NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.BASIS OF PRESENTATION
Description of Company
Gulfport Energy Corporation (the "Company" or "Gulfport") is an independent natural gas-weighted exploration and production company focused on the production of natural gas, crude oil and NGL in the United States. The Company's principal properties are located in eastern Ohio targeting the Utica and Marcellus and in central Oklahoma targeting the SCOOP Woodford and Springer formations.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Gulfport were prepared in accordance with GAAP and the rules and regulations of the SEC.
This Quarterly Report on Form 10-Q (this “Form 10-Q”) relates to the financial position and periods as of and for the three months ended March 31, 2023, and the three months ended March 31, 2022. The Company's annual report on Form 10-K for the year ended December 31, 2022, should be read in conjunction with this Form 10-Q. The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of our condensed consolidated financial statements and accompanying notes and include the accounts of our wholly-owned subsidiaries. Intercompany accounts and balances have been eliminated. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following at March 31, 2023 and December 31, 2022 (in thousands): | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Revenue payable and suspense | $ | 195,318 | | | $ | 222,721 | |
Accounts payable | 55,417 | | | 37,807 | |
Accrued capital expenditures | 50,972 | | | 36,464 | |
Accrued transportation, gathering, processing and compression | 30,754 | | | 56,138 | |
Accrued contract rejection damages and shares held in reserve | 1,996 | | | 40,996 | |
Other accrued liabilities | 43,580 | | | 43,258 | |
Total accounts payable and accrued liabilities | $ | 378,037 | | | $ | 437,384 | |
Other, net (in thousands)
Other, net in the Company's consolidated statements of operations for the three months ended March 31, 2023, included $17.8 million related to the interim TC claim distribution as discussed in Note 9. The timing and amount of any future distributions to Gulfport are not certain, and the total amount will be impacted by the liquidating trust's distributions and resolution of other remaining bankruptcy claims. Additionally, as discussed in Note 9, Other, net includes a $1 million cash payment to satisfy the Rover administrative claim. Other, net in the Company's consolidated statements of operations for the three months ended March 31, 2022, included $11.5 million related to the initial TC claim distribution as discussed in Note 9.
Supplemental Cash Flow and Non-Cash Information (in thousands) | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
Supplemental disclosure of cash flow information: | | | |
Interest payments, net of amounts capitalized | $ | 2,353 | | | $ | 2,110 | |
Changes in operating assets and liabilities: | | | |
Decrease in accounts receivable - oil and natural gas sales | $ | 158,541 | | | $ | 25,985 | |
Increase in accounts receivable - joint interest and other | (1,837) | | | (17,722) | |
(Decrease) increase in accounts payable and accrued liabilities | (82,671) | | | 2,135 | |
Decrease in prepaid expenses | 764 | | | 6,811 | |
Increase in other assets | (38) | | | (17) | |
Total changes in operating assets and liabilities | $ | 74,759 | | | $ | 17,192 | |
Supplemental disclosure of non-cash transactions: | | | |
Capitalized stock-based compensation | $ | 864 | | | $ | 597 | |
Asset retirement obligation capitalized | $ | — | | | $ | 16 | |
Asset retirement obligation removed due to divestiture | $ | (919) | | | $ | — | |
Release of common stock held in reserve | $ | — | | | $ | 28,220 | |
Interest capitalized | $ | 824 | | | $ | — | |
2.PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated DD&A as of March 31, 2023 and December 31, 2022, are as follows (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Proved oil and natural gas properties | $ | 2,564,378 | | | $ | 2,418,666 | |
Unproved properties | 183,456 | | | 178,472 | |
Other depreciable property and equipment | 6,788 | | | 5,977 | |
Land | 386 | | | 386 | |
Total property and equipment | 2,755,008 | | | 2,603,501 | |
Accumulated DD&A | (625,019) | | | (545,771) | |
Property and equipment, net | $ | 2,129,989 | | | $ | 2,057,730 | |
Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the Company's oil and natural gas properties. At March 31, 2023 and 2022, the net book value of the Company's oil and gas properties was below the calculated ceiling. As a result, the Company did not record an impairment of its oil and natural gas properties for the three months ended March 31, 2023 or 2022.
Certain general and administrative costs are capitalized to the full cost pool and represent management’s estimate of costs incurred directly related to exploration and development activities. All general and administrative costs not capitalized are charged to expense as they are incurred. Capitalized general and administrative costs were approximately $5.1 million and $4.7 million for the three months ended March 31, 2023 and 2022, respectively.
The Company evaluates the costs excluded from its amortization calculation at least annually. Individually insignificant unevaluated properties are grouped for evaluation and periodically transferred to evaluated properties over a timeframe consistent with their expected development schedule.
The following table summarizes the Company’s non-producing properties excluded from amortization by area as of March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Utica | $ | 153,435 | | | $ | 147,370 | |
SCOOP | 30,021 | | | 31,102 | |
Total unproved properties | $ | 183,456 | | | $ | 178,472 | |
Asset Retirement Obligation
The following table provides a reconciliation of the Company’s asset retirement obligation for the three months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
Asset retirement obligation, beginning of period | $ | 33,171 | | | $ | 28,264 | |
Liabilities incurred | — | | | 16 | |
Liabilities settled | (165) | | | — | |
Liabilities removed due to divestitures | (919) | | | — | |
Accretion expense | 764 | | | 692 | |
Total asset retirement obligation as of end of period | $ | 32,851 | | | $ | 28,972 | |
3.DEBT
Debt consisted of the following items as of March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
8.0% senior unsecured notes due 2026 | $ | 550,000 | | | $ | 550,000 | |
Credit Facility due 2025 | — | | | 145,000 | |
Net unamortized debt issuance costs | (790) | | | (845) | |
Total debt, net | 549,210 | | | 694,155 | |
Less: current maturities of long-term debt | — | | | — | |
Total long-term debt, net | $ | 549,210 | | | $ | 694,155 | |
Credit Facility
On October 14, 2021, the Company entered into the Existing Credit Facility with JPMorgan Chase Bank, N.A., as administrative agent, and various lender parties. The Existing Credit Facility provided for an aggregate maximum principal amount of up to $1.5 billion, an initial borrowing base of $850 million and an initial aggregate elected commitment amount of $700 million. The Existing Credit Facility also provides for a $175.0 million sublimit of the aggregate commitments that is available for the issuance of letters of credit. The Credit Facility matures October 14, 2025.
The borrowing base is redetermined semiannually on or around May 1 and November 1 of each year.
On May 2, 2022, the Company completed its semi-annual borrowing base redetermination and entered into the Amendment to Borrowing Base Redetermination Agreement and First Amendment to our Credit Agreement, which amended the Existing Credit Facility. The amendment, among other things, (a) increased the borrowing base under the Credit Facility from $850 million to $1.0 billion with the elected commitments remaining at $700 million, (b) amended certain covenants related to hedging to ease certain requirements and limitations, (c) amended the covenants governing restricted payments to (i) increased the Net Leverage Ratio allowing unlimited restricted payments from 1.00 to 1.00 to 1.25 to 1.00 and (ii) permitted additional restricted payments to redeem preferred equity until December 31, 2022, provided certain leverage, no event of default or borrowing base deficiency and availability tests were met, and (d) provided for the transition from a LIBOR to a SOFR benchmark, with a 10 basis point credit spread adjustment for all tenors.
On October 31, 2022, the Company completed its semi-annual borrowing base redetermination and entered into the Borrowing Base Reaffirmation Agreement and Second Amendment to our Credit Agreement ("Amendment"), which amended the Existing Credit Facility (as amended, the "Credit Facility"). The Amendment, among other things, reconfirmed the borrowing base under the Credit Facility at $1.0 billion and the elected commitments at $700 million.
On May 1, 2023, the Company completed its semi-annual Credit Facility borrowing base redetermination as discussed in Note 15. The Credit Facility bears interest at a rate equal to, at the Company’s election, either (a) SOFR benchmark plus an applicable margin that varies from 2.75% to 3.75% per annum or (b) a base rate plus an applicable margin that varies from 1.75% to 2.75% per annum, based on borrowing base utilization. The Company is required to pay a commitment fee of 0.50% per annum on the average daily unused portion of the current aggregate commitments under the Credit Facility. The Company is also required to pay customary letter of credit and fronting fees.
The Credit Facility requires the Company to maintain as of the last day of each fiscal quarter (i) a net funded leverage ratio of less than or equal to 3.25 to 1.00, and (ii) a current ratio of greater than or equal to 1.00 to 1.00.
The obligations under the Credit Facility, certain swap obligations and certain cash management obligations, are guaranteed by the Company and the wholly-owned domestic material subsidiaries of the Borrower (collectively, the “Guarantors” and, together with the Borrower, the “Loan Parties”) and secured by substantially all of the Loan Parties’ assets (subject to customary exceptions).
The Credit Facility also contains customary affirmative and negative covenants, including, among other things, as to compliance with laws (including environmental laws and anti-corruption laws), delivery of quarterly and annual financial statements and borrowing base certificates, conduct of business, maintenance of property, maintenance of insurance, entry into certain derivatives contracts, restrictions on the incurrence of liens, indebtedness, asset dispositions, restricted payments, and other customary covenants. These covenants are subject to a number of limitations and exceptions.
As of March 31, 2023, the Company had no outstanding borrowings under the Credit Facility, $74.4 million in letters of credit outstanding and was in compliance with all covenants under the credit agreement.
For the three months ended March 31, 2023, the Credit Facility bore interest at a weighted average rate of 7.58%.
2026 Senior Notes
On the Emergence Date, pursuant to the terms of the Plan, the Company issued $550 million aggregate principal amount of its 8.0% senior notes due 2026. The notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that guarantee the Credit Facility. Interest on the 2026 Senior Notes is payable semi-annually, on June 1 and December 1 of each year. The 2026 Senior Notes were issued under the Indentures, dated as of May 17, 2021, by and among the Issuer, UMB Bank, National Association, as trustee, and the Guarantors and mature on May 17, 2026.
The covenants of the 1145 Indenture (other than the payment covenant) require that the Company comply with the covenants of the 4(a)(2) Indenture, as amended. The 4(a)(2) Indenture contains covenants limiting the Issuer’s and its restricted subsidiaries’ ability to (i) incur additional debt, (ii) pay dividends or distributions in respect of certain equity interests or redeem, repurchase or retire certain equity interests or subordinated indebtedness, (iii) make certain investments, (iv) create restrictions on distributions from restricted subsidiaries, (v) engage in specified sales of assets, (vi) enter into certain transactions among affiliates, (vii) engage in certain lines of business, (viii) engage in consolidations, mergers and acquisitions,
(ix) create unrestricted subsidiaries and (x) incur or create liens. These covenants contain important exceptions, limitations and qualifications. At any time that the 2026 Senior Notes are rated investment grade, certain covenants will be terminated and cease to apply.
Capitalization of Interest
The Company capitalized $0.8 million in interest expense for the three months ended March 31, 2023 and did not capitalize interest expense for the three months ended March 31, 2022.
Fair Value of Debt
At March 31, 2023, the carrying value of the outstanding debt represented by the 2026 Senior Notes was $549.2 million. Based on the quoted market prices (Level 1), the fair value of the 2026 Senior Notes was determined to be $549.5 million at March 31, 2023.
4.MEZZANINE EQUITY
On the Emergence Date, the Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State to provide for, among other things, (i) the authority to issue 42 million shares of common stock with a par value of $0.0001 per share and (ii) the designation of 110,000 shares of preferred stock, with a par value of $0.0001 per share and a liquidation preference of $1,000 per share (the "Liquidation Preference").
Preferred Stock
On the Emergence Date, the Successor issued 55,000 shares of preferred stock.
Holders of preferred stock are entitled to receive cumulative quarterly dividends at a rate of 10% per annum of the Liquidation Preference with respect to cash dividends and 15% per annum of the Liquidation Preference with respect to dividends paid in kind as additional shares of preferred stock (“PIK Dividends”). Gulfport currently has the option to pay either cash dividends or PIK Dividends on a quarterly basis.
Each holder of shares of preferred stock has the right (the “Conversion Right”), at its option and at any time, to convert all or a portion of the shares of preferred stock that it holds into a number of shares of common stock equal to the quotient obtained by dividing (x) the product obtained by multiplying (i) the Liquidation Preference times (ii) an amount equal to one (1) plus the Per Share Makewhole Amount (as defined in the Preferred Terms) on the date of conversion, by (y) $14.00 per share (as may be adjusted under the Preferred Terms). The shares of preferred stock outstanding at March 31, 2023, would convert to approximately 3.7 million shares of common stock if all holders of preferred stock exercised their Conversion Right.
Gulfport shall have the right, but not the obligation, to redeem all, but not less than all, of the outstanding shares of preferred stock by notice to the holders of preferred stock, at the greater of (i) the aggregate value of the preferred stock, calculated by the Current Market Price (as defined in the Preferred Terms) of the number of shares of common stock into which, subject to redemption, such preferred stock would have been converted if such shares were converted pursuant to the Conversion Right at the time of such redemption and (ii) (y) if the date of such redemption is on or prior to the three year anniversary of the Emergence Date, the sum of the Liquidation Preference plus the sum of all unpaid PIK Dividends through the three year anniversary of the Emergence Date, or (x) if the date of such redemption is after the three year anniversary of the Emergence Date, the Liquidation Preference (the “Redemption Price”).
Following the Emergence Date, if there is a Fundamental Change (as defined in the Preferred Terms), Gulfport is required to redeem all, but not less than all, of the outstanding shares of preferred stock by cash payment of the Redemption Price per share of preferred stock within three (3) business days of the occurrence of such Fundamental Change. Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if Gulfport lacks sufficient cash to redeem all outstanding shares of preferred stock, the Company is required to redeem a pro rata portion of each holder’s shares of preferred stock.
The preferred stock has no stated maturity and will remain outstanding indefinitely unless repurchased or redeemed by Gulfport or converted into common stock.
The preferred stock has been classified as mezzanine equity in the accompanying consolidated balance sheets due to the redemption features noted above.
Dividends and Conversions
During the three months ended March 31, 2023, the Company paid $1.3 million of cash dividends to holders of our preferred stock.
There were no conversions of preferred stock during the three months ended March 31, 2023. Preferred stock outstanding as of March 31, 2023, totaled 52,295 shares.
5.EQUITY
On the Emergence Date, the Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State to provide for, among other things, (i) the authority to issue 42 million shares of common stock with a par value of $0.0001 per share and (ii) the designation of 110,000 shares of preferred stock, with a par value of $0.0001 per share and a Liquidation Preference of $1,000 per share.
Common Stock
On the Emergence Date, Gulfport issued approximately 19.8 million shares of common stock and 1.7 million shares of common stock were issued to the Disputed Claims Reserve.
In January 2022, approximately 876,000 shares in the Disputed Claims Reserve at December 31, 2021 were issued to certain claimants. As of March 31, 2023, approximately 62,000 shares continue to be held in the Disputed Claims Reserve and may be issued upon finalization of remaining claims.
Share Repurchase Program
In November 2021 the Company's Board of Directors approved the Repurchase Program to acquire up to $100 million of common stock and subsequently increased the authorization to $300 million in 2022, extending through June 30, 2023. On February 27, 2023, the Board of Directors approved an increase to the authorization up to $400 million. The additional $100 million authorization expires on March 31, 2024. Purchases under the Repurchase Program may be made from time to time in open market or privately negotiated transactions, and will be subject to available liquidity, market conditions, credit agreement restrictions, applicable legal requirements, contractual obligations and other factors. The Repurchase Program does not require the Company to acquire any specific number of shares of common stock. The Company intends to purchase shares under the Repurchase Program with available funds while maintaining sufficient liquidity to fund its capital development program. The Repurchase Program may be suspended from time to time, modified, extended or discontinued by the Board of Directors at any time. During the three months ended March 31, 2023, the Company repurchased 459,087 shares for $32.9 million at a weighted average price of $71.61 per share. As of March 31, 2023, the Company has repurchased 3.4 million shares for $283.6 million at a weighted average price of $84.44 per share since the inception of the Repurchase Program.
6.STOCK-BASED COMPENSATION
As of the Emergence Date, the Board of Directors adopted the Incentive Plan with a share reserve equal to 2.8 million shares of common stock. The Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and performance awards or any combination of the foregoing. The Company has granted both restricted stock units and performance vesting restricted stock units to employees and directors pursuant to the Incentive Plan, as discussed below. During the three months ended March 31, 2023 and 2022, the Company's stock-based compensation expense was $2.6 million and $1.8 million, of which the Company capitalized $0.9 million and $0.6 million, respectively, relating to its exploration and development efforts. Stock compensation expense, net of the amounts capitalized, is included in general and administrative expenses in the accompanying consolidated statements of operations. As of March 31, 2023, the Company has awarded an aggregate of approximately 307,531 restricted stock units and approximately 259,530 performance vesting restricted stock units under the Incentive Plan.
The vesting for certain share-based awards was accelerated in the first three months of 2023 in conjunction with the restructuring activities described in Note 7 and is included in restructuring costs in the accompanying consolidated statement of operations. The following tables summarizes activity for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Unvested Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Number of Unvested Performance Vesting Restricted Stock Units | | Weighted Average Grant Date Fair Value |
Unvested shares as of January 1, 2023 | 197,772 | | | $ | 77.49 | | | 190,804 | | | $ | 52.15 | |
Granted | 43,415 | | | 77.84 | | | 68,726 | | | 56.57 | |
Vested | (11,608) | | | 70.86 | | | — | | | — | |
Forfeited/canceled | (971) | | | 87.68 | | | (5,069) | | | 47.67 | |
Unvested shares as of March 31, 2023 | 228,608 | | | $ | 77.85 | | | 254,461 | | | $ | 53.43 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Unvested Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Number of Unvested Performance Vesting Restricted Stock Units | | Weighted Average Grant Date Fair Value |
Unvested shares as of January 1, 2022 | 198,413 | | | $ | 66.04 | | | 153,138 | | | $ | 48.54 | |
Granted | 2,154 | | | 73.83 | | | — | | | — | |
Vested | (3,074) | | | 65.75 | | | — | | | — | |
Forfeited/canceled | (1,157) | | | 66.89 | | | — | | | — | |
Unvested shares as of March 31, 2022 | 196,336 | | | $ | 67.16 | | | 153,138 | | | $ | 48.54 | |
Restricted Stock Units
Restricted stock units awarded under the Incentive Plan generally vest over a period of 3 to 4 years in the case of employees and 4 years in the case of directors upon the recipient meeting applicable service requirements. Stock-based compensation expense is recorded ratably over the service period. The grant date fair value of restricted stock units represents the closing market price of the Company's common stock on the date of the grant. Unrecognized compensation expense as of March 31, 2023, was $11.9 million. The expense is expected to be recognized over a weighted average period of 2.03 years.
Performance Vesting Restricted Stock Units
The Company has awarded performance vesting restricted stock units to certain of its executive officers under the Incentive Plan. The number of shares of common stock issued pursuant to the award will be based on a combination of (i) the Company's total shareholder return ("TSR") and (ii) the Company's relative total shareholder return ("RTSR") for the performance period. Participants will earn from 0% to 200% of the target award based on the Company's TSR and RTSR ranking compared to the TSR of the companies in the Company's designated peer group at the end of the performance period. Awards will be earned and vested at the end of a three-year performance period, subject to earlier termination of the performance period in the event of a change in control. The grant date fair values were determined using the Monte Carlo simulation method and are being recorded ratably over the performance period.
The table below summarizes the assumptions used in the Monte Carlo simulation to determine the grant date fair value of awards granted during the three months ended March 31, 2023:
| | | | | | | | |
Grant date | January 24, 2023 | March 3, 2023 |
Forecast period (years) | 3 | 3 |
Risk-free interest rates | 3.88% | 4.64% |
Implied equity volatility | 87.2% | 86.4% |
Stock price on the date of grant | $72.99 | $82.20 |
Unrecognized compensation expense as of March 31, 2023, related to performance vesting restricted shares was $6.2 million. The expense is expected to be recognized over a weighted average period of 1.73 years.
7.RESTRUCTURING COSTS
During the three months ended March 31, 2023, Gulfport recognized $1.9 million in personnel-related restructuring expenses associated with changes in the organizational structure and leadership team resulting from the appointment of Gulfport's new CEO in January 2023. Of these expenses, $0.5 million resulted from accelerated vesting of certain share-based grants, which are non-cash charges. As of March 31, 2023, there were no remaining employee termination liabilities for the impacted employees.
8.EARNINGS (LOSS) PER SHARE
Basic income or loss per share attributable to common stockholders is computed as (i) net income or loss less (ii) dividends paid to holders of preferred stock less (iii) net income or loss attributable to participating securities divided by (iv) weighted average basic shares outstanding. Diluted net income or loss per share attributable to common stockholders is computed as (i) basic net income or loss attributable to common stockholders plus (ii) diluted adjustments to income allocable to participating securities divided by (iii) weighted average diluted shares outstanding. The "if-converted" method is used to determine the dilutive impact for the Company's convertible preferred stock and the treasury stock method is used to determine the dilutive impact of unvested restricted stock.
There were 180,811 shares of restricted stock that were considered dilutive for the three months ended March 31, 2023. There were no shares of restricted stock that were considered dilutive for the three months ended March 31, 2022. There were 3.7 million and 4.1 million shares of potential common shares issuable due to the Company's preferred stock for the three months ended March 31, 2023 and 2022, respectively. There were 0.1 million shares of restricted stock that were considered anti-dilutive during the three months ended March 31, 2022.
Reconciliations of the components of basic and diluted net income (loss) per common share are presented in the table below (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
| | | |
Net income (loss) | $ | 523,054 | | | $ | (491,975) | |
Dividends on preferred stock | (1,307) | | | (1,447) | |
Participating securities - preferred stock(1) | (86,221) | | | — | |
Net income (loss) attributable to common stockholders | $ | 435,526 | | | $ | (493,422) | |
Re-allocation of participating securities | 684 | | | — | |
Diluted net income (loss) attributable to common stockholders | $ | 436,210 | | | $ | (493,422) | |
Basic Shares | 18,868 | | | 21,242 | |
Dilutive Shares | 19,049 | | | 21,242 | |
Basic EPS | $ | 23.08 | | | $ | (23.23) | |
Dilutive EPS | $ | 22.90 | | | $ | (23.23) | |
_____________________(1) Preferred stock represents participating securities because it participates in any dividends on shares of common stock on a pari passu, pro rata basis. However, preferred stock does not participate in undistributed net losses.
9.COMMITMENTS AND CONTINGENCIES
Commitments
Firm Transportation and Gathering Agreements
The Company has contractual commitments with midstream and pipeline companies for future gathering and transportation of natural gas from the Company's producing wells to downstream markets. Under certain of these agreements, the Company has minimum daily volume commitments. The Company is also obligated under certain of these arrangements to pay a demand charge for firm capacity rights on pipeline systems regardless of the amount of pipeline capacity utilized by the Company. If the Company does not utilize the capacity, it often can release it to other counterparties, thus reducing the cost of these commitments. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to future firm transportation and gathering agreements are not recorded as obligations in the accompanying consolidated balance sheets; however, costs associated with utilized future firm transportation and gathering agreements are reflected in the Company's estimates of proved reserves.
A summary of these commitments at March 31, 2023, are set forth in the table below (in thousands):
| | | | | | | | |
Remaining 2023 | | $ | 169,573 | |
2024 | | 218,797 | |
2025 | | 137,795 | |
2026 | | 134,324 | |
2027 | | 136,492 | |
Thereafter | | 737,104 | |
Total | | $ | 1,534,085 | |
Other Operational Commitments
During 2022, the Company entered into various contractual commitments to purchase inventory and other material to be used in future activities. The Company's commitment to purchase these materials spans 2023 and 2024, with approximately $52.7 million remaining in 2023 and $31.2 million for 2024.
Contingencies
The Company is involved in a number of litigation and regulatory proceedings including those described below. Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. The Company's total accrued liabilities in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, its experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and their final liabilities may ultimately be materially different. In accordance with ASC Topic 450, Contingencies, an accrual is recorded for a material loss contingency when its occurrence is probable and damages are reasonably estimable based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes.
Litigation and Regulatory Proceedings
As part of its Chapter 11 Cases and restructuring efforts, the Company filed motions to reject certain firm transportation agreements between the Company and affiliates of TC Energy Corporation ("TC") and Rover Pipeline LLC ("Rover"). During the third quarter of 2021, Gulfport finalized a settlement agreement with TC that was approved by the Bankruptcy Court on September 21, 2021. Pursuant to the settlement agreement, Gulfport and TC agreed that the firm transportation contracts between them would be rejected without any further payment or obligation by either party, and TC assigned its damages claims from such rejection to Gulfport. In exchange, Gulfport agreed to make a payment of $43.8 million in cash to TC. The $43.8 million was paid on October 7, 2021. Gulfport expects to receive distributions for a significant portion of such amounts through future distributions with respect to the assigned claims pursuant to the terms of the Plan that became effective in May 2021. Any future distributions will be recognized once received by Gulfport. In February 2022, Gulfport received an initial distribution of $11.5 million from the above-mentioned claim, which is included in Other, net in the accompanying consolidated statements of operations.
During the first quarter of 2023, Gulfport finalized a settlement agreement with Rover that was approved by the Bankruptcy Court on February 21, 2023. Pursuant to the settlement agreement, Gulfport and Rover agreed that the firm transportation contracts between them would be rejected. The Bankruptcy Court Order provided Rover will: (a) receive an allowed $85.9 million Class 4A General Unsecured Claim (the “Rover Unsecured Claim”), (b) receive an administrative claim of $1.0 million payable by Gulfport, and (c) draw the full amount of its credit assurance. Gulfport paid the $1.0 million administrative claim during the first quarter, and has no further obligations to Rover. The Rover Unsecured Claim will receive distributions under the Plan payable from the liquidating trust, not Gulfport. On February 24, 2023, Gulfport received an additional $17.8 million interim distribution for its TC claim. The timing and amount of any future distributions to Gulfport are not certain, and the total amount received will be impacted by the liquidating trust’s distributions and resolution of other remaining bankruptcy claims. These payments are included in Other, net in the accompanying consolidated statements of operations.
The Company has been named as a defendant in three separate complaints, two filed by Siltstone Resources, LLC, and the third filed by the Ohio Public Works Commission (OPWC) (together, the "Complaints"). The Complaints all arise from restrictive covenants in favor of OPWC generally prohibiting any transfer and any use inconsistent with a green park space. OPWC filed crossclaims against Gulfport in the Siltstone matters alleging that the transfer of the mineral rights and the development of oil and gas on the property violated these restrictive covenants. On June 19, 2018, October 25, 2019, and March 15, 2019, each trial court in the Complaints entered judgment in favor of the Company and other defendants, finding the restrictive covenants only applied to the surface estate. OPWC appealed each judgement to the respective Ohio Courts of Appeal where the trial court decisions were reversed in favor of OPWC. The Company and certain other parties to the Complaints appealed the appellate court decisions to the Ohio Supreme Court. On February 23, 2022, the Ohio Supreme Court affirmed the first appellate decision and remanded the case back to the trial court. On December 27, 2022, the Ohio Supreme Court affirmed the other two complaints and remanded the matters back to the trial court. OPWC is seeking both injunctive relief to enforce the restrictive covenants and equitable relief. Liquidated damages were successfully discharged in the Company’s Chapter 11 proceedings through May 17, 2021. The scope and consequence of any injunctive relief that may be
granted is not certain, but may have an adverse impact on the Company's operations associated with the leases subject to the Complaints, including a potential order to plug and abandon the wells at issue.
The Company, along with other oil and gas companies, have been named as a defendant in a number of lawsuits where Plaintiffs assert their respective leases are limited to the Marcellus and Utica shale geological formations and allege that Defendants have willfully trespassed and illegally produced oil, natural gas, and other hydrocarbon products beyond these respective formations. Plaintiffs seek the full value of any production from below the Marcellus and Utica shale formations, unspecified damages from the diminution of value to their mineral estate, unspecified punitive damages, and the payment of reasonable attorney fees, legal expenses, and interest. On April 27, 2021, the Bankruptcy Court for the Southern District of Texas approved a settlement agreement in which the plaintiffs fully released the Company from all claims for amounts allegedly owed to the plaintiffs through the effective date of the Company’s Chapter 11 plan, which occurred on May 17, 2021. The plaintiffs are continuing to pursue alleged damages after May 17, 2021.
Business Operations
The Company is involved in various lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions.
Environmental Contingencies
The nature of the oil and gas business carries with it certain environmental risks for Gulfport and its subsidiaries. Gulfport and its subsidiaries have implemented various policies, programs, procedures, training and audits to reduce and mitigate environmental risks. The Company conducts periodic reviews, on a company-wide basis, to assess changes in its environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. The Company manages its exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, it may, among other things, exclude a property from the transaction, require the seller to remediate the property to its satisfaction in an acquisition or agree to assume liability for the remediation of the property.
Other Matters
Based on management’s current assessment, they are of the opinion that no pending or threatened lawsuit or dispute relating to its business operations is likely to have a material adverse effect on their future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.
10.DERIVATIVE INSTRUMENTS
Natural Gas, Oil and NGL Derivative Instruments
The Company seeks to mitigate risks related to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, costless collars and various types of option contracts. These contracts allow the Company to mitigate the impact of declines in future natural gas, oil and NGL prices by effectively locking in a floor price for a certain level of the Company’s production. However, these hedge contracts also limit the benefit to the Company in periods of favorable price movements.
The volume of production subject to commodity derivative instruments and the mix of the instruments are frequently evaluated and adjusted by management in response to changing market conditions. Gulfport may enter into commodity derivative contracts up to limitations set forth in its Credit Facility. The Company generally enters into commodity derivative contracts for approximately 50% to 75% of its forecasted current year annual production by the end of the first quarter of each fiscal year. The Company typically enters into commodity derivative contracts for the next 12 to 36 months. Gulfport does not enter into commodity derivative contracts for speculative purposes.
The Company does not currently have any commodity derivative transactions that have margin requirements or collateral provisions that would require payments prior to the scheduled settlement dates. The Company's commodity derivative contract counterparties are typically financial institutions and energy trading firms with investment-grade credit ratings. Gulfport
routinely monitors and manages its exposure to counterparty risk by requiring specific minimum credit standards for all counterparties, actively monitoring counterparties' public credit ratings and avoiding the concentration of credit exposure by transacting with multiple counterparties. The Company has master netting agreements with some counterparties that allow the offsetting of receivables and payables in a default situation.
Fixed price swaps require that the Company receive a fixed price and pay a floating market price to the counterparty for the hedged community. They are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume.
The Company has entered into natural gas, crude oil and NGL fixed price swap contracts based off the NYMEX Henry Hub, NYMEX WTI and Mont Belvieu C3 indices. Below is a summary of the Company’s open fixed price swap positions as of March 31, 2023.
| | | | | | | | | | | | | | | | | |
| Index | | Daily Volume | | Weighted Average Price |
Natural Gas | | | (MMBtu/d) | | ($/MMBtu) |
Remaining 2023 | NYMEX Henry Hub | | 220,145 | | | $ | 4.13 | |
2024 | NYMEX Henry Hub | | 234,973 | | | $ | 4.26 | |
2025 | NYMEX Henry Hub | | 20,000 | | | $ | 4.10 | |
| | | | | |
Oil | | | (Bbl/d) | | ($/Bbl) |
Remaining 2023 | NYMEX WTI | | 3,000 | | | $ | 74.47 | |
| | | | | |
NGL | | | (Bbl/d) | | ($/Bbl) |
Remaining 2023 | Mont Belvieu C3 | | 3,000 | | | $ | 38.07 | |
| | | | | |
| | | | | |
Each two-way price costless collar has a set floor and ceiling price for the hedged production. They are settled monthly based on differences between the floor and ceiling prices specified in the contract and the referenced settlement price. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the collar contracts, the Company will cash-settle the difference with the hedge counterparty. When the referenced settlement price is less than the floor price in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the hedged contract volume. Similarly, when the referenced settlement price exceeds the ceiling price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the hedged contract volume. No payment is due from either party if the referenced settlement price is within the range set by the floor and ceiling prices.
The Company has entered into natural gas costless collars based off the NYMEX Henry Hub natural gas index. Below is a summary of the Company's costless collar positions as of March 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | |
| Index | | Daily Volume | | Weighted Average Floor Price | | Weighted Average Ceiling Price |
Natural Gas | | | (MMBtu/d) | | ($/MMBtu) | | ($/MMBtu) |
Remaining 2023 | NYMEX Henry Hub | | 285,000 | | | $ | 2.93 | | | $ | 4.78 | |
2024 | NYMEX Henry Hub | | 180,000 | | | $ | 3.43 | | | $ | 5.49 | |
From time to time, the Company has sold natural gas call options in exchange for a premium, and used the associated premiums received to enhance the fixed price for a portion of the fixed price natural gas swaps. Each sold call option has an established ceiling price. If at the time of settlement the referenced settlement price exceeds the ceiling price, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. No payment is due from either party if the referenced settlement price is below the price ceiling. Below is a summary of the Company's open sold call option positions as of March 31, 2023.
| | | | | | | | | | | | | | | | | |
| Index | | Daily Volume | | Weighted Average Price |
Natural Gas | | | (MMBtu/d) | | ($/MMBtu) |
Remaining 2023 | NYMEX Henry Hub | | 407,925 | | | $ | 3.21 | |
2024 | NYMEX Henry Hub | | 202,000 | | | $ | 3.33 | |
2025 | NYMEX Henry Hub | | 193,315 | | | $ | 5.80 | |
In addition, the Company has entered into natural gas basis swap positions. These instruments are arrangements that guarantee a fixed price differential to NYMEX Henry Hub from a specified delivery point. The Company receives the fixed price differential and pays the floating market price differential to the counterparty for the hedged community. As of March 31, 2023, the Company had the following natural gas basis swap positions open:
| | | | | | | | | | | | | | | | | | | | | | | |
| Gulfport Pays | | Gulfport Receives | | Daily Volume | | Weighted Average Fixed Spread |
Natural Gas | | | | | (MMBtu/d) | | ($/MMBtu) |
Remaining 2023 | Rex Zone 3 | | NYMEX Plus Fixed Spread | | 140,000 | | | $ | (0.22) | |
Remaining 2023 | NGPL TXOK | | NYMEX Plus Fixed Spread | | 80,000 | | | $ | (0.35) | |
Remaining 2023 | TETCO M2 | | NYMEX Plus Fixed Spread | | 170,145 | | | $ | (0.91) | |
2024 | Rex Zone 3 | | NYMEX Plus Fixed Spread | | 70,000 | | | $ | (0.15) | |
2024 | NGPL TXOK | | NYMEX Plus Fixed Spread | | 60,000 | | | $ | (0.31) | |
2024 | TETCO M2 | | NYMEX Plus Fixed Spread | | 69,945 | | | $ | (0.89) | |
Balance Sheet Presentation
The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company’s derivative instruments on a gross basis at March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Short-term derivative asset | $ | 137,869 | | | $ | 87,508 | |
Long-term derivative asset | 62,834 | | | 26,525 | |
Short-term derivative liability | (80,858) | | | (343,522) | |
Long-term derivative liability | (90,044) | | | (118,404) | |
Total commodity derivative position | $ | 29,801 | | | $ | (347,893) | |
Gains and Losses
The following table presents the gain and loss recognized in net gain (loss) on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the three months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | |
| Net gain (loss) on derivative instruments |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
Natural gas derivatives - fair value gains (losses) | $ | 374,148 | | | $ | (619,319) | |
Natural gas derivatives - settlement losses | (173) | | | (111,157) | |
Total gains (losses) on natural gas derivatives | 373,975 | | | (730,476) | |
| | | |
Oil derivatives - fair value gains (losses) | 4,733 | | | (29,853) | |
Oil derivatives - settlement losses | (443) | | | (8,144) | |
Total gains (losses) on oil derivatives | 4,290 | | | (37,997) | |
| | | |
NGL derivatives - fair value losses | (1,186) | | | (14,333) | |
NGL derivatives - settlement gains (losses) | 982 | | | (5,745) | |
Total losses on NGL derivatives | (204) | | | (20,078) | |
| | | |
Total gains (losses) on natural gas, oil and NGL derivatives | $ | 378,061 | | | $ | (788,551) | |
Offsetting of Derivative Assets and Liabilities
As noted above, the Company records the fair value of derivative instruments on a gross basis. The following tables present the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value (in thousands):
| | | | | | | | | | | | | | | | | |
| As of March 31, 2023 |
| Gross Assets (Liabilities) Presented in the Consolidated Balance Sheets | | Gross Amounts Subject to Master Netting Agreements | | Net Amount |
Derivative assets | $ | 200,703 | | | $ | (79,841) | | | $ | 120,862 | |
Derivative liabilities | $ | (170,902) | | | $ | 79,841 | | | $ | (91,061) | |
| | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| Gross Assets (Liabilities) Presented in the Consolidated Balance Sheets | | Gross Amounts Subject to Master Netting Agreements | | Net Amount |
Derivative assets | $ | 114,033 | | | $ | (80,345) | | | $ | 33,688 | |
Derivative liabilities | $ | (461,926) | | | $ | 80,345 | | | $ | (381,581) | |
Concentration of Credit Risk
By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company’s derivative contracts are spread between multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company’s counterparties is subject to periodic review. None of the Company’s derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company’s revolving credit facility, the
Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company.
11.FAIR VALUE MEASUREMENTS
The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. Fair value measurements are classified and disclosed in one of the following categories:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date.
Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Significant inputs to the valuation model are unobservable.
Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter.
Financial assets and liabilities
The following tables summarize the Company’s financial and non-financial assets and liabilities by valuation level as of March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | |
Derivative instruments | $ | — | | | $ | 200,703 | | | $ | — | |
Contingent consideration arrangement | — | | | — | | | 3,300 | |
Total assets | $ | — | | | $ | 200,703 | | | $ | 3,300 | |
Liabilities: | | | | | |
Derivative instruments | $ | — | | | $ | 170,902 | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | |
Derivative instruments | $ | — | | | $ | 114,033 | | | $ | — | |
Contingent consideration arrangement | — | | | — | | | 4,900 | |
Total assets | $ | — | | | $ | 114,033 | | | $ | 4,900 | |
Liabilities: | | | | | |
Derivative instruments | $ | — | | | $ | 461,926 | | | $ | — | |
The Company estimates the fair value of all derivative instruments using industry-standard models that consider various assumptions, including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data.
The Company's SCOOP water infrastructure sale, which closed in the first quarter of 2020, included a contingent consideration arrangement. As of March 31, 2023, the fair value of the contingent consideration was $3.3 million, of which $0.2 million is included in prepaid expenses and other assets and $3.1 million is included in other assets in the accompanying consolidated balance sheets. The fair value of the contingent consideration arrangement is calculated using discounted cash flow techniques and is based on internal estimates of the Company's future development program and water production levels. Given the unobservable nature of the inputs, the fair value measurement of the contingent consideration arrangement is deemed to use Level 3 inputs. The Company has elected the fair value option for this contingent consideration arrangement and, therefore, records changes in fair value in earnings. The Company recognized a $1.2 million loss and a $0.1 million loss for the three months ended March 31, 2023 and 2022, respectively, which are included in other expense (income) in the accompanying consolidated statements of operations.
Non-financial assets and liabilities
The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 2 for further discussion of the Company’s asset retirement obligations. Fair value of other financial instruments
The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the Company's Credit Facility is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities.
12.REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
The Company’s revenues are primarily derived from the sale of natural gas, oil, condensate and NGL. These sales are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at the time control of the product is transferred to the customer. Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered.
Gathering, processing and compression fees attributable to gas processing, as well as any transportation fees, including firm transportation fees, incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing and compression expense in the accompanying consolidated statements of operations.
Transaction Price Allocated to Remaining Performance Obligations
A significant number of the Company's product sales are short-term in nature generally through evergreen contracts with contract terms of one year or less. These contracts typically automatically renew under the same provisions. For those contracts, the Company has utilized the practical expedient allowed in the revenue accounting standard that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
For product sales that have a contract term greater than one year, the Company has utilized the practical expedient that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, the Company's product sales that have a contractual term greater than one year have no long-term fixed consideration.
Contract Balances
Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $119.9 million and $278.4 million as of March 31, 2023 and December 31, 2022, respectively, and are reported in accounts receivable - oil and natural gas sales, and natural gas liquids sales in the accompanying consolidated balance sheets. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments.
Prior-Period Performance Obligations
The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain sales may be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The differences between the estimates and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. For each of the periods presented, revenue recognized in the reporting periods related to performance obligations satisfied in prior reporting periods was not material.
13.LEASES
Nature of Leases
The Company has operating leases on certain equipment with remaining lease durations in excess of one year. The Company recognizes a right-of-use asset and lease liability on the balance sheet for all leases with lease terms of greater than one year. Short-term leases that have an initial term of one year or less are not capitalized.
The Company has entered into contracts for drilling rigs with varying terms with third parties to ensure operational continuity, cost control and rig availability in its operations. The Company has concluded its drilling rig contracts are operating leases as the assets are identifiable and the Company has the right to control the identified assets. At March 31, 2023, the Company had one active long-term drilling rig contract.
The Company rents office space for its corporate headquarters, field locations and certain other equipment from third parties, which expire at various dates through 2026. These agreements are typically structured with non-cancelable terms of one to five years. The Company has determined these agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. The Company has included any renewal options that it has determined are reasonably certain of exercise in the determination of the lease terms. In July 2022, the Company moved its headquarters to a new location. The impact of the Company's new headquarters lease is reflected in the tables below.
Discount Rate
As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Future amounts due under operating lease liabilities as of March 31, 2023 were as follows (in thousands):
| | | | | | | | |
Remaining 2023 | | $ | 10,309 | |
2024 | | 13,439 | |
2025 | | 836 | |
2026 | | 561 | |
2027 | | 10 | |
Total lease payments | | $ | 25,155 | |
Less: imputed interest | | (1,474) | |
Total | | $ | 23,682 | |
Lease costs incurred for the three months ended March 31, 2023 and 2022, consisted of the following (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
Operating lease cost | $ | 3,443 | | | $ | 50 | |
Variable lease cost | — | | | — | |
Short-term lease cost | 9,248 | | | 8,622 | |
Total lease cost(1) | $ | 12,691 | | | $ | 8,672 | |
_____________________(1) The majority of the Company's total lease cost was capitalized to the full cost pool, and the remainder was included in either lease operating expenses or general and administrative expenses in the accompanying consolidated statements of operations.
Supplemental cash flow information related to leases was as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from operating leases | $ | 2,038 | | | $ | 49 | |
The weighted-average remaining lease term as of March 31, 2023 was 1.92 years. The weighted-average discount rate used to determine the operating lease liability as of March 31, 2023 was 6.71%.
14.INCOME TAXES
The Company records its quarterly tax provision based on an estimate of the annual effective tax rate expected to apply to continuing operations for the various jurisdictions in which it operates. The tax effects of certain items, such as tax rate changes, significant unusual or infrequent items, and certain changes in the assessment of the realizability of deferred taxes, are recognized as discrete items in the period in which they occur and are excluded from the estimated annual effective tax rate.
For the three months ended March 31, 2023, the Company's effective tax rate for the period was 0%, which differs from the statutory rate of 21% primarily as a result of the valuation allowance on the Company's deferred tax assets.
At each reporting period, the Company weighs all available positive and negative evidence to determine whether its deferred tax assets are more likely than not to be realized. A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. To assess that likelihood, the Company uses estimates and judgment regarding future taxable income and considers the tax laws in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities and tax planning strategies as well as the current and forecasted business economics of the oil and gas industry. Based upon the Company’s analysis, the Company determined a full valuation allowance was necessary against its net deferred tax assets as of March 31, 2023.
The Company will continue to evaluate whether the valuation allowance is needed in future reporting periods. The valuation allowance will remain until it is determined that the net deferred tax assets are more likely than not to be realized. Future events or new evidence which may lead us to conclude that it is more likely than not that its net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings, improvements in oil prices, and taxable events that could result from one or more transactions. The valuation allowance does not prevent future utilization of the tax attributes if the Company recognizes taxable income. As long as the Company concludes that the valuation allowance against its net deferred tax assets is necessary, the Company likely will not have any additional deferred income tax expense or benefit.
The Company emerged from Chapter 11 bankruptcy on May 17, 2021, which resulted in a change in ownership for purposes of IRC Section 382. The Company is applying rules under IRC Section 382(l)(5) that allows the Company to mitigate the limitations imposed under the regulations with respect to the Company’s remaining tax attributes. The Company’s deferred tax assets and liabilities, prior to the valuation allowance, have been computed on such basis. Additionally, under IRC Section 382(l)(5), an ownership change subsequent to the Company’s emergence could severely limit or effectively eliminate its ability to realize the value of its tax attributes.
15.SUBSEQUENT EVENTS
Natural Gas, Oil and NGL Derivative Instruments
Subsequent to March 31, 2023 as of April 26, 2023, the Company entered into the following derivative contracts:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Type of Derivative Instrument | | Index | | Daily Volume (MMBtu) | | Weighted Average Price |
2023 | | Basis Swaps | | TETCO M2 | | 13,382 | | | $(0.88) |
2024 | | Basis Swaps | | Rex Zone 3 | | 20,000 | | | $(0.15) |
2025 | | Swaps | | NYMEX Henry Hub | | 50,000 | | | $4.08 |
Credit Facility Redetermination
On May 1, 2023, the Company entered into that certain Joinder, Commitment Increase and Borrowing Base Redetermination Agreement, and Third Amendment to Credit Agreement (the “Third Amendment”) which amended the Company’s Existing Credit Facility (as amended, the “Credit Facility”). The Third Amendment, among other things, (a) increased the aggregate elected commitment amounts under the Credit Facility from $700 million to $900 million, (b) increased the borrowing base under the Credit Facility from $1 billion to $1.1 billion, (c) increased the excess cash threshold under the Credit Facility from $45 million to $75 million, and (d) extended the maturity date under the Credit Facility from October 14, 2025 to the earlier of (i) four years from the closing date of the Third Amendment and (ii) the 91st day prior to the maturity date of the 2026 Senior Notes or any other permitted senior notes or any permitted refinancing debt under the Credit Facility having an aggregate outstanding principal amount equal to or exceeding $100 million; provided that such notes have not be refinanced, redeemed or repaid in full on or prior to such 91st day.