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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 2021
or
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from ____________ to ____________
Commission File Number 001-14039

Callon Petroleum Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware64-0844345
State or Other Jurisdiction of
Incorporation or Organization
I.R.S. Employer Identification No.
One Briarlake Plaza
2000 W. Sam Houston Parkway S., Suite 2000
Houston,Texas77042
Address of Principal Executive OfficesZip Code
(281)589-5200
Registrant’s Telephone Number, Including Area Code
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, $0.01 par valueCPENew 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No

The Registrant had 55,850,147 shares of common stock outstanding as of October 29, 2021.



Table of Contents
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Part II. Other Information

2


GLOSSARY OF CERTAIN TERMS

All defined terms under Rule 4-10(a) of Regulation S-X shall have their prescribed meanings when used in this report. As used in this document:

ASU: accounting standards update.
Bbl:  barrel or barrels of oil or natural gas liquids.
Boe:  barrel of oil equivalent, determined by using the ratio of one Bbl of oil or NGLs to six Mcf of natural gas. The ratio of one barrel of oil or NGLs to six Mcf of natural gas is commonly used in the industry and represents the approximate energy equivalence of oil or NGLs to natural gas, and does not represent the economic equivalency of oil and NGLs to natural gas. The sales price of a barrel of oil or NGLs is considerably higher than the sales price of six Mcf of natural gas.
Boe/d:  Boe per day.
Btu:  a British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit.
Completion: the process of treating a drilled well followed by the installation of permanent equipment for the production of oil or natural gas or, in the case of a dry hole, the reporting of abandonment to the appropriate agency.
Cushing: an oil delivery point that serves as the benchmark oil price for West Texas Intermediate.
FASB: Financial Accounting Standards Board.
GAAP: Generally Accepted Accounting Principles in the United States.
Henry Hub: a natural gas pipeline delivery point that serves as the benchmark natural gas price underlying NYMEX natural gas futures contracts.
Horizontal drilling: a drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at an angle within a specified interval.
LOE:  lease operating expense.
MBbls:  thousand barrels of oil.
MBoe:  thousand Boe.
Mcf:  thousand cubic feet of natural gas.
MEH: Magellan East Houston, a delivery point in Houston, Texas that serves as a benchmark for crude oil.
MMBoe:  million Boe.
MMBtu:  million Btu.
MMcf:  million cubic feet of natural gas.
NGL or NGLs:  natural gas liquids, such as ethane, propane, butane and natural gasoline that are extracted from natural gas production streams.
NYMEX:  New York Mercantile Exchange.
Oil: includes crude oil and condensate.
OPEC: Organization of Petroleum Exporting Countries.
Proved reserves: Those reserves which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced, or the operator must be reasonably certain that it will commence the project, within a reasonable time.
The area of the reservoir considered as proved includes all of the following:
a.The area identified by drilling and limited by fluid contacts, if any, and
b.Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.
Reserves that can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when both of the following occur:
a.Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based, and
b.The project has been approved for development by all necessary parties and entities, including governmental entities.
Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12‑month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
3




Realized price: the cash market price less all expected quality, transportation and demand adjustments.
RSU: restricted stock units.
SEC:  United States Securities and Exchange Commission.
Waha: a delivery point in West Texas that serves as the benchmark for natural gas.
Working interest: an operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production and requires the owner to pay a share of the costs of drilling and production operations.
WTI: West Texas Intermediate grade crude oil, used as a pricing benchmark for sales contracts and NYMEX oil futures contracts.
With respect to information relating to our working interest in wells or acreage, “net” oil and gas wells or acreage is determined by multiplying gross wells or acreage by our working interest therein. Unless otherwise specified, all references to wells and acres are gross. 
4


Part I.  Financial Information
Item 1.  Financial Statements

Callon Petroleum Company
Consolidated Balance Sheets
(In thousands, except par and share amounts)
(Unaudited)
 September 30, 2021December 31, 2020
ASSETS 
Current assets:  
Cash and cash equivalents$3,699 $20,236 
Accounts receivable, net216,116 133,109 
Fair value of derivatives18,605 921 
Other current assets30,110 24,103 
Total current assets268,530 178,369 
Oil and natural gas properties, full cost accounting method:  
  Evaluated properties, net2,565,601 2,355,710 
Unevaluated properties1,712,428 1,733,250 
Total oil and natural gas properties, net4,278,029 4,088,960 
Other property and equipment, net30,591 31,640 
Deferred financing costs19,274 23,643 
Other assets, net89,992 40,256 
Total assets$4,686,416 $4,362,868 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
Accounts payable and accrued liabilities$442,053 $341,519 
Fair value of derivatives324,682 97,060 
Other current liabilities61,641 58,529 
Total current liabilities828,376 497,108 
Long-term debt2,809,610 2,969,264 
Asset retirement obligations58,703 57,209 
Fair value of derivatives15,250 88,046 
Other long-term liabilities41,448 40,239 
Total liabilities3,753,387 3,651,866 
Commitments and contingencies
Stockholders’ equity:  
Common stock, $0.01 par value, 78,750,000 and 52,500,000 shares authorized; 46,290,611 and 39,758,817 shares outstanding, respectively
463 398 
Capital in excess of par value3,365,121 3,222,959 
Accumulated deficit(2,432,555)(2,512,355)
Total stockholders’ equity933,029 711,002 
Total liabilities and stockholders’ equity$4,686,416 $4,362,868 



The accompanying notes are an integral part of these consolidated financial statements.
5



Callon Petroleum Company
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended September 30,Nine Months Ended
September 30,
 2021202020212020
Operating Revenues:  
Oil$409,293 $231,654 $1,009,780 $627,934 
Natural gas36,519 15,034 84,819 33,305 
Natural gas liquids58,097 23,025 124,079 55,627 
Sales of purchased oil and gas48,653 20,313 134,164 21,469 
Total operating revenues552,562 290,026 1,352,842 738,335 
Operating Expenses:    
Lease operating42,706 45,870 129,619 149,091 
Production and ad valorem taxes26,070 16,110 66,467 46,151 
Gathering, transportation and processing20,875 22,200 58,887 56,615 
Cost of purchased oil and gas49,392 21,282 139,558 22,450 
Depreciation, depletion and amortization89,890 114,201 244,005 384,594 
General and administrative9,503 8,224 37,367 26,573 
Impairment of evaluated oil and gas properties 684,956  1,961,474 
Merger, integration and transaction3,018 2,465 3,018 26,362 
Other operating 4,425 3,366 8,548 
Total operating expenses241,454 919,733 682,287 2,681,858 
Income (Loss) From Operations311,108 (629,707)670,555 (1,943,523)
Other (Income) Expenses:    
Interest expense, net of capitalized amounts27,736 24,683 76,786 67,843 
(Gain) loss on derivative contracts107,169 27,038 512,155 (97,966)
Gain on extinguishment of debt(2,420) (2,420) 
Other (income) expense4,305 (1,044)3,217 (149)
Total other (income) expense136,790 50,677 589,738 (30,272)
Income (Loss) Before Income Taxes174,318 (680,384)80,817 (1,913,251)
Income tax expense(2,416) (1,017)(115,299)
Net Income (Loss)$171,902 ($680,384)$79,800 ($2,028,550)
Net Income (Loss) Per Common Share:    
Basic$3.71 ($17.12)$1.77 ($51.09)
Diluted$3.65 ($17.12)$1.69 ($51.09)
Weighted Average Common Shares Outstanding:   
Basic46,290 39,746 45,063 39,707 
Diluted47,096 39,746 47,119 39,707 


The accompanying notes are an integral part of these consolidated financial statements.
6



Callon Petroleum Company
Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
CommonCapital inTotal
StockExcessAccumulatedStockholders’
Shares$of ParDeficitEquity
Balance at December 31, 202039,759 $398 $3,222,959 ($2,512,355)$711,002 
Net loss— — — (80,407)(80,407)
Restricted stock13 — 2,609 — 2,609 
Warrant exercises6,385 64 134,754 — 134,818 
Balance at March 31, 202146,157 $462 $3,360,322 ($2,592,762)$768,022 
Net loss— — — (11,695)(11,695)
Restricted stock132 1 960 — 961 
Balance at June 30, 202146,289 $463 $3,361,282 ($2,604,457)$757,288 
Net income— — — 171,902 171,902 
Restricted stock2 — 3,839 — 3,839 
Balance at September 30, 202146,291 $463 $3,365,121 ($2,432,555)$933,029 
Retained
CommonCapital inEarningsTotal
StockExcess(AccumulatedStockholders’
Shares (1)
$of ParDeficit)Equity
Balance at December 31, 201939,659 $3,966 $3,198,076 $21,266 $3,223,308 
Net income— — — 216,565 216,565 
   Restricted stock14 1 3,141 — 3,142 
   Other— — (112)— (112)
Balance at March 31, 202039,673 $3,967 $3,201,105 $237,831 $3,442,903 
Net loss— — — (1,564,731)(1,564,731)
   Restricted stock66 7 3,205 — 3,212 
Balance at June 30, 202039,739 $3,974 $3,204,310 ($1,326,900)$1,881,384 
Net loss— — — (680,384)(680,384)
   Restricted stock11 1 3,008 — 3,009 
   Reverse stock split— (3,578)3,578 —  
Other— — 95 — 95 
Balance at September 30, 202039,750 $397 $3,210,991 ($2,007,284)$1,204,104 
(1)    All share amounts have been retroactively adjusted for the Company’s 1-for-10 reverse stock split effective August 7, 2020. See “Note 11 - Stockholders’ Equity” of the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.


The accompanying notes are an integral part of these consolidated financial statements.

7



Callon Petroleum Company
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended September 30,
Cash flows from operating activities:20212020
Net income (loss)$79,800 ($2,028,550)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:  
Depreciation, depletion and amortization244,005 384,594 
Impairment of evaluated oil and gas properties 1,961,474 
Amortization of non-cash debt related items, net7,166 1,582 
Deferred income tax expense 115,299 
(Gain) loss on derivative contracts512,155 (97,966)
Cash received (paid) for commodity derivative settlements, net(238,378)101,754 
Gain on extinguishment of debt(2,420) 
Non-cash expense (benefit) related to share-based awards11,984 (305)
Other, net11,006 5,740 
Changes in current assets and liabilities:
Accounts receivable(83,227)96,110 
Other current assets(8,701)(6,556)
Accounts payable and accrued liabilities74,443 (107,979)
Net cash provided by operating activities607,833 425,197 
Cash flows from investing activities:  
Capital expenditures(427,552)(555,222)
Acquisition of oil and gas properties(7,119)(12,524)
Deposit for acquisition of oil and gas properties(60,117) 
Proceeds from sale of assets35,415 149,818 
Cash paid for settlements of contingent consideration arrangements, net (40,000)
Other, net4,206 8,261 
Net cash used in investing activities(455,167)(449,667)
Cash flows from financing activities:  
Borrowings on Credit Facility1,236,500 5,087,500 
Payments on Credit Facility(1,498,500)(5,347,500)
Redemption of 6.25% Senior Notes
(542,755) 
Issuance of 8.00% Senior Notes due 2028
650,000  
Issuance of 9.00% Second Lien Senior Secured Notes due 2025
 300,000 
Discount on the issuance of 9.00% Second Lien Senior Secured Notes due 2025
 (35,270)
Issuance of September 2020 Warrants 23,909 
Payment of deferred financing costs(12,168)(6,312)
Tax withholdings related to restricted stock units(2,280)(495)
Other, net (203)
Net cash provided by (used in) financing activities(169,203)21,629 
Net change in cash and cash equivalents(16,537)(2,841)
Balance, beginning of period20,236 13,341 
Balance, end of period$3,699 $10,500 


The accompanying notes are an integral part of these consolidated financial statements.
8


Index to the Notes to the Consolidated Financial Statements
9.
2.
10.Share-Based Compensation
3.Acquisitions and Divestitures11.Stockholders’ Equity
4.Property and Equipment, Net12.
Accounts Receivable, Net
5.13.Accounts Payable and Accrued Liabilities
6.14.Supplemental Cash Flow
7.15.Subsequent Events
8.

Note 1 - Description of Business and Basis of Presentation
Description of Business
Callon Petroleum Company is an independent oil and natural gas company focused on the acquisition, exploration and development of high-quality assets in the leading oil plays of South and West Texas. As used herein, the “Company,” “Callon,” “we,” “us,” and “our” refer to Callon Petroleum Company and its predecessors and subsidiaries unless the context requires otherwise.
The Company’s activities are primarily focused on horizontal development in the Midland and Delaware Basins, both of which are part of the larger Permian Basin in West Texas, as well as the Eagle Ford in South Texas. The Company’s primary operations in the Permian reflect a high-return, oil-weighted drilling inventory with multiple prospective horizontal development intervals and are complemented by a well-established and repeatable cash flow-generating business in the Eagle Ford.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements include the accounts of the Company after elimination of intercompany transactions and balances. These financial statements have been prepared pursuant to the rules and regulations of the SEC and therefore do not include all disclosures required for financial statements prepared in conformity with U.S. GAAP. In the opinion of management, these financial statements include all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly, in all material respects, the Company’s interim financial position, results of operations and cash flows. However, the results of operations for the periods presented are not necessarily indicative of the results of operations that may be expected for the full year. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications did not have a material impact on prior period financial statements.
Significant Accounting Policies
The Company’s significant accounting policies are described in “Note 2 - Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Annual Report”) and are supplemented by the notes included in this Quarterly Report on Form 10-Q. The financial statements and related notes included in this report should be read in conjunction with the Company’s 2020 Annual Report.
Recently Adopted Accounting Standards
Income Taxes. In December 2019, the FASB released ASU No. 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The amended standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact to the Company’s consolidated financial statements or disclosures.
Recently Issued Accounting Pronouncements
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 (“ASU 2020-04”) followed by ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), issued in January 2021 to provide clarifying guidance regarding the scope of Topic 848. ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Generally, the guidance is to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. ASU 2020-04 and ASU 2021-01 are effective for all entities through December 31, 2022. As of September 30, 2021, 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. Please refer to “Note 6 – Borrowings”
9


for discussion of the use of the adjusted LIBO rate in connection with borrowings under the Company’s senior secured revolving credit facility.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 was issued to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. The guidance is to be applied using either a modified retrospective or a fully retrospective method. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. As of September 30, 2021, the Company has not elected to early adopt and is evaluating the impact on the Company’s accompanying consolidated financial statements and related disclosures.
Subsequent Events
The Company evaluates subsequent events through the date the financial statements are issued. See “Note 15 - Subsequent Events” for further discussion.
Note 2 - Revenue Recognition
Revenue from Contracts with Customers
The Company recognizes oil, natural gas, and NGL production revenue at the point in time when control of the product transfers to the purchaser, which differs depending on the applicable contractual terms. Transfer of control also drives the presentation of gathering, transportation and processing in the consolidated statements of operations. See “Note 3 - Revenue Recognition” of the Notes to Consolidated Financial Statements in the 2020 Annual Report for more information regarding the types of contracts under which oil, natural gas, and NGL production revenue is generated.
Accounts Receivable from Revenues from Contracts with Customers
Net accounts receivable include amounts billed and currently due from revenues from contracts with customers of our oil and natural gas production, which had a balance at September 30, 2021 and December 31, 2020 of $168.1 million and $100.3 million, respectively, and are presented in “Accounts receivable, net” in the consolidated balance sheets.
Transaction Price Allocated to Remaining Performance Obligations
For the Company’s product sales that have a contract term greater than one year, it has utilized the practical expedient in Accounting Standards Codification 606-10-50-14, which states the Company is not required to disclose 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.
Prior Period Performance Obligations
The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for sales may not 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 delivered to the purchaser and the price that will be received for the sale of the product. The Company records the differences between estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. The Company has existing internal controls for its revenue estimation process and related accruals, and any identified differences between its revenue estimates and actual revenue received historically have not been significant.
Note 3 - Acquisitions and Divestitures
Primexx Acquisition
On August 3, 2021, the Company entered into purchase and sale agreements with Primexx Resource Development, LLC and BPP Acquisition, LLC (collectively, the “Primexx PSAs”) to purchase, effective as of July 1, 2021, certain producing oil and gas properties, undeveloped acreage and associated infrastructure assets in the Delaware Basin for total consideration of $440.0 million in cash and 9.19 million shares of the Company’s common stock, subject to customary purchase price adjustments (the “Primexx Acquisition”). Upon signing the Primexx PSAs, the Company paid approximately $60.1 million as a deposit into third-party escrow accounts, which is classified as cash flows from investing activities in the consolidated statements of cash flows.
On October 1, 2021, the Company closed the Primexx Acquisition for an adjusted purchase price of approximately $453.7 million in cash, inclusive of the deposit paid at signing, and 8.84 million shares of the Company’s common stock for total consideration of $864.6 million, subject to post-closing adjustments. The Company funded the cash portion of the total consideration with borrowings under its Credit Facility, as defined below. Of the 8.84 million shares of the Company’s common stock issued upon closing, 2.6 million shares were held in escrow pursuant to the Primexx PSAs. Additionally, 50% of the shares held in escrow will be released six months after the closing date, and the remaining shares will be released twelve months after the closing date, in each case subject to holdback for the satisfaction of any applicable indemnification claims that may be made under the Primexx PSAs. Also, pursuant to
10


the Primexx PSAs, certain interest owners exercised their option to sell their interest in the properties included in the Primexx Acquisition to the Company for consideration structured similarly to the Primexx Acquisition, for an incremental purchase price totaling approximately $37.5 million, net of customary purchase price adjustments.
The Primexx Acquisition will be accounted for as a business combination. The Company has not completed its initial allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated acquisition date fair values. The Company will disclose the preliminary allocation of the purchase price as well as other related disclosures in its Annual Report on Form 10-K for the year ended December 31, 2021.
Non-Core Asset Divestitures
On September 27, 2021, the Company entered into a purchase and sale agreement for the divestiture of certain non-core assets in the Eagle Ford Shale. The transaction, which is comprised of producing properties as well as an undeveloped acreage position, has an agreed upon purchase price of approximately $100.0 million, subject to customary purchase price adjustments, and is expected to close during the fourth quarter of 2021. Upon signing the purchase and sale agreement, the purchaser paid $10.0 million as a deposit into a third-party escrow account which will be applied against the purchase price to be paid upon closing. The net proceeds will be recognized in the fourth quarter of 2021 as a reduction of evaluated oil and gas properties with no gain or loss recognized.
During the second quarter of 2021, the Company completed its divestitures of certain non-core assets in the Delaware Basin for aggregate net cash proceeds of $29.6 million. The divestitures were primarily comprised of natural gas producing properties in the Western Delaware Basin as well as a small undeveloped acreage position. The net proceeds were recognized as a reduction of evaluated oil and gas properties with no gain or loss recognized.
Note 4 - Property and Equipment, Net
As of September 30, 2021 and December 31, 2020, total property and equipment, net consisted of the following:
September 30, 2021December 31, 2020
Oil and natural gas properties, full cost accounting method(In thousands)
Evaluated properties$8,341,434 $7,894,513 
Accumulated depreciation, depletion, amortization and impairments(5,775,833)(5,538,803)
Evaluated properties, net2,565,601 2,355,710 
Unevaluated properties
Unevaluated leasehold and seismic costs1,453,255 1,532,304 
Capitalized interest259,173 200,946 
Total unevaluated properties1,712,428 1,733,250 
Total oil and natural gas properties, net$4,278,029 $4,088,960 
Other property and equipment$60,396 $60,287 
Accumulated depreciation(29,805)(28,647)
Other property and equipment, net$30,591 $31,640 
The Company capitalized internal costs of employee compensation and benefits, including share-based compensation, directly associated with acquisition, exploration and development activities totaling $10.4 million and $10.3 million for the three months ended September 30, 2021 and 2020, respectively, and $33.7 million and $26.7 million for the nine months ended September 30, 2021 and 2020, respectively.
The Company capitalized interest costs to unproved properties totaling $26.1 million and $20.7 million for the three months ended September 30, 2021 and 2020, respectively, and $74.0 million and $65.6 million for the nine months ended September 30, 2021 and 2020, respectively.
Impairment of Evaluated Oil and Gas Properties
For the three and nine months ended September 30, 2021, the capitalized costs of oil and gas properties did not exceed the cost center ceiling. As a result, the Company did not recognize an impairment in the carrying value of evaluated oil and gas properties for the three and nine months ended September 30, 2021.
Primarily due to declines in the average realized prices for sales of oil on the first calendar day of each month during the trailing 12-month period (“12-Month Average Realized Price”) prior to September 30, 2020, the capitalized costs of oil and gas properties exceeded the cost center ceiling, resulting in an impairment in the carrying value of evaluated oil and gas properties for the three and nine months ended September 30, 2020.
11


Details of the 12-Month Average Realized Price of crude oil for the three and nine months ended September 30, 2021 and 2020 are summarized in the table below:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Impairment of evaluated oil and gas properties (in thousands)$$684,956$$1,961,474
Beginning of period 12-Month Average Realized Price ($/Bbl)$48.06$45.87$37.44$53.90
End of period 12-Month Average Realized Price ($/Bbl)$56.47$41.71$56.47$41.71
Percent increase (decrease) in 12-Month Average Realized Price17 %(9 %)51 %(23 %)
Note 5 - Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding for the periods presented. The calculation of diluted earnings per share includes the potential dilutive impact of non-vested restricted shares and unexercised warrants outstanding during the periods presented, as calculated using the treasury stock method, unless their effect is anti-dilutive. For the three and nine months ended September 30, 2020, the Company reported a net loss. As a result, the calculation of diluted weighted average common shares outstanding excluded all potentially dilutive common shares outstanding.
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
(In thousands, except per share amounts)
Net Income (Loss)$171,902 ($680,384)$79,800 ($2,028,550)
Basic weighted average common shares outstanding46,290 39,746 45,063 39,707 
Dilutive impact of restricted stock305  244  
Dilutive impact of warrants (1)
501  1,812  
Diluted weighted average common shares outstanding47,096 39,746 47,119 39,707 
    
Net Income (Loss) Per Common Share
Basic$3.71 ($17.12)$1.77 ($51.09)
Diluted$3.65 ($17.12)$1.69 ($51.09)
    
Restricted stock (2)
8 703 28 506 
Warrants (2)
481 560 481 508 
(1)    See “Note 15 - Subsequent Events” for discussion of warrants exercised.
(2)    Shares excluded from the diluted earnings per share calculation as their effect would be anti-dilutive.
12


Note 6 - Borrowings
The Company’s borrowings consisted of the following:
September 30, 2021December 31, 2020
(In thousands)
6.25% Senior Notes due 2023
$ $542,720 
6.125% Senior Notes due 2024
460,241 460,241 
Senior Secured Revolving Credit Facility due 2024723,000 985,000 
9.00% Second Lien Senior Secured Notes due 2025
516,659 516,659 
8.25% Senior Notes due 2025
187,238 187,238 
6.375% Senior Notes due 2026
320,783 320,783 
8.00% Senior Notes due 2028
650,000  
Total principal outstanding2,857,921 3,012,641 
Unamortized premium on 6.25% Senior Notes
 2,917 
Unamortized premium on 6.125% Senior Notes
2,589 3,236 
Unamortized discount on Second Lien Notes(33,524)(41,820)
Unamortized premium on 8.25% Senior Notes
2,668 3,240 
Unamortized deferred financing costs for Second Lien Notes(3,142)(3,931)
Unamortized deferred financing costs for Senior Notes(16,902)(7,019)
Total carrying value of borrowings (1)
$2,809,610 $2,969,264 
(1)    Excludes unamortized deferred financing costs related to the Company’s senior secured revolving credit facility of $19.3 million and $23.6 million as of September 30, 2021 and December 31, 2020, respectively, which are classified in “Deferred financing costs” in the consolidated balance sheets.
Senior Secured Revolving Credit Facility
The Company has a senior secured revolving credit facility with a syndicate of lenders (the “Credit Facility”) that, as of September 30, 2021, had a borrowing base and elected commitment amount of $1.6 billion, with borrowings outstanding of $723.0 million at a weighted-average interest rate of 2.35%, and letters of credit outstanding of $24.0 million. The credit agreement governing the Credit Facility provides for interest-only payments until December 20, 2024 (subject to remaining springing maturity dates of (i) July 2, 2024 if the 6.125% Senior Notes due 2024 (the “6.125% Senior Notes”) are outstanding at such time and (ii) if the 9.00% Second Lien Senior Secured Notes due 2025 (the “Second Lien Notes”) are outstanding at such time, the date which is 182 days prior to the maturity of any of the 6.125% Senior Notes, to the extent a principal amount of more than $100.0 million with respect to each such issuance is outstanding as of such date), when the credit agreement matures and any outstanding borrowings are due. The borrowing base under the credit agreement is subject to regular redeterminations in the spring and fall of each year, as well as special redeterminations described in the credit agreement, which in each case may reduce the amount of the borrowing base. The Credit Facility is secured by first preferred mortgages covering the Company’s major producing properties.
On November 1, 2021, the Company entered into the fifth amendment to its credit agreement governing the Credit Facility which, among other things, reaffirmed the borrowing base and elected commitment amount of $1.6 billion as a result of the fall 2021 scheduled redetermination.
Borrowings outstanding under the credit agreement bear interest at the Company’s option at either (i) a base rate for a base rate loan plus a margin between 1.00% to 2.00%, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.50% and the adjusted LIBO rate plus 1.00%, or (ii) an adjusted LIBO rate for a Eurodollar loan plus a margin between 2.00% to 3.00%. The Company also incurs commitment fees at rates ranging between 0.375% to 0.500% on the unused portion of lender commitments, which are included in “Interest expense, net of capitalized amounts” in the consolidated statements of operations.
Issuance of 8.00% Senior Notes and Redemption of 6.25% Senior Notes
On June 21, 2021, the Company entered into a Purchase Agreement pursuant to which it agreed to issue and sell $650.0 million in aggregate principal amount of 8.00% senior unsecured notes due 2028 (the “8.00% Senior Notes”) in a private placement, which closed on July 6, 2021, for proceeds of approximately $638.1 million, net of underwriting discounts and commissions and offering costs. The 8.00% Senior Notes mature on August 1, 2028 and interest is payable semi-annually each February 1 and August 1, commencing on February 1, 2022.
At any time prior to August 1, 2024, the Company may, from time to time, redeem up to 35% of the aggregate principal amount of the 8.00% Senior Notes in an amount of cash not greater than the net cash proceeds from certain equity offerings at the redemption price of 108.00% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption, if at least 65% of the aggregate principal amount of the 8.00% Senior Notes remains outstanding after such redemption and the redemption occurs within 180 days of the closing date of such equity offering. Prior to August 1, 2024, the Company may, at its option, on any one or
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more occasions, redeem all or a portion of the 8.00% Senior Notes at 100.00% of the principal amount plus an applicable make-whole premium and accrued and unpaid interest. On or after August 1, 2024, the Company may redeem all or a portion of the 8.00% Senior Notes at redemption prices decreasing annually from 104.00% to 100.00% of the principal amount redeemed plus accrued and unpaid interest. Upon the occurrence of certain kinds of change of control, the Company must make an offer to repurchase all or a portion of each holder’s 8.00% Senior Notes for cash at a price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest.
Also on June 21, 2021, the Company delivered a redemption notice with respect to all $542.7 million of its outstanding 6.25% Senior Notes due 2023 (the “6.25% Senior Notes”), which became redeemable on July 21, 2021. The Company used a portion of the net proceeds from the 8.00% Senior Notes to redeem all of its outstanding 6.25% Senior Notes and the remaining proceeds to partially repay amounts outstanding under the Credit Facility. The Company recognized a gain on extinguishment of debt of approximately $2.4 million in its consolidated statements of operations, which was primarily related to writing off the remaining unamortized premium associated with the 6.25% Senior Notes.
Second Lien Notes Exchange
On August 3, 2021, the Company entered into an agreement with Chambers Investments, LLC (“Kimmeridge”), a private investment vehicle managed by Kimmeridge Energy Management, LLC, to exchange $197.0 million of its outstanding Second Lien Notes for a notional amount of approximately $223.1 million of the Company’s common stock (the “Exchange”). The value of equity to be delivered is based on the optional redemption language in the indenture for the Second Lien Notes. The price of the Company’s common stock used to calculate the shares issued is based on the 10-day volume-weighted average price as of August 2, 2021 and equates to 5.5 million shares.
The Exchange was contingent upon, among other things, (i) the closing of the Primexx Acquisition, which occurred on October 1, 2021, and (ii) the approval of the Company’s shareholders, as required under New York Stock Exchange rules, of the issuance of approximately 5.5 million shares of the Company’s common stock to Kimmeridge in the Exchange. A special meeting of shareholders was held on November 3, 2021, at which time the requisite shareholder approval for the issuance was obtained. The exchange is anticipated to close on November 5, 2021. See “Note 15 - Subsequent Events” for further discussion.
Restrictive Covenants
The Company’s credit agreement governing the Credit Facility contains certain covenants including restrictions on additional indebtedness, payment of cash dividends and maintenance of certain financial ratios.
Under the credit agreement, the Company must maintain the following financial covenants determined as of the last day of the quarter: (1) a Secured Leverage Ratio (as defined in the credit agreement governing the Credit Facility) of no more than 3.00 to 1.00 and (2) a Current Ratio (as defined in the credit agreement governing the Credit Facility) of not less than 1.00 to 1.00. The Company was in compliance with these covenants at September 30, 2021.
The credit agreement governing the Credit Facility and the indentures governing the Company’s 6.125% Senior Notes, 8.25% Senior Notes due 2025, 6.375% Senior Notes due 2026 and 8.00% Senior Notes due 2028 (together with the 6.25% Senior Notes, the “Senior Unsecured Notes”) also place restrictions on the Company and certain of its subsidiaries with respect to additional indebtedness, liens, dividends and other payments to shareholders, repurchases or redemptions of the Company’s common stock, redemptions of senior notes, investments, acquisitions, mergers, asset dispositions, transactions with affiliates, hedging transactions and other matters.
The credit agreement and indentures are subject to customary events of default. If an event of default occurs and is continuing, the holders or lenders may elect to accelerate amounts due (except in the case of a bankruptcy event of default, in which case such amounts will automatically become due and payable).
Note 7 - Derivative Instruments and Hedging Activities
Objectives and Strategies for Using Derivative Instruments
The Company is exposed to fluctuations in oil, natural gas and NGL prices received for its production. Consequently, the Company believes it is prudent to manage the variability in cash flows on a portion of its oil, natural gas and NGL production. The Company utilizes a mix of collars, swaps, and put and call options to manage fluctuations in cash flows resulting from changes in commodity prices. The Company does not use these instruments for speculative or trading purposes.
Counterparty Risk and Offsetting
The Company typically has numerous commodity derivative instruments outstanding with a counterparty that were executed at various dates, for various contract types, commodities and time periods. This often results in both commodity derivative asset and liability positions with that counterparty. The Company nets its commodity derivative instrument fair values executed with the same counterparty to a single asset or liability pursuant to International Swap Dealers Association Master Agreements (“ISDA Agreements”), which provide for net settlement over the term of the contract and in the event of default or termination of the contract.
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In general, if a party to a derivative transaction incurs an event of default, as defined in the applicable agreement, the other party will have the right to demand the posting of collateral, demand a cash payment transfer or terminate the arrangement.
As of September 30, 2021, the Company has outstanding commodity derivative instruments with fifteen counterparties to minimize its credit exposure to any individual counterparty. All of the counterparties to the Company’s commodity derivative instruments are also lenders under the Company’s credit agreement. Therefore, each of the Company’s counterparties allow the Company to satisfy any need for margin obligations associated with commodity derivative instruments where the Company is in a net liability position with the collateral securing the credit agreement, thus eliminating the need for independent collateral posting.
Because each of the Company’s counterparties has an investment grade credit rating, the Company believes it does not have significant credit risk and accordingly does not currently require its counterparties to post collateral to support the net asset positions of its commodity derivative instruments. Although the Company does not currently anticipate nonperformance from its counterparties, it continually monitors the credit ratings of each counterparty.
While the Company monitors counterparty creditworthiness on an ongoing basis, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, the Company may not realize the benefit of some of its derivative instruments under lower commodity prices while continuing to be obligated under higher commodity price contracts subject to any right of offset under the agreements. Counterparty credit risk is considered when determining the fair value of a derivative instrument. See “Note 8 - Fair Value Measurements” for further discussion.
Financial Statement Presentation and Settlements
Settlements of the Company’s commodity derivative instruments are based on the difference between the contract price or prices specified in the derivative instrument and a benchmark price, such as the NYMEX price. To determine the fair value of the Company’s derivative instruments, the Company utilizes present value methods that include assumptions about commodity prices based on those observed in underlying markets. See “Note 8 - Fair Value Measurements” for additional information regarding fair value.
Contingent Consideration Arrangements
Ranger Divestiture. In the second quarter of 2019, the Company completed its divestiture of certain non-core assets in the southern Midland Basin (the “Ranger Divestiture”). The Company’s Ranger Divestiture provided for potential contingent consideration to be received by the Company if commodity prices exceed specified thresholds. See “Note 8 - Fair Value Measurements” for further discussion. This contingent consideration arrangement is summarized in the table below (in thousands except for per Bbl amounts):
Year
Threshold (1)
Contingent Receipt - Annual
Threshold (1)
Contingent Receipt - AnnualPeriod Cash Flow OccursStatement of Cash Flows PresentationRemaining Contingent Receipt - Aggregate Limit
Remaining Potential Settlement2021
Greater than $60/Bbl, less than $65/Bbl
$9,000
Equal to or greater than $65/Bbl
$20,833
(2)
(2)
$20,833 
(1)    The price used to determine whether the specified thresholds have been met is the average of the final monthly settlements for each month during each annual period end for NYMEX Light Sweet Crude Oil Futures, as reported by the CME Group.
(2)    Cash received for settlements of contingent consideration arrangements are classified as cash flows from financing activities up to the divestiture date fair value with any excess classified as cash flows from operating activities. If either of the commodity price thresholds is reached in 2021, $8.5 million of the contingent receipt will be presented in cash flows from financing activities with the remainder presented in cash flows from operating activities in the first quarter of 2022.
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Contingent ExL Consideration. As a result of the acquisition of Carrizo Oil & Gas, Inc. (“Carrizo”) in late 2019 (the “Carrizo Acquisition”), the Company assumed all contingent consideration arrangements previously entered into by Carrizo. As of September 30, 2021, the Contingent ExL Consideration, as summarized below, is the only contingent consideration arrangement remaining from the Carrizo Acquisition.
Year
Threshold (1)
Period
Cash Flow
Occurs
Statement of
Cash Flows Presentation
Contingent
Payment -
Annual
Remaining Contingent
Payments -
Aggregate Limit
(In thousands)
Remaining Potential Settlement2021$50.00 
(2)
(2)
($25,000)($25,000)
(1)    The price used to determine whether the specified threshold for the year has been met is the average daily settlement price of the front month NYMEX WTI futures contract as published by the CME Group.
(2)    Cash paid for settlements of contingent consideration arrangements are classified as cash flows from investing activities up to the acquisition date fair value with any excess classified as cash flows from operating activities. If the commodity price threshold is reached in 2021, $19.2 million of the contingent payment will be presented in cash flows from investing activities with the remainder presented in cash flows from operating activities in the first quarter of 2022.
Warrants
On September 30, 2020, the Company issued $300.0 million in aggregate principal amount of its Second Lien Notes and warrants for 7.3 million shares of the Company’s common stock exercisable only on a net share settlement basis (the “September 2020 Warrants”). The Company determined that the September 2020 Warrants were required to be accounted for as a derivative instrument. The Company recorded the September 2020 Warrants as a liability on its consolidated balance sheet measured at fair value as a component of “Fair value of derivatives” with gains and losses as a result of changes in the fair value of the September 2020 Warrants recorded as “(Gain) loss on derivative contracts” in the consolidated statements of operations in the period in which the changes occur. See “Note 8 - Fair Value Measurements” for additional details.
In February 2021, holders of the September 2020 Warrants provided notice and exercised all of their outstanding warrants. As a result of this exercise, the Company issued 5.6 million shares of its common stock in exchange for all of the outstanding September 2020 Warrants. The exercise of the September 2020 Warrants resulted in settlement of the associated derivative liability, which was $134.8 million at the time of exercise, and the fair value of the September 2020 Warrants at exercise, less the par value of the shares of common stock issued in the exercise, was reclassified to “Capital in excess of par value” in the consolidated balance sheets.
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Derivatives Not Designated as Hedging Instruments
The Company records its derivative instruments at fair value in the consolidated balance sheets and records changes in fair value as “(Gain) loss on derivative contracts” in the consolidated statements of operations. Settlements are also recorded as “(Gain) loss on derivative contracts” in the consolidated statements of operations. As previously discussed, the Company’s commodity derivative contracts are subject to master netting arrangements. The Company’s policy is to present the fair value of derivative contracts on a net basis in the consolidated balance sheets. The following presents the impact of this presentation to the Company’s recognized assets and liabilities for the periods indicated:
As of September 30, 2021
Presented without As Presented with
Effects of NettingEffects of NettingEffects of Netting
(In thousands)
Assets
Commodity derivative instruments$64,151 ($64,113)$38 
Contingent consideration arrangements18,567  18,567 
Fair value of derivatives - current$82,718 ($64,113)$18,605 
Commodity derivative instruments$7,278 ($7,278)$ 
Contingent consideration arrangements   
Other assets, net$7,278 ($7,278)$ 
Liabilities   
Commodity derivative instruments (1)
($364,107)$64,113 ($299,994)
Contingent consideration arrangements(24,688)