ | 47.37 | $ | 66.00 | |||||||||||||||||||||||||||
| 2Q23 | 167,949 | $ | 53.91 | $ | 64.89 | |||||||||||||||||||||||||||
| 3Q23 | 72,847 | $ | 59.27 | $ | 66.26 | |||||||||||||||||||||||||||
| 4Q23 | 72,242 | $ | 58.54 | $ | 65.13 | |||||||||||||||||||||||||||
| 2024 Contracts | ||||||||||||||||||||||||||||||||
| 1Q24 | 137,700 | $ | 51.61 | $ | 65.86 | |||||||||||||||||||||||||||
| 2Q24 | 33,000 | $ | 45.00 | $ | 60.72 | |||||||||||||||||||||||||||
| 3-Way Collar Contracts | ||||||||||||||||||||||||||||||||
| 2022 Contracts | ||||||||||||||||||||||||||||||||
| 4Q22 | 13,280 | $ | 42.21 | $ | 52.94 | $ | 62.14 | |||||||||||||||||||||||||
| 2023 Contracts | ||||||||||||||||||||||||||||||||
| 1Q23 | 14,470 | $ | 44.24 | $ | 55.14 | $ | 64.55 | |||||||||||||||||||||||||
| 2Q23 | 13,260 | $ | 44.19 | $ | 55.04 | $ | 64.53 | |||||||||||||||||||||||||
| 3Q23 | 9,570 | $ | 43.08 | $ | 53.41 | $ | 63.33 | |||||||||||||||||||||||||
| 4Q23 | 8,970 | $ | 43.08 | $ | 53.38 | $ | 63.35 | |||||||||||||||||||||||||
| 2024 Contracts | ||||||||||||||||||||||||||||||||
| 1Q24 | 8,247 | $ | 45.00 | $ | 57.50 | $ | 67.85 | |||||||||||||||||||||||||
| 2Q24 | 7,757 | $ | 45.00 | $ | 57.50 | $ | 67.85 | |||||||||||||||||||||||||
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| Natural Gas Derivative Contracts (NYMEX Henry Hub Settlements) | Total Volumes (MMBtu) | Weighted-Average Price | Weighted-Average Collar Sub Floor Price | Weighted-Average Collar Floor Price | Weighted-Average Collar Call Price | |||||||||||||||||||||||||||
| Swap Contracts | ||||||||||||||||||||||||||||||||
| 2022 Contracts | ||||||||||||||||||||||||||||||||
| 4Q22 | 4,267,284 | $ | 2.64 | |||||||||||||||||||||||||||||
| 2023 Contracts | ||||||||||||||||||||||||||||||||
| 1Q23 | 981,000 | $ | 6.74 | |||||||||||||||||||||||||||||
| 2Q23 | 3,816,000 | $ | 4.55 | |||||||||||||||||||||||||||||
| 3Q23 | 4,816,000 | $ | 4.57 | |||||||||||||||||||||||||||||
| 4Q23 | 3,887,000 | $ | 4.71 | |||||||||||||||||||||||||||||
| 2024 Contracts | ||||||||||||||||||||||||||||||||
| 1Q24 | 891,000 | $ | 4.50 | |||||||||||||||||||||||||||||
| 2Q24 | 5,525,000 | $ | 3.89 | |||||||||||||||||||||||||||||
| 3Q24 | 5,060,000 | $ | 3.94 | |||||||||||||||||||||||||||||
| 4Q24 | 5,060,000 | $ | 4.21 | |||||||||||||||||||||||||||||
| Collar Contracts | ||||||||||||||||||||||||||||||||
| 2022 Contracts | ||||||||||||||||||||||||||||||||
| 4Q22 | 10,972,376 | $ | 3.42 | $ | 4.16 | |||||||||||||||||||||||||||
| 2023 Contracts | ||||||||||||||||||||||||||||||||
| 1Q23 | 13,067,900 | $ | 3.79 | $ | 5.36 | |||||||||||||||||||||||||||
| 2Q23 | 11,231,250 | $ | 3.22 | $ | 3.96 | |||||||||||||||||||||||||||
| 3Q23 | 10,976,400 | $ | 3.39 | $ | 4.12 | |||||||||||||||||||||||||||
| 4Q23 | 11,525,000 | $ | 3.82 | $ | 4.70 | |||||||||||||||||||||||||||
| 2024 Contracts | ||||||||||||||||||||||||||||||||
| 1Q24 | 6,931,000 | $ | 4.02 | $ | 6.19 | |||||||||||||||||||||||||||
| 2Q24 | 1,913,000 | $ | 4.20 | $ | 5.13 | |||||||||||||||||||||||||||
| 3Q24 | 2,038,000 | $ | 4.12 | $ | 5.28 | |||||||||||||||||||||||||||
| 4Q24 | 2,025,000 | $ | 4.35 | $ | 5.73 | |||||||||||||||||||||||||||
| 3-Way Collar Contracts | ||||||||||||||||||||||||||||||||
| 2023 Contracts | ||||||||||||||||||||||||||||||||
| 1Q23 | 347,800 | $ | 2.06 | $ | 2.56 | $ | 3.03 | |||||||||||||||||||||||||
| 2Q23 | 310,400 | $ | 2.04 | $ | 2.54 | $ | 3.01 | |||||||||||||||||||||||||
| 3Q23 | 233,100 | $ | 2.00 | $ | 2.50 | $ | 2.95 | |||||||||||||||||||||||||
| 4Q23 | 219,200 | $ | 2.00 | $ | 2.50 | $ | 2.94 | |||||||||||||||||||||||||
| 2024 Contracts | ||||||||||||||||||||||||||||||||
| 1Q24 | 198,000 | $ | 2.00 | $ | 2.50 | $ | 3.37 | |||||||||||||||||||||||||
| 2Q24 | 188,000 | $ | 2.00 | $ | 2.50 | $ | 3.37 | |||||||||||||||||||||||||
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| Natural Gas Basis Derivative Swaps (East Texas Houston Ship Channel vs. NYMEX Settlements) | Total Volumes (MMBtu) | Weighted-Average Price | ||||||||||||
| 2022 Contracts | ||||||||||||||
| 4Q22 | 6,140,000 | $ | (0.07) | |||||||||||
| 2023 Contracts | ||||||||||||||
| 1Q23 | 8,100,000 | $ | 0.07 | |||||||||||
| 2Q23 | 8,190,000 | $ | (0.22) | |||||||||||
| 3Q23 | 8,280,000 | $ | (0.19) | |||||||||||
| 4Q23 | 8,280,000 | $ | (0.18) | |||||||||||
| 2024 Contracts | ||||||||||||||
| 1Q24 | 5,460,000 | $ | 0.12 | |||||||||||
| 2Q24 | 5,460,000 | $ | (0.27) | |||||||||||
| 3Q24 | 5,520,000 | $ | (0.23) | |||||||||||
| 4Q24 | 5,520,000 | $ | (0.19) | |||||||||||
| Houston Ship Channel Fixed Price Contracts | ||||||||||||||
| 2022 Contracts | ||||||||||||||
| 4Q22 | 132,000 | $ | 1.80 | |||||||||||
| 2023 Contracts | ||||||||||||||
| 1Q23 | 180,000 | $ | 2.64 | |||||||||||
| 2Q23 | 60,000 | $ | 2.64 | |||||||||||
| Oil Basis Swaps (Argus Cushing (WTI) and Magellan East Houston) | Total Volumes (Bbls) | Weighted-Average Price | ||||||||||||
| Calendar Monthly Roll Differential Swaps | ||||||||||||||
| 2022 Contracts | ||||||||||||||
| 4Q22 | 266,800 | $ | 0.12 | |||||||||||
| NGL Swaps (Mont Belvieu) | Total Volumes (Bbls) | Weighted-Average Price | ||||||||||||
| 2022 Contracts | ||||||||||||||
| 4Q22 | 345,000 | $ | 35.00 | |||||||||||
| 2023 Contracts | ||||||||||||||
| 1Q23 | 292,500 | $ | 34.04 | |||||||||||
| 2Q23 | 295,750 | $ | 34.04 | |||||||||||
| 3Q23 | 299,000 | $ | 33.75 | |||||||||||
| 4Q23 | 299,000 | $ | 33.75 | |||||||||||
| 2024 Contracts | ||||||||||||||
| 1Q24 | 127,400 | $ | 29.39 | |||||||||||
| 2Q24 | 127,400 | $ | 29.39 | |||||||||||
| 3Q24 | 128,800 | $ | 29.39 | |||||||||||
| 4Q24 | 128,800 | $ | 29.39 | |||||||||||
(9) Fair Value Measurements
Fair Value on a Recurring Basis. Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives, the Credit Facility and the Second Lien Notes. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the highly liquid or short-term nature of these instruments.
The fair values of our derivative contracts are computed using observable market data whereas our derivative collar contracts are valued using a Black-Scholes pricing model. The fair value of the current and long-term 2021 WTI Contingency
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Payout and 2022 WTI Contingency Payout, included within “Accounts payable and accrued liabilities” and “Other long-term liabilities” on the condensed consolidated balance sheets, respectively, is estimated using observable market data and a Monte Carlo pricing model. These are considered Level 2 valuations (defined below).
The carrying value of our Credit Facility and Second Lien approximates fair value because the respective borrowing rates do not materially differ from market rates for similar borrowings. These are considered Level 3 valuations (defined below).
Fair Value on a Nonrecurring Basis. The Company applies the provisions of the fair value measurement standard on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties acquired and assessed for classification as a business or an asset and asset retirement obligations. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value estimation when acquisitions occur or asset retirement obligations are recorded. These are considered Level 3 valuations (defined below).
Asset retirement obligations. The initial measurement of asset retirement obligations (“ARO”) at fair value is recorded in the period in which the liability is incurred. Fair value is determined by calculating the present value of estimated future cash flows related to the liability. Estimating the future ARO requires management to make estimates and judgments regarding the timing and existence of a liability, as well as what constitutes adequate restoration when considering current regulatory requirements. Inherent in the fair value calculation are numerous assumptions and judgments, including the ultimate costs, inflation factors, credit-adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments.
2022 and 2021 Acquisitions. The Company recognized the assets acquired in our 2022 and 2021 acquisitions at cost at a relative fair value basis (refer to Note 7 of these Notes to Consolidated Financial Statements). Fair value was determined using a discounted cash flow model. The underlying future commodity prices included in the Company’s estimated future cash flows of its proved oil and gas properties were determined using NYMEX forward strip prices as of the closing date of each acquisition. The estimated future cash flows also included management’s assumptions for the estimates of production from the crude oil and natural gas proved properties, future operating, development costs and income taxes of the acquired properties and risk adjusted discount rates.
The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value:
Level 1 – Uses quoted prices in active markets for identical, unrestricted assets or liabilities. Instruments in this category have comparable fair values for identical instruments in active markets.
Level 2 – Uses quoted prices for similar assets or liabilities in active markets or observable inputs for assets or liabilities in non-active markets. Instruments in this category are periodically verified against quotes from brokers and include our commodity derivatives that we value using commonly accepted industry-standard models which contain inputs such as contract prices, risk-free rates, volatility measurements and other observable market data that are obtained from independent third-party sources.
Level 3 – Uses unobservable inputs for assets or liabilities that are in non-active markets.
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The following table presents our assets and liabilities that are measured on a recurring basis at fair value as of each of September 30, 2022 and December 31, 2021, and are categorized using the fair value hierarchy. For additional discussion related to the fair value of the Company's derivatives, refer to Note 8 of these Notes to Condensed Consolidated Financial Statements.
| Fair Value Measurements at | |||||||||||||||||||||||
| (in thousands) | Total | Quoted Prices in Active markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Natural Gas Derivatives | $ | 4,280 | $ | — | $ | 4,280 | $ | — | |||||||||||||||
| Natural Gas Basis Derivatives | 8,308 | — | 8,308 | — | |||||||||||||||||||
| Oil Derivatives | 36,418 | — | 36,418 | — | |||||||||||||||||||
| NGL Derivatives | 11,609 | — | 11,609 | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Natural Gas Derivatives | 115,871 | — | 115,871 | — | |||||||||||||||||||
| Natural Gas Basis Derivatives | 1,675 | — | 1,675 | — | |||||||||||||||||||
| Oil Derivatives | 20,199 | — | 20,199 | — | |||||||||||||||||||
| Oil Basis Derivatives | 167 | — | 167 | — | |||||||||||||||||||
| NGL Derivatives | 656 | — | 656 | — | |||||||||||||||||||
| 2022 WTI Contingency Payout | 3,121 | — | 3,121 | — | |||||||||||||||||||
| 2021 WTI Contingency Payout | 2,591 | — | 2,591 | — | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Natural Gas Derivatives | $ | 1,159 | $ | — | $ | 1,159 | $ | — | |||||||||||||||
| Natural Gas Basis Derivatives | 1,025 | — | 1,025 | — | |||||||||||||||||||
| Oil Derivatives | 371 | — | 371 | — | |||||||||||||||||||
| Oil Basis Derivatives | 3 | — | 3 | — | |||||||||||||||||||
| NGL Derivatives | 449 | — | 449 | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Natural Gas Derivatives | 31,801 | — | 31,801 | — | |||||||||||||||||||
| Natural Gas Basis Derivatives | 452 | — | 452 | — | |||||||||||||||||||
| Oil Derivatives | 21,330 | — | 21,330 | — | |||||||||||||||||||
| Oil Basis Derivatives | 514 | — | 514 | — | |||||||||||||||||||
| NGL Derivatives | 1,941 | — | 1,941 | — | |||||||||||||||||||
| 2021 WTI Contingency Payout | 1,841 | — | 1,841 | — | |||||||||||||||||||
Our current and long-term unsettled derivative assets and liabilities in the table above are measured at gross fair value and are shown on the accompanying condensed consolidated balance sheets in “Fair value of commodity derivatives” and “Fair Value of Long-Term Commodity Derivatives,” respectively.
(10) Asset Retirement Obligations
Liabilities for legal obligations associated with the retirement obligations of tangible long-lived assets are initially recorded at fair value in the period in which they are incurred. Estimates for the initial recognition of asset retirement obligations are derived from historical costs as well as management's expectation of future cost environments and other unobservable inputs. As there is no corroborating market activity to support the assumptions used, the Company has designated these liabilities as Level 3 fair value measurements. When a liability is initially recorded, the carrying amount of the related asset is increased. The liability is discounted from the expected date of abandonment. Over time, accretion of the liability is recognized each period, and the capitalized cost is amortized on a unit-of-production basis as part of depreciation, depletion,
33
and amortization expense for our oil and gas properties. Upon settlement of the liability, the Company either settles the obligation for its recorded amount or incurs a gain or loss upon settlement which is included in the “Property and Equipment” balance on our accompanying condensed consolidated balance sheets.
The following provides a roll-forward of our asset retirement obligations for the year ended December 31, 2021 and the nine months ended September 30, 2022 (in thousands):
| Asset Retirement Obligations as of December 31, 2020 | $ | 4,974 | |||
| Accretion expense | 306 | ||||
| Liabilities incurred for new wells, acquired wells and facilities construction | 1,120 | ||||
| Reductions due to plugged wells and facilities | (192) | ||||
| Revisions in estimates | (158) | ||||
| Asset Retirement Obligations as of December 31, 2021 | $ | 6,050 | |||
| Accretion expense | 366 | ||||
| Liabilities incurred for new wells, acquired wells and facilities construction | 2,754 | ||||
| Reductions due to sold wells and facilities | (43) | ||||
| Reductions due to plugged wells and facilities | (22) | ||||
| Revisions in estimates | (321) | ||||
| Asset Retirement Obligations as of September 30, 2022 | $ | 8,784 | |||
At both September 30, 2022 and December 31, 2021, approximately $0.5 million of our asset retirement obligations were classified as a current liability in “Accounts payable and accrued liabilities” on the accompanying consolidated balance sheets.
(11) Commitments and Contingencies
In the ordinary course of business, we are party to various legal actions, which arise primarily from our activities as an operator of oil and natural gas wells. In our management's opinion, the outcome of any such currently pending legal actions will not have a material adverse effect on our financial position or results of operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with the Company's financial information and its condensed consolidated financial statements and accompanying notes included in this report and its audited consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2021. The following information contains forward-looking statements; see “Forward-Looking Statements” in this report.
Company Overview
SilverBow is an independent oil and gas company headquartered in Houston, Texas. The Company's strategy is focused on acquiring and developing assets in the Eagle Ford and Austin Chalk located in South Texas where it has assembled approximately 180,000 net acres across five operating areas. SilverBow's acreage position in each of its operating areas is highly contiguous and designed for optimal and efficient horizontal well development. The Company has built a balanced portfolio of properties with a significant base of current production and reserves coupled with low-risk development drilling opportunities and meaningful upside from newer operating areas.
Being a committed and long-term operator in South Texas, SilverBow possesses a significant understanding of the reservoir characteristics, geology, landowners and competitive landscape in the region. The Company leverages this in-depth knowledge to continue to assemble high quality drilling inventory while continuously enhancing its operations to maximize returns on capital invested.
Acquisitions Update
On September 15, 2022, SilverBow announced the addition of a new acreage block in the Dorado play in Webb County. Through a series of transactions, including bolt-on acquisitions, leasing and drill-to-earn agreements, the Company has assembled 7,500 net acres with current net production of approximately 30 million cubic feet per day (“MMcf/d”). Approximately $37.6 million of the total $45 million land and leasing spend in the aforementioned area occurred during the third quarter of 2022. The new block adds stacked pay, co-development inventory with over 50 net high rate of return drilling locations across the Austin Chalk and Eagle Ford formations.
On October 3, 2022, SilverBow announced the acquisition of oil and gas assets in the proven highly economic oil and condensate windows of DeWitt and Gonzales counties for a cash purchase price of $87 million, subject to customary closing adjustments. The Company added 5,200 net acres and net production from the acquired assets based on June 2022 production data of approximately 1,100 barrels of oil equivalent per day (“Boe/d”). The transaction was comprised of incremental working interest on SilverBow’s existing acreage as well as new adjacent acreage. This provides for extended laterals, additional inventory locations and more efficient development. The Company closed on the asset transaction on October 31, 2022.
Operational Results
Total production for the nine months ended September 30, 2022 increased 26% from the nine months ended September 30, 2021 to 254 million cubic feet of natural gas equivalent per day.
During the third quarter of 2022, SilverBow drilled 13 net wells and completed and brought online 11 net wells. In its Webb County Gas area, the Company completed and brought online a two-well pad which produced a 30-day average of 30 MMcf/d (100% gas). Of the two wells, one targeted the Austin Chalk formation and represents SilverBow's best performing Austin Chalk well to date. In its Central Oil area, the Company completed and brought online a two-well pad which had been drilled by the previous operator prior to SilverBow taking ownership on June 30, 2022. Performance from the wells has exceeded expectations with a 30-day average of 2,400 Boe/d (94% liquids), however the drilling rig experienced operational delays prior to SilverBow taking ownership and, ultimately, a third well that was drilled on the pad had to be abandoned due to a mechanical failure. The Company also brought online a three-well pad in its Central Oil area early in the fourth quarter with initial results exceeding expectations.
Net equivalent production for the third quarter of 2022 was at the midpoint of guidance. Gas volumes came in at the high-end of guidance, with NGL volumes exceeding guidance. Oil volumes were lower than anticipated due to the mechanical failure on the aforementioned two-well pad and resultant timing delays of the remaining wells drilled during the third quarter. However, as mentioned above, the performance to date from the wells in the Central Oil area remains strong and is exceeding expectations. The rig subsequently returned to expected efficiency levels by the end of July. The Company does not expect any other impact outside of first sales occurring later in the year than what was originally planned. Factoring in the changes to the
35
drilling and completion schedule, SilverBow is guiding to estimated production of 315-329 MMcfe/d (70% gas) for the fourth quarter of 2022 and 270-274 MMcfe/d (73% gas) for full year 2022, respectively.
SilverBow operated two drilling rigs for the entirety of the third quarter, and the Company intends to continue at this pace for the remainder of 2022. At the beginning of October, SilverBow moved both its drilling rigs to its Webb County Gas area. This decision was based on the continued strong Austin Chalk results in the Dorado play. Combining the third and fourth quarters, the Company will have drilled 16 wells at its Fasken property, with 15 of them targeting the Austin Chalk and 1 targeting the Upper Eagle Ford. The returns SilverBow is generating in the Austin Chalk warranted this shift and much of this development should benefit from strong winter gas prices. In addition, the Company's non-op partner elected not to participate in 12 of the 16 wells which will add an incremental 4.5 net wells to SilverBow's 2022 development as it increases its working interest in those wells from 64% to 100%. Management believes this near-term drilling opportunity will result in significant accretion to reserve PV-10 value and increased gas production beyond 2022, which more than offsets the lower near-term oil production from the recent scheduling changes. As a returns-focused company, SilverBow has continued to benefit from its ability to be nimble and deploy capital where the economics make the largest impact.
SilverBow revised its 2022 capital budget to a range of $320-$340 million. The 5% increase to the capital budget reflects the higher working interest captured across the aforementioned Webb County Gas wells drilled in the fourth quarter and land and leasing spend of approximately $7.5 million. Inflationary pressures remain persistent in the current service market but had previously been factored into SilverBow's 2022 capital budget outlook and were not a primary driver of the updated range. With two fully utilized rigs, the Company has greater line of sight into upcoming activity levels and is addressing cost inflation through enhanced procurement initiatives, pre-ordering key materials and employing a range of short and long-term contracts. As always, SilverBow optimizes its drilling schedule based on commodity prices, returns on investment and strategically proving up additional inventory within the portfolio.
Liquidity and Capital Resources
SilverBow's primary use of cash has been to fund capital expenditures to develop its oil and gas properties, fund acquisitions and to repay Credit Facility borrowings. The Company uses cash generated from operating activities and borrowings under its Credit Facility as its primary source of liquidity. As of September 30, 2022, SilverBow’s liquidity consisted of $1.9 million of cash-on-hand and $295.0 million in available borrowings on its Credit Facility, which had a $775.0 million borrowing base. Management believes the Company has sufficient liquidity to meet its obligations through the fourth quarter of 2023 and execute its long-term development plans. For more information on its Credit Facility, see the Credit Facility section within Note 6 to SilverBow's condensed consolidated financial statements.
Contractual Commitments and Obligations
Other than as discussed below, there were no other material changes in SilverBow's contractual commitments during the nine months ended September 30, 2022 from amounts referenced under “Contractual Commitments and Obligations” in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021.
Borrowings under our Credit Facility increased $253.0 million from December 31, 2021 primarily related to our acquisitions during the nine months ended September 30, 2022.
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Summary of 2022 Financial Results Through September 30, 2022
•Revenues and Net Income (Loss): The Company's oil and gas revenues were $554.4 million for the nine months ended September 30, 2022, compared to $255.9 million for the nine months ended September 30, 2021. Revenues were higher due to increased production volumes driven by acquisitions and overall higher commodity pricing. The Company's net income was $167.1 million for the nine months ended September 30, 2022, compared to a net loss of $27.5 million for the nine months ended September 30, 2021. The increase in net income was primarily driven by higher revenues due to increased production volumes and higher commodity pricing.
•Capital Expenditures: The Company's capital expenditures on an accrual basis were $224.8 million for the nine months ended September 30, 2022 compared to $109.9 million for the nine months ended September 30, 2021. The expenditures for the nine months ended September 30, 2022 and 2021 were primarily attributable to drilling and completion activity.
•Working Capital: The Company had a working capital deficit of $141.9 million at September 30, 2022 and a working capital deficit of $65.8 million at December 31, 2021. Included in our working capital deficit was a net liability of $75.4 million and $44.6 million at September 30, 2022 and December 31, 2021, respectively, related to the fair value of our current open derivative contracts. Additionally included in our working capital deficit was a liability of $2.9 million associated with the fair value of our 2021 WTI Contingency Payout and 2022 WTI Contingency Payout. The working capital computation does not include available liquidity through our Credit Facility.
•Cash Flows: For the nine months ended September 30, 2022, the Company generated cash from operating activities of $212.2 million which included negative impacts attributable to changes in working capital of $25.4 million. Cash used for property additions was $163.6 million while cash used in property acquisitions, including purchase price adjustments, was $293.9 million. This excluded $60.6 million attributable to a net increase of capital-related payables and accrued costs. The Company’s net borrowings on the Credit Facility were $253.0 million during the nine months ended September 30, 2022 which were primarily used to fund acquisitions during the nine months ended September 30, 2022.
For the nine months ended September 30, 2021, the Company generated cash from operating activities of $133.6 million which included negative impacts attributable to changes in working capital of $13.9 million. Cash used for property additions was $98.2 million while cash used in property acquisitions was $13.2 million. This excluded $11.4 million attributable to a net increase of capital-related payables and accrued costs. The Company’s net repayments on the Credit Facility were $32.0 million during the nine months ended September 30, 2021.
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Results of Operations
Revenues — Three Months Ended September 30, 2022 and Three Months Ended September 30, 2021
Natural gas production was 70% and 77% of the Company's production volumes for the three months ended September 30, 2022 and 2021, respectively. Natural gas sales were 62% and 63% of oil and gas sales for the three months ended September 30, 2022 and 2021, respectively.
Crude oil production was 17% and 11% of the Company's production volumes for the three months ended September 30, 2022 and 2021, respectively. Crude oil sales were 30% and 25% of oil and gas sales for the three months ended September 30, 2022 and 2021, respectively.
NGL production was 13% and 12% of the Company's production volumes for the three months ended September 30, 2022 and 2021, respectively. NGL sales were 8% and 12% of oil and gas sales for the three months ended September 30, 2022 and 2021, respectively.
The following table provides additional information regarding the Company's oil and gas sales, by area, excluding any effects of the Company's hedging activities, for the three months ended September 30, 2022 and 2021:
| Fields | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||||||||||
| Oil and Gas Sales (In Millions) | Net Oil and Gas Production Volumes (MMcfe) | Oil and Gas Sales (In Millions) | Net Oil and Gas Production Volumes (MMcfe) | |||||||||||||||||
| Webb County Gas | $ | 106.1 | 13,514 | $ | 44.9 | 10,858 | ||||||||||||||
| Western Condensate | 39.7 | 4,623 | 30.9 | 4,807 | ||||||||||||||||
| Southern Eagle Ford | 29.3 | 3,913 | 9.8 | 2,336 | ||||||||||||||||
| Central Oil | 59.6 | 4,727 | 12.1 | 1,333 | ||||||||||||||||
| Eastern Extension | 7.3 | 682 | — | — | ||||||||||||||||
| Non Core | 0.2 | 46 | 1.5 | 196 | ||||||||||||||||
| Total | $ | 242.2 | 27,505 | $ | 99.2 | 19,530 | ||||||||||||||
The sales volumes increase from 2021 to 2022 was primarily due to acquisitions in the second half of 2021 and first half of 2022, in addition to wells brought online as part of our full year 2021 capital program and the first half of 2022.
In the third quarter of 2022, our $142.9 million, or 144%, increase in oil, NGL and natural gas sales from the prior year period resulted from:
•Price variances that had an approximately $90.6 million favorable impact on sales due to overall higher commodity pricing; and
•Volume variances that had an approximately $52.3 million favorable impact on sales due to overall increased commodity production.
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The following table provides additional information regarding our oil and gas sales, by commodity type, as well as the effects of our hedging activities for derivative contracts held to settlement, for the three months ended September 30, 2022 and 2021 (in thousands, except per-dollar amounts):
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||
| Production volumes: | |||||||||||
Oil (MBbl) (1) | 781 | 368 | |||||||||
| Natural gas (MMcf) | 19,324 | 15,092 | |||||||||
Natural gas liquids (MBbl) (1) | 582 | 372 | |||||||||
| Total (MMcfe) | 27,505 | 19,530 | |||||||||
| Oil, natural gas and natural gas liquids sales: | |||||||||||
| Oil | $ | 71,811 | $ | 25,230 | |||||||
| Natural gas | 150,958 | 62,530 | |||||||||
| Natural gas liquids | 19,412 | 11,489 | |||||||||
| Total | $ | 242,181 | $ | 99,249 | |||||||
| Average realized price: | |||||||||||
| Oil (per Bbl) | $ | 91.93 | $ | 68.54 | |||||||
| Natural gas (per Mcf) | 7.81 | 4.14 | |||||||||
| Natural gas liquids (per Bbl) | 33.34 | 30.92 | |||||||||
| Average per Mcfe | $ | 8.81 | $ | 5.08 | |||||||
| Price impact of cash-settled derivatives: | |||||||||||
| Oil (per Bbl) | $ | (20.44) | $ | (17.18) | |||||||
| Natural gas (per Mcf) | (3.47) | (0.69) | |||||||||
| Natural gas liquids (per Bbl) | (1.86) | (7.07) | |||||||||
| Average per Mcfe | $ | (3.06) | $ | (0.99) | |||||||
| Average realized price including impact of cash-settled derivatives: | |||||||||||
| Oil (per Bbl) | $ | 71.49 | $ | 51.36 | |||||||
| Natural gas (per Mcf) | 4.34 | 3.45 | |||||||||
| Natural gas liquids (per Bbl) | 31.48 | 23.85 | |||||||||
| Average per Mcfe | $ | 5.75 | $ | 4.09 | |||||||
(1) Oil and natural gas liquids are converted at the rate of one barrel to six Mcfe. Mcf refers to one thousand cubic feet, and MMcf refers to one million cubic feet. Bbl refers to one barrel of oil, and MBbl refers to one thousand barrels.
For the three months ended September 30, 2022 and 2021, the Company recorded net losses of $1.3 million and $88.6 million from our commodities derivatives activities, respectively. Additionally for the three months ended September 30, 2022, we recorded a net gain of $6.1 million related to valuation changes from our 2021 and 2022 WTI Contingency Payouts. Hedging activity is recorded in “Gain (loss) on commodity derivatives, net” on the accompanying condensed consolidated statements of operations.
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Costs and Expenses — Three Months Ended September 30, 2022 and Three Months Ended September 30, 2021
The following table provides additional information regarding our expenses for the three months ended September 30, 2022 and 2021 (in thousands):
| Costs and Expenses | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||
| General and administrative, net | $ | 4,343 | $ | 5,257 | ||||
| Depreciation, depletion, and amortization | 41,501 | 16,054 | ||||||
| Accretion of asset retirement obligations | 166 | 77 | ||||||
| Lease operating expenses | 17,701 | 6,978 | ||||||
| Workovers | 284 | 423 | ||||||
| Transportation and gas processing | 9,662 | 5,913 | ||||||
| Severance and other taxes | 12,581 | 4,908 | ||||||
| Interest expense, net | 12,173 | 7,433 | ||||||
General and Administrative Expenses, Net. These expenses on a per-Mcfe basis were $0.16 and $0.27 for the three months ended September 30, 2022 and 2021, respectively. The decrease in costs was primarily due to increased supervision fees charged to wells we operate, which are recorded as a reduction of general and administrative expenses, during the three months ended September 30, 2022, while the decrease in per-Mcfe rate was due to an overall increase in production driven by our acquisitions. Included in general and administrative expenses is $1.2 million in share-based compensation for both the three months ended September 30, 2022 and 2021, respectively.
Depreciation, Depletion and Amortization. These expenses on a per-Mcfe basis were $1.51 and $0.82 for the three months ended September 30, 2022 and 2021, respectively. The increase in our per-Mcfe depreciation, depletion and amortization rate was primarily related to the acquisitions in the second half of 2021 and first half of 2022 and inflation on future development costs. The increase in costs is related to the increase in the per-Mcfe rate, coupled with an overall increase in production.
Lease Operating Expenses and Workovers. These expenses on a per-Mcfe basis were $0.65 and $0.38 for the three months ended September 30, 2022 and 2021, respectively. The increase in costs was primarily due to higher compression, labor, salt water disposal and chemical costs driven by our acquisitions in the second half of 2021 and first half of 2022.
Transportation and Gas Processing. These expenses are related to natural gas and NGL sales. These expenses on a per-Mcfe basis were $0.35 and $0.30 for the three months ended September 30, 2022 and 2021, respectively.
Severance and Other Taxes. These expenses on a per-Mcfe basis were $0.46 and $0.25 for the three months ended September 30, 2022 and 2021, respectively. Severance and other taxes, as a percentage of oil and gas sales, were approximately 5.2% and 4.9% for the three months ended September 30, 2022 and 2021, respectively.
Interest. Our gross interest cost was $12.2 million and $7.4 million for the three months ended September 30, 2022 and 2021, respectively. The increase in gross interest is primarily due to higher borrowings. There were no capitalized interest costs for the three months ended September 30, 2022 and 2021.
Income Taxes. The Company recorded an income tax provision of $6.1 million for the three months ended September 30, 2022 primarily attributable to a deferred federal income tax expense and deferred state income tax expense. The provision is a product of the overall forecasted annual effective tax rate applied to the year to date income. There was $0.4 million income tax benefit for the three months ended September 30, 2021 which was fully attributable to a current income tax benefit.
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Results of Operations
Revenues — Nine Months Ended September 30, 2022 and Nine Months Ended September 30, 2021
Natural gas production was 75% and 79% of the Company's production volumes for the nine months ended September 30, 2022 and 2021, respectively. Natural gas sales were 63% and 67% of oil and gas sales for the nine months ended September 30, 2022 and 2021, respectively.
Crude oil production was 14% and 10% of the Company's production volumes for the nine months ended September 30, 2022 and 2021, respectively. Crude oil sales were 28% and 23% of oil and gas sales for the nine months ended September 30, 2022 and 2021, respectively.
NGL production was 11% of the Company's production volumes for both the nine months ended September 30, 2022 and 2021. NGL sales were 9% and 10% of oil and gas sales for the nine months ended September 30, 2022 and 2021, respectively.
The following table provides additional information regarding the Company's oil and gas sales, by area, excluding any effects of the Company's hedging activities, for the nine months ended September 30, 2022 and 2021:
| Fields | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||||||||||
| Oil and Gas Sales (In Millions) | Net Oil and Gas Production Volumes (MMcfe) | Oil and Gas Sales (In Millions) | Net Oil and Gas Production Volumes (MMcfe) | |||||||||||||||||
| Webb County Gas | $ | 253.5 | 37,386 | $ | 127.1 | 31,070 | ||||||||||||||
| Western Condensate | 116.2 | 13,096 | 61.1 | 11,550 | ||||||||||||||||
| Southern Eagle Ford | 64.1 | 9,236 | 27.6 | 7,341 | ||||||||||||||||
| Central Oil | 94.6 | 7,251 | 37.6 | 4,675 | ||||||||||||||||
| Eastern Extension | 24.5 | 2,242 | — | — | ||||||||||||||||
| Non Core | 1.5 | 256 | 2.5 | 485 | ||||||||||||||||
| Total | $ | 554.4 | 69,467 | $ | 255.9 | 55,121 | ||||||||||||||
The sales volumes increase from 2021 to 2022 was primarily due to acquisitions in the second half of 2021 and first half of 2022, in addition to wells brought online as part of our full year 2021 capital program and the first half of 2022.
In the third quarter of 2022, our $298.6 million, or 117%, increase in oil, NGL and natural gas sales from the prior year period resulted from:
•Price variances that had an approximately $214.8 million favorable impact on sales due to overall higher commodity pricing; and
•Volume variances that had an approximately $83.8 million favorable impact on sales due to overall increased commodity production.
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The following table provides additional information regarding our oil and gas sales, by commodity type, as well as the effects of our hedging activities for derivative contracts held to settlement, for the nine months ended September 30, 2022 and 2021 (in thousands, except per-dollar amounts):
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||
| Production volumes: | |||||||||||
Oil (MBbl) (1) | 1,611 | 933 | |||||||||
| Natural gas (MMcf) | 51,829 | 43,594 | |||||||||
Natural gas liquids (MBbl) (1) | 1,329 | 988 | |||||||||
| Total (MMcfe) | 69,467 | 55,121 | |||||||||
| Oil, natural gas and natural gas liquids sales: | |||||||||||
| Oil | $ | 155,566 | $ | 58,587 | |||||||
| Natural gas | 351,626 | 172,234 | |||||||||
| Natural gas liquids | 47,250 | 25,029 | |||||||||
| Total | $ | 554,442 | $ | 255,850 | |||||||
| Average realized price: | |||||||||||
| Oil (per Bbl) | $ | 96.58 | $ | 62.82 | |||||||
| Natural gas (per Mcf) | 6.78 | 3.95 | |||||||||
| Natural gas liquids (per Bbl) | 35.56 | 25.32 | |||||||||
| Average per Mcfe | $ | 7.98 | $ | 4.64 | |||||||
| Price impact of cash-settled derivatives: | |||||||||||
Oil (per Bbl)(2) | $ | (28.60) | $ | (16.57) | |||||||
| Natural gas (per Mcf) | (2.45) | (0.29) | |||||||||
| Natural gas liquids (per Bbl) | (4.33) | (4.19) | |||||||||
| Average per Mcfe | $ | (2.57) | $ | (0.58) | |||||||
| Average realized price including impact of cash-settled derivatives: | |||||||||||
| Oil (per Bbl) | $ | 67.98 | $ | 46.25 | |||||||
| Natural gas (per Mcf) | 4.33 | 3.66 | |||||||||
| Natural gas liquids (per Bbl) | 31.23 | 21.13 | |||||||||
| Average per Mcfe | $ | 5.41 | $ | 4.06 | |||||||
(1) Oil and natural gas liquids are converted at the rate of one barrel to six Mcfe. Mcf refers to one thousand cubic feet, and MMcf refers to one million cubic feet. Bbl refers to one barrel of oil, and MBbl refers to one thousand barrels.
(2) Excludes approximately $3.6 million in settled oil hedges related to our Sundance acquisition.
For the nine months ended September 30, 2022 and 2021, the Company recorded net losses of $162.5 million and $152.9 million from our derivatives activities, respectively. Additionally for the nine months ended September 30, 2022, we recorded a net gain of $4.7 million related to valuation changes from our 2021 and 2022 WTI Contingency Payouts. Hedging activity is recorded in “Gain (loss) on commodity derivatives, net” on the accompanying condensed consolidated statements of operations.
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Costs and Expenses — Nine Months Ended September 30, 2022 and Nine Months Ended September 30, 2021
The following table provides additional information regarding our expenses for the nine months ended September 30, 2022 and 2021 (in thousands):
| Costs and Expenses | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||
| General and administrative, net | $ | 14,840 | $ | 14,872 | ||||
| Depreciation, depletion, and amortization | 89,096 | 45,485 | ||||||
| Accretion of asset retirement obligations | 366 | 226 | ||||||
| Lease operating expenses | 37,095 | 18,767 | ||||||
| Workovers | 933 | 512 | ||||||
| Transportation and gas processing | 22,784 | 17,175 | ||||||
| Severance and other taxes | 30,183 | 11,974 | ||||||
| Interest expense, net | 26,632 | 21,888 | ||||||
General and Administrative Expenses, Net. These expenses on a per-Mcfe basis were $0.21 and $0.27 for the nine months ended September 30, 2022 and 2021, respectively. The decrease in per-Mcfe rate was due to an overall increase in production driven by our acquisitions. Included in general and administrative expenses is $3.9 million and $3.5 million in share-based compensation for the nine months ended September 30, 2022 and 2021, respectively.
Depreciation, Depletion and Amortization. These expenses on a per-Mcfe basis were $1.28 and $0.83 for the nine months ended September 30, 2022 and 2021, respectively. The increase in our per-Mcfe depreciation, depletion and amortization rate was primarily related to the acquisitions in the second half of 2021 and the first half of 2022 and inflation on future development costs. The increase in costs is related to the increase in the per-Mcfe rate, coupled with an overall increase in production.
Lease Operating Expenses and Workovers. These expenses on a per-Mcfe basis were $0.55 and $0.35 for the nine months ended September 30, 2022 and 2021, respectively. The increase in costs was primarily due to higher compression, labor, salt water disposal and chemical costs driven by our acquisitions in the second half of 2021 and first half of 2022.
Transportation and Gas Processing. These expenses are related to natural gas and NGL sales. These expenses on a per-Mcfe basis were $0.33 and $0.31 for the nine months ended September 30, 2022 and 2021.
Severance and Other Taxes. These expenses on a per-Mcfe basis were $0.43 and $0.22 for the nine months ended September 30, 2022 and 2021, respectively. Severance and other taxes, as a percentage of oil and gas sales, were approximately 5.4% and 4.7% for the nine months ended September 30, 2022 and 2021, respectively.
Interest. Our gross interest cost was $26.6 million and $21.9 million for the nine months ended September 30, 2022 and 2021, respectively. The increase in gross interest is primarily due to higher borrowings. There were no capitalized interest costs for the nine months ended September 30, 2022 and 2021.
Income Taxes. The Company recorded an income tax provision of $7.7 million for the nine months ended September 30, 2022 primarily attributable to a deferred federal income tax expense and deferred state income tax expense. The benefit is a product of the overall forecasted annual effective tax rate applied to the year to date income. There was $0.4 million income tax benefit for the nine months ended September 30, 2021 which was fully attributable to a current state income tax benefit.
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Critical Accounting Policies and New Accounting Pronouncements
There have been no changes in the critical accounting policies disclosed in our 2021 Annual Report on Form 10-K.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Risk. Our major market risk exposure is the commodity pricing applicable to our oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas. This commodity pricing volatility has continued with unpredictable price swings in recent periods.
Our price risk management policy permits the utilization of agreements and financial instruments (such as futures, forward contracts, swaps and options contracts) to mitigate price risk associated with fluctuations in oil and natural gas prices. We do not utilize these agreements and financial instruments for trading and only enter into derivative agreements with banks in our Credit Facility. For additional discussion related to our price risk management policy, refer to Note 8 of our condensed consolidated financial statements included in Item 1 of this report.
Customer Credit Risk. We are exposed to the risk of financial non-performance by customers. Our ability to collect on sales to our customers is dependent on the liquidity of our customer base. Continued volatility in both credit and commodity markets may reduce the liquidity of our customer base. To manage customer credit risk, we monitor credit ratings of customers and, when considered necessary, we also obtain letters of credit from certain customers, parent company guarantees, if applicable, and other collateral as considered necessary to reduce risk of loss. Due to availability of other purchasers, we do not believe the loss of any single oil or natural gas customer would have a material adverse effect on our results of operations.
Concentration of Sales Risk. A large portion of our oil and gas sales are made to Kinder Morgan, Inc. and its affiliates and we expect to continue this relationship in the future. We believe that the business risk of this relationship is mitigated by the reputation and nature of their business and the availability of other purchasers.
Interest Rate Risk. At September 30, 2022, we had a combined $630.0 million drawn under our Credit Facility and our Second Lien, which bear floating rates of interest and therefore are susceptible to interest rate fluctuations. These variable interest rate borrowings are also impacted by changes in short-term interest rates. A hypothetical one percentage point increase in interest rates on our borrowings outstanding under our Credit Facility and Second Lien at September 30, 2022 would increase our annual interest expense by $6.3 million.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, consisting of controls and other procedures designed to give reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding such required disclosure. Our Chief Executive Officer and Chief Financial Officer have evaluated such disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q and have determined that such disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the three months ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
No material legal proceedings are pending other than ordinary, routine litigation incidental to the Company’s business.
Item 1A. Risk Factors.
A description of our risk factors can be found in “Part I, Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and “Part II, Item 1A. Risk Factors” included in our Quarterly Report on Form 10-Q for the period ended March 31, 2022. Other than as provided below, there have been no material changes in our risk factors disclosed in the 2021 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the period ended March 31, 2022.
We may not be able to utilize a portion of our NOLs to offset future taxable income for U.S. federal income tax purposes, which could adversely affect our net income and cash flow.
As of December 31, 2021, we had federal NOLs of approximately $463 million, approximately $274 million of which will expire in varying amounts beginning in 2033 through 2037. Utilization of these NOLs depends on many factors, including our future taxable income, which cannot be assured. In addition, Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes limitations on a corporation’s ability to utilize its NOLs if it experiences an ownership change (as determined under Section 382 of the Code). Generally, an ownership change occurs if one or more shareholders (or groups of shareholders), each of whom is deemed to own five percent or more in value of a corporation’s stock, increase their aggregate percentage ownership by more than 50 percent over the lowest percentage of stock owned by those shareholders at any time during the preceding three-year period. In the event of an ownership change, utilization of the NOLs would be subject to an annual limitation under Section 382. We believe we had an ownership change in August 2022 and, therefore, are subject to an annual limitation on the usage of our NOLs generated prior to the ownership change. However, we do not expect to have any of our NOLs expire before becoming available to be utilized by the Company. Management will continue to monitor the potential impact of Section 382 with respect to our NOLs. Additional changes in our future stock ownership or future regulatory changes could also limit our ability to utilize our NOLs. To the extent we are not able to offset future taxable income with our NOLs, our net income and cash flow may be adversely affected
Certain provisions of our Charter (as defined below), our Bylaws (as defined below) and the Rights Agreement may make it difficult for stockholders to change the composition of our Board and may discourage, delay or prevent a merger or acquisition that some stockholders may consider beneficial.
Certain provisions of our Certificate of Incorporation, as amended, effective April 22, 2016 ( the “Charter”) and our Second Amended and Restated Bylaws, effective October 31, 2022 (the “Bylaws”) and our existing director nomination agreement may have the effect of delaying or preventing changes in control if our Board determines that such changes in control are not in the best interests of the Company and our stockholders. The provisions in our Charter and Bylaws and our existing director nomination agreement include, among other things, those that:
•provide for a classified board of directors;
•authorize our Board to issue preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;
•establish advance notice procedures for nominating directors or presenting matters at stockholder meetings;
•provide SVP the right to nominate up to two of our directors; and
•limit the persons who may call special meetings of stockholders.
While these provisions have the effect of encouraging persons seeking to acquire control of the Company to negotiate with our Board, they could enable the Board to hinder or frustrate a transaction that some, or a majority, of the stockholders may believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board, which is responsible for appointing the members of our management. Furthermore, we have entered into a director nomination agreement with each of SVP, and other former holders of our senior notes that provides for certain continuing nomination rights subject to conditions on share ownership.
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Additionally, on September 20, 2022, the Board adopted the Rights Agreement and declared a dividend distribution of one Right for each outstanding share of Company common stock to holders of record on October 5, 2022. In the event that a person or group acquires beneficial ownership of 15% or more of the Company’s then-outstanding common stock, subject to certain exceptions, each Right would entitle its holder (other than such person or members of such group) to purchase additional shares of Company common stock at a substantial discount to the public market price. In addition, at any time after a person or group acquires beneficial ownership of 15% or more of the outstanding common stock, subject to certain exceptions, the Board may direct the Company to exchange the Rights (other than Rights owned by such person or certain related parties, which will have become null and void), in whole or in part, at an exchange ratio of one share of common stock per Right (subject to adjustment). While in effect, the Rights Agreement could make it more difficult for a third party to acquire control of the Company or a large block of the common stock of the Company without the approval of the Board. The Rights Agreement will expire on the earliest of (a) 5:00 p.m., New York City time, on the first business day after the 2023 annual stockholders’ meeting, (b) 5:00 p.m., New York City time, on June 30, 2023, (c) the time at which the Rights are redeemed and (d) the time at which the Rights are exchanged in full.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Except as previously disclosed in a Current Report on Form 8-K, no unregistered sales of our common stock were made during the quarterly period ended September 30, 2022.
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Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
On October 31, 2022, the Board adopted the Second Amended and Restated Bylaws of the Company (the “Bylaws”), which became effective the same day. Among other things, the amendments: (a) eliminate the requirement to have a stockholder list available for inspection at the stockholder meeting; (b) update the procedural mechanics with respect to adjourned meetings of stockholders; (c) provide for procedures and requirements with respect to stockholders’ right to act by written consent in lieu of a meeting (including procedures and requirements for stockholders to request a record date for such action); (d) enhance the procedural mechanics and disclosure requirements relating to business proposals submitted and director nominations made by stockholders, including by requiring: (i) certain additional background information regarding the proposing stockholders, proposed nominees or business and other persons related to such matter, (ii) a representation as to whether such stockholder intends or is part of a group which intends to deliver, in the same manner required of the Company under the Exchange Act, a proxy statement or form of proxy to holders of shares representing, in the case of nominations, at least 67% of the voting power of the Company’s outstanding stock entitled to vote generally in the election of directors, or in the case of other business, at least the percentage of the voting power of the Company’s outstanding stock required to approve or adopt such proposal and (iii) a representation that, immediately after soliciting the required percentage of stockholders described above, the stockholder submitting such matter will provide the Company with evidence confirming that the necessary steps have been taken to deliver a proxy statement and form of proxy to holders of the required percentage of the voting power of the Company’s stock entitled to vote generally in the election of directors; (e) require that a stockholder directly or indirectly soliciting proxies from other stockholders use a proxy card color other than white; and (f) opt out of Section 116 of the General Corporation Law of the State of Delaware by requiring that certain notices and other information or documents provided by stockholders to the Company pursuant to the Bylaws must be delivered in writing. The Bylaws also incorporate various other updates and technical, clarifying and conforming changes.
The preceding summary of the amendments to the Bylaws is qualified in its entirety by reference to, and should be read in connection with, the complete copy of the Second Amended and Restated Bylaws filed herewith as Exhibit 3.2.
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Item 6. Exhibits.
The following exhibits in this index are required by Item 601 of Regulation S-K and are filed herewith or are incorporated herein by reference:
| 3.1 | |||||
| 3.2* | |||||
| 3.3 | |||||
| 4.1 | |||||
| 31.1* | |||||
| 31.2* | |||||
| 32.1# | |||||
| 101* | The following materials from SilverBow Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets (Unaudited), (ii) the Condensed Consolidated Statements of Operations (Unaudited), (iii) the Consolidated Statements of Stockholders Equity (Unaudited), (iv) the Condensed Consolidated Statements of Cash Flows (Unaudited), and (v) Notes to the Condensed Consolidated Financial Statements. | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | ||||
*Filed herewith
# Furnished herewith. Not considered to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section.
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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 thereunto duly authorized.
| SILVERBOW RESOURCES, INC. (Registrant) | ||||||||||||||
| Date: | November 3, 2022 | By: | /s/ Christopher M. Abundis | |||||||||||
| Christopher M. Abundis Executive Vice President, Chief Financial Officer, General Counsel and Secretary | ||||||||||||||
| Date: | November 3, 2022 | By: | /s/ W. Eric Schultz | |||||||||||
| W. Eric Schultz Controller | ||||||||||||||
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