Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Organization and Nature of Business
Continental Resources, Inc. (the “Company”) was formed in 1967 and is incorporated under the laws of the State of Oklahoma. The Company’s principal business is the exploration, development, management, and production of crude oil and natural gas and associated products with properties primarily located in four leading basins in the United States – the Bakken field of North Dakota and Montana, the Anadarko Basin of Oklahoma, the Permian Basin of Texas, and the Powder River Basin of Wyoming. Additionally, the Company pursues the acquisition and management of perpetually owned minerals located in certain of its key operating areas. For the three months ended March 31, 2023, crude oil accounted for 51% of the Company’s total production and 77% of its crude oil, natural gas, and natural gas liquids revenues.
2022 Take-Private Transaction
On October 16, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Omega Acquisition, Inc. (“Merger Sub”), an entity owned by the Company’s founder, Harold G. Hamm. Pursuant to the Merger Agreement, on November 22, 2022 Merger Sub completed a tender offer to purchase any and all of the outstanding shares of the Company’s common stock for $74.28 per share in cash, other than: (i) shares of common stock owned by Mr. Hamm, certain of his family members and their affiliated entities (collectively, the “Hamm Family”) and (ii) shares of common stock underlying unvested equity awards issued pursuant to the Company’s long-term incentive plans. Immediately prior to the consummation of the Offer, Mr. Hamm contributed 100% of the capital stock of Merger Sub to the Company, as a result of which Merger Sub became a wholly owned subsidiary of the Company. Following consummation of the Offer, Merger Sub merged with and into the Company, with the Company continuing as the surviving corporation wholly owned by the Hamm Family. As of March 31, 2023, the Hamm Family holds approximately 299.6 million shares of common stock of the Company.
Following the completion of the transaction: (i) our common stock ceased to be listed on the New York Stock Exchange effective November 23, 2022, (ii) our common stock was deregistered under Section 12(b) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), and (iii) we suspended our reporting obligations under Section 15(d) of the Exchange Act. As a result, certain of the corporate governance, disclosure, and other provisions applicable to a company with listed equity securities and reporting obligations under the Exchange Act no longer apply to us. We will continue to furnish Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K with the SEC as required by our senior note indentures.
5
Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 2. Basis of Presentation and Significant Accounting Policies
Basis of presentation
The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and entities in which the Company has a controlling financial interest. Intercompany accounts and transactions have been eliminated upon consolidation. Noncontrolling interests reflected herein represent third party ownership in the net assets of consolidated subsidiaries. The portions of consolidated net income and equity attributable to the noncontrolling interests are presented separately in the Company’s financial statements.
Investments in entities in which the Company has the ability to exercise significant influence, but does not control, are accounted for using the equity method of accounting. In applying the equity method, the investments are initially recognized at cost and are subsequently adjusted for the Company's proportionate share of earnings, losses, contributions, and distributions as applicable.
This report has been prepared pursuant to rules and regulations applicable to interim financial information. Because this is an interim period filing presented using a condensed format, it does not include all disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”), although the Company believes the disclosures are adequate to make the information not misleading. You should read this Quarterly Report on Form 10-Q (“Form 10-Q”) together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”), which includes a summary of the Company’s significant accounting policies and other disclosures.
The condensed consolidated financial statements as of March 31, 2023 and for the three month periods ended March 31, 2023 and 2022 are unaudited. The condensed consolidated balance sheet as of December 31, 2022 was derived from the audited balance sheet included in the 2022 Form 10-K. The Company evaluated its March 31, 2023 financial statements for subsequent events through May 8, 2023, the date the financial statements were available to be issued.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure and estimation of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. The most significant estimates and assumptions impacting reported results are estimates of the Company’s crude oil and natural gas reserves, which are used to compute depreciation, depletion, amortization and impairment of proved crude oil and natural gas properties. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation in accordance with U.S. GAAP have been included in these unaudited condensed consolidated financial statements. The results of operations for any interim period are not necessarily indicative of the results of operations that may be expected for any other interim period or for an entire year.
Earnings per share
Basic net income per share is computed by dividing net income attributable to the Company by the weighted-average number of shares outstanding for the period. Prior to the Hamm Family's take-private transaction, in periods where the Company had net income, diluted earnings per share reflected the potential dilution of non-vested restricted stock awards, which was calculated using the
6
Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
treasury stock method. The following table presents the calculation of basic and diluted weighted average shares outstanding and net income per share attributable to the Company for the three months ended March 31, 2023 and 2022.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
In thousands, except per share data |
|
2023 |
|
|
2022 |
|
Net income attributable to Continental Resources (numerator) |
|
$ |
884,297 |
|
|
$ |
597,757 |
|
Weighted average shares (denominator): |
|
|
|
|
|
|
Weighted average shares - basic |
|
|
299,610 |
|
|
|
358,171 |
|
Non-vested restricted stock and long-term incentive awards (1) |
|
|
— |
|
|
|
4,204 |
|
Weighted average shares - diluted |
|
|
299,610 |
|
|
|
362,375 |
|
Net income per share attributable to Continental Resources: |
|
|
|
|
|
|
Basic |
|
$ |
2.95 |
|
|
$ |
1.67 |
|
Diluted |
|
$ |
2.95 |
|
|
$ |
1.65 |
|
(1)At March 31, 2023, the Company's outstanding long-term incentive awards are expected to be paid in cash, not common stock, upon vesting and are classified as liability awards pursuant to ASC Topic 718, Compensation—Stock Compensation. As a result, no potential dilutive effect for the awards is presented for the three months ended March 31, 2023.
7
Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3. Property Acquisitions
2023
In March 2023, the Company acquired oil and gas properties in the Anadarko Basin of Oklahoma for cash consideration of $178 million. As of March 31, 2023, the Company was continuing to evaluate the allocation between proved and unproved properties.
2022
In March 2022, the Company acquired oil and gas properties in the Powder River Basin of Wyoming for cash consideration of $403 million.
Note 4. Supplemental Cash Flow Information
The following table discloses supplemental cash flow information about cash paid for interest and income tax payments and refunds. Also disclosed is information about investing activities that affects recognized assets and liabilities but does not result in cash receipts or payments.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
In thousands |
|
2023 |
|
|
2022 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
Cash paid for interest |
|
$ |
94,875 |
|
|
$ |
66,794 |
|
Cash paid for income taxes |
|
|
— |
|
|
|
145 |
|
Cash received for income tax refunds |
|
|
2 |
|
|
|
— |
|
Non-cash investing activities: |
|
|
|
|
|
|
Asset retirement obligation additions and revisions, net |
|
|
477 |
|
|
|
14,055 |
|
As of March 31, 2023 and December 31, 2022, the Company had $459.7 million and $344.9 million, respectively, of accrued capital expenditures included in “Net property and equipment” with an offsetting amount in “Accounts payable trade” in the condensed consolidated balance sheets.
Note 5. Revenues
The following table presents the disaggregation of the Company's crude oil and natural gas revenues by operating area for the three months ended March 31, 2023 and 2022. Sales of natural gas and NGLs are combined, as a substantial majority of the Company's natural gas sales contracts represent wellhead sales of unprocessed gas.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2023 |
|
|
Three months ended March 31, 2022 |
|
In thousands |
|
Crude Oil |
|
|
Natural Gas
and NGLs |
|
|
Total |
|
|
Crude Oil |
|
|
Natural Gas
and NGLs |
|
|
Total |
|
Bakken |
|
$ |
796,920 |
|
|
$ |
152,885 |
|
|
$ |
949,805 |
|
|
$ |
963,317 |
|
|
$ |
239,868 |
|
|
$ |
1,203,185 |
|
Anadarko Basin |
|
|
200,981 |
|
|
|
220,220 |
|
|
|
421,201 |
|
|
|
281,163 |
|
|
|
343,358 |
|
|
|
624,521 |
|
Powder River Basin |
|
|
100,748 |
|
|
|
14,257 |
|
|
|
115,005 |
|
|
|
79,915 |
|
|
|
8,292 |
|
|
|
88,207 |
|
Permian Basin |
|
|
243,605 |
|
|
|
18,854 |
|
|
|
262,459 |
|
|
|
262,383 |
|
|
|
38,425 |
|
|
|
300,808 |
|
All other |
|
|
43,182 |
|
|
|
68 |
|
|
|
43,250 |
|
|
|
57,069 |
|
|
|
471 |
|
|
|
57,540 |
|
Crude oil, natural gas, and natural gas liquids sales |
|
$ |
1,385,436 |
|
|
$ |
406,284 |
|
|
$ |
1,791,720 |
|
|
$ |
1,643,847 |
|
|
$ |
630,414 |
|
|
$ |
2,274,261 |
|
Note 6. Derivative Instruments
From time to time the Company enters into derivative contracts to economically hedge against the variability in cash flows associated with future sales of production. The Company recognizes its derivative instruments on the balance sheet as either assets or liabilities measured at fair value. The estimated fair value is based upon various factors, including commodity exchange prices, over-the-counter
8
Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
quotations, and, in the case of collars, volatility, the risk-free interest rate, and the time to expiration. The calculation of the fair value of collars requires the use of an option-pricing model. See Note 7. Fair Value Measurements.
At March 31, 2023 the Company had outstanding derivative contracts as set forth in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Hedge Price ($/MMBtu) |
|
Period and Type of Contract |
|
Average Volumes Hedged |
|
Basis Swaps |
|
|
Swaps |
|
|
Floor |
|
|
Ceiling |
|
April 2023 - December 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis Swaps - NGPL TXOK |
|
|
75,000 |
|
|
MMBtus/day |
|
$ |
(0.17 |
) |
|
|
|
|
|
|
|
|
|
April 2023 - June 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps - Henry Hub |
|
|
615,000 |
|
|
MMBtus/day |
|
|
|
|
$ |
3.49 |
|
|
|
|
|
|
|
Swaps - WAHA |
|
|
55,000 |
|
|
MMBtus/day |
|
|
|
|
$ |
2.81 |
|
|
|
|
|
|
|
July 2023 - Sept 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps - Henry Hub |
|
|
615,000 |
|
|
MMBtus/day |
|
|
|
|
$ |
3.49 |
|
|
|
|
|
|
|
Swaps - WAHA |
|
|
70,000 |
|
|
MMBtus/day |
|
|
|
|
$ |
2.74 |
|
|
|
|
|
|
|
October 2023 - December 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps - Henry Hub |
|
|
420,000 |
|
|
MMBtus/day |
|
|
|
|
$ |
3.70 |
|
|
|
|
|
|
|
Collars - Henry Hub |
|
|
200,000 |
|
|
MMBtus/day |
|
|
|
|
|
|
|
$ |
3.12 |
|
|
$ |
4.09 |
|
Swaps - WAHA |
|
|
70,000 |
|
|
MMBtus/day |
|
|
|
|
$ |
2.74 |
|
|
|
|
|
|
|
January 2024 - December 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps - Henry Hub |
|
|
618,000 |
|
|
MMBtus/day |
|
|
|
|
$ |
3.44 |
|
|
|
|
|
|
|
Collars - Henry Hub |
|
|
50,000 |
|
|
MMBtus/day |
|
|
|
|
|
|
|
$ |
3.12 |
|
|
$ |
4.09 |
|
Swaps - WAHA |
|
|
42,000 |
|
|
MMBtus/day |
|
|
|
|
$ |
3.08 |
|
|
|
|
|
|
|
January 2025 - December 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps - Henry Hub |
|
|
477,000 |
|
|
MMBtus/day |
|
|
|
|
$ |
3.93 |
|
|
|
|
|
|
|
January 2026 - December 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps - Henry Hub |
|
|
330,000 |
|
|
MMBtus/day |
|
|
|
|
$ |
4.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil derivatives |
|
|
|
|
|
|
Weighted Average
Hedge Price ($/Bbl) |
|
Period and Type of Contract |
|
Average Volumes Hedged |
|
Roll Swaps |
|
|
Fixed Swaps |
|
April 2023 - December 2023 |
|
|
|
|
|
|
|
|
|
|
|
Roll Swaps - NYMEX |
|
|
12,000 |
|
|
Bbls/day |
|
$ |
1.07 |
|
|
|
|
Fixed Swaps - WTI |
|
|
60,000 |
|
|
Bbls/day |
|
|
|
|
$ |
78.62 |
|
January 2024 - March 2024 |
|
|
|
|
|
|
|
|
|
|
|
Fixed Swaps - WTI |
|
|
52,000 |
|
|
Bbls/day |
|
|
|
|
$ |
77.92 |
|
Derivative gains and losses
Cash receipts and payments in the following table reflect the gains or losses on derivative contracts which matured during the applicable period, calculated as the difference between the contract price and the market settlement price of matured contracts. The Company's derivative contracts are settled based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on NYMEX West Texas Intermediate ("WTI") pricing and natural gas derivative settlements based primarily on NYMEX Henry Hub pricing. Non-cash gains and losses below represent the change in fair value of derivative instruments which
9
Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
continued to be held at period end and the reversal of previously recognized non-cash gains or losses on derivative contracts that matured during the period.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
In thousands |
|
2023 |
|
|
2022 |
|
Cash received (paid) on derivatives: |
|
|
|
|
|
|
Crude oil fixed price swaps |
|
$ |
5,098 |
|
|
$ |
— |
|
Crude oil NYMEX roll swaps |
|
|
1,400 |
|
|
|
(1,480 |
) |
Natural gas basis swaps |
|
|
1,357 |
|
|
|
(72 |
) |
Natural gas WAHA swaps |
|
|
12 |
|
|
|
— |
|
Natural gas fixed price swaps |
|
|
15,702 |
|
|
|
(4,229 |
) |
Natural gas collars |
|
|
24,380 |
|
|
|
— |
|
Natural gas 3-way collars |
|
|
3,741 |
|
|
|
(16,459 |
) |
Cash received (paid) on derivatives, net |
|
|
51,690 |
|
|
|
(22,240 |
) |
Non-cash gain (loss) on derivatives: |
|
|
|
|
|
|
Crude oil fixed price swaps |
|
|
78,539 |
|
|
|
— |
|
Crude oil NYMEX roll swaps |
|
|
(608 |
) |
|
|
(7,640 |
) |
Natural gas basis swaps |
|
|
(6,741 |
) |
|
|
6,113 |
|
Natural gas WAHA swaps |
|
|
15,671 |
|
|
|
(13,677 |
) |
Natural gas fixed price swaps |
|
|
215,692 |
|
|
|
(327,676 |
) |
Natural gas collars |
|
|
29,134 |
|
|
|
(98,236 |
) |
Natural gas 3-way collars |
|
|
(598 |
) |
|
|
(12,582 |
) |
Non-cash gain (loss) on derivatives, net |
|
|
331,089 |
|
|
|
(453,698 |
) |
Gain (loss) on derivative instruments, net |
|
$ |
382,779 |
|
|
$ |
(475,938 |
) |
Balance sheet offsetting of derivative assets and liabilities
The Company’s derivative contracts are recorded at fair value in the condensed consolidated balance sheets under the captions “Derivative assets,” “Derivative assets, noncurrent,” “Derivative liabilities,” and “Derivative liabilities, noncurrent” as applicable. Derivative assets and liabilities with the same counterparty that are subject to contractual terms which provide for net settlement are reported on a net basis in the condensed consolidated balance sheets.
The following table presents the gross amounts of recognized derivative assets and liabilities, as applicable, the amounts offset under netting arrangements with counterparties, and the resulting net amounts presented in the condensed consolidated balance sheets for the periods presented, all at fair value.
|
|
|
|
|
|
|
|
|
In thousands |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
Commodity derivative assets: |
|
|
|
|
|
|
Gross amounts of recognized assets |
|
$ |
268,178 |
|
|
$ |
50,559 |
|
Gross amounts offset on balance sheet |
|
|
(16,107 |
) |
|
|
(7,731 |
) |
Net amounts of assets on balance sheet |
|
|
252,071 |
|
|
|
42,828 |
|
Commodity derivative liabilities: |
|
|
|
|
|
|
Gross amounts of recognized liabilities |
|
|
(115,760 |
) |
|
|
(229,230 |
) |
Gross amounts offset on balance sheet |
|
|
16,107 |
|
|
|
7,731 |
|
Net amounts of liabilities on balance sheet |
|
$ |
(99,653 |
) |
|
$ |
(221,499 |
) |
The following table reconciles the net amounts disclosed above to the individual financial statement line items in the condensed consolidated balance sheets.
|
|
|
|
|
|
|
|
|
In thousands |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
Derivative assets |
|
$ |
245,891 |
|
|
$ |
39,280 |
|
Derivative assets, noncurrent |
|
|
6,180 |
|
|
|
3,548 |
|
Net amounts of assets on balance sheet |
|
|
252,071 |
|
|
|
42,828 |
|
Derivative liabilities |
|
|
— |
|
|
|
(88,136 |
) |
Derivative liabilities, noncurrent |
|
|
(99,653 |
) |
|
|
(133,363 |
) |
Net amounts of liabilities on balance sheet |
|
|
(99,653 |
) |
|
|
(221,499 |
) |
Total derivative assets (liabilities), net |
|
$ |
152,418 |
|
|
$ |
(178,671 |
) |
10
Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 7. Fair Value Measurements
The Company's derivative instruments are reported at fair value on a recurring basis. In determining the fair values of swap contracts, a discounted cash flow method is used due to the unavailability of relevant comparable market data for the Company’s exact contracts. The discounted cash flow method estimates future cash flows based on quoted market prices for forward commodity prices and a risk-adjusted discount rate. The fair values of swap contracts are calculated mainly using significant observable inputs (Level 2). Calculation of the fair values of collars requires the use of an industry-standard option pricing model that considers various inputs including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. These assumptions are observable in the marketplace or can be corroborated by active markets or broker quotes and are therefore designated as Level 2 within the valuation hierarchy. The Company’s calculation of fair value for each of its derivative positions is compared to the counterparty valuation for reasonableness.
The following tables summarize the valuation of derivative instruments by pricing levels that were accounted for at fair value on a recurring basis as of March 31, 2023 and December 31, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at March 31, 2023 using: |
|
|
|
|
In thousands |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Derivative assets (liabilities): |
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil fixed price swaps |
|
$ |
— |
|
|
$ |
90,235 |
|
|
$ |
— |
|
|
$ |
90,235 |
|
Crude oil NYMEX roll swaps |
|
|
— |
|
|
|
2,228 |
|
|
|
— |
|
|
|
2,228 |
|
Natural gas basis swaps |
|
|
— |
|
|
|
2,170 |
|
|
|
— |
|
|
|
2,170 |
|
Natural gas WAHA swaps |
|
|
— |
|
|
|
35,056 |
|
|
|
— |
|
|
|
35,056 |
|
Natural gas fixed price swaps |
|
|
— |
|
|
|
23,913 |
|
|
|
— |
|
|
|
23,913 |
|
Natural gas collars |
|
|
— |
|
|
|
(1,184 |
) |
|
|
— |
|
|
|
(1,184 |
) |
Total |
|
$ |
— |
|
|
$ |
152,418 |
|
|
$ |
— |
|
|
$ |
152,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at December 31, 2022 using: |
|
|
|
|
In thousands |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Derivative assets (liabilities): |
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil fixed price swaps |
|
$ |
— |
|
|
$ |
11,696 |
|
|
$ |
— |
|
|
$ |
11,696 |
|
Crude oil NYMEX roll swaps |
|
|
— |
|
|
|
2,836 |
|
|
|
— |
|
|
|
2,836 |
|
Natural gas basis swaps |
|
|
— |
|
|
|
8,910 |
|
|
|
— |
|
|
|
8,910 |
|
Natural gas WAHA swaps |
|
|
— |
|
|
|
19,386 |
|
|
|
— |
|
|
|
19,386 |
|
Natural gas fixed price swaps |
|
|
— |
|
|
|
(191,779 |
) |
|
|
— |
|
|
|
(191,779 |
) |
Natural gas collars |
|
|
— |
|
|
|
(30,318 |
) |
|
|
— |
|
|
|
(30,318 |
) |
Natural gas 3-way collars |
|
|
— |
|
|
|
598 |
|
|
|
— |
|
|
|
598 |
|
Total |
|
$ |
— |
|
|
$ |
(178,671 |
) |
|
$ |
— |
|
|
$ |
(178,671 |
) |
11
Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 8. Debt
The Company's debt, net of unamortized discounts, premiums, and debt issuance costs totaling $47.5 million and $49.6 million at March 31, 2023 and December 31, 2022, respectively, consists of the following.
|
|
|
|
|
|
|
|
|
In thousands |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
Credit facility |
|
$ |
961,000 |
|
|
$ |
1,160,000 |
|
Term Loan |
|
|
747,328 |
|
|
|
747,073 |
|
Notes payable |
|
|
19,447 |
|
|
|
20,041 |
|
4.5% Senior Notes due 2023 (1) |
|
|
635,949 |
|
|
|
635,648 |
|
3.8% Senior Notes due 2024 |
|
|
891,701 |
|
|
|
891,404 |
|
2.268% Senior Notes due 2026 |
|
|
794,428 |
|
|
|
794,062 |
|
4.375% Senior Notes due 2028 |
|
|
993,383 |
|
|
|
993,076 |
|
5.75% Senior Notes due 2031 |
|
|
1,484,239 |
|
|
|
1,483,843 |
|
2.875% Senior Notes due 2032 |
|
|
792,421 |
|
|
|
792,238 |
|
4.9% Senior Notes due 2044 |
|
|
692,306 |
|
|
|
692,255 |
|
Total debt |
|
$ |
8,012,202 |
|
|
$ |
8,209,640 |
|
Less: Current portion of long-term debt (1) |
|
|
638,379 |
|
|
|
638,058 |
|
Long-term debt, net of current portion |
|
$ |
7,373,823 |
|
|
$ |
7,571,582 |
|
(1)The Company repaid in full its 2023 Notes in April 2023 as discussed in Note 11. Subsequent Events.
Credit Facility
The Company has a credit facility, maturing in October 2026, with aggregate lender commitments totaling $2.255 billion. The credit facility is unsecured and has no borrowing base requirement subject to redetermination.
The Company had $961 million of outstanding borrowings on its credit facility at March 31, 2023, a portion of which was incurred to fund a portion of the Hamm Family’s November 2022 take-private transaction. Credit facility borrowings bear interest at market-based interest rates plus a margin based on the terms of the borrowing and the credit ratings assigned to the Company’s senior, unsecured, long-term indebtedness. The weighted-average interest rate on outstanding credit facility borrowings at March 31, 2023 was 6.2%.
The Company had approximately $1.29 billion of borrowing availability on its credit facility at March 31, 2023 after considering outstanding borrowings and letters of credit. The Company incurs commitment fees based on currently assigned credit ratings of 0.20% per annum on the daily average amount of unused borrowing availability.
The credit facility contains certain restrictive covenants including a requirement that the Company maintain a consolidated net debt to total capitalization ratio of no greater than 0.65 to 1.00. This ratio represents the ratio of net debt (calculated as total face value of debt plus outstanding letters of credit less cash and cash equivalents) divided by the sum of net debt plus total shareholders' equity plus, to the extent resulting in a reduction of total shareholders’ equity, the amount of any non-cash impairment charges incurred, net of any tax effect, after June 30, 2014. The Company was in compliance with the credit facility covenants at March 31, 2023.
12
Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Senior Notes
The following table summarizes the face values, maturity dates, semi-annual interest payment dates, and optional redemption periods related to the Company’s outstanding senior note obligations at March 31, 2023. The Company fully repaid its 2023 Notes in April 2023 as discussed in Note 11. Subsequent Events.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 Notes |
|
|
2024 Notes |
|
|
2026 Notes |
|
|
2028 Notes |
|
|
2031 Notes |
|
|
2032 Notes |
|
|
2044 Notes |
|
Face value (in thousands) |
|
$ |
636,000 |
|
|
$ |
893,126 |
|
|
$ |
800,000 |
|
|
$ |
1,000,000 |
|
|
$ |
1,500,000 |
|
|
$ |
800,000 |
|
|
$ |
700,000 |
|
Maturity date |
|
April 15, 2023 |
|
|
June 1, 2024 |
|
|
November 15, 2026 |
|
|
January 15, 2028 |
|
|
January 15, 2031 |
|
|
April 1, 2032 |
|
|
June 1, 2044 |
|
Interest payment dates |
|
n/a |
|
|
June 1, Dec 1 |
|
|
May 15, Nov 15 |
|
|
Jan 15, July 15 |
|
|
Jan 15, Jul 15 |
|
|
April 1, Oct 1 |
|
|
June 1, Dec 1 |
|
Make-whole redemption period (1) |
|
n/a |
|
|
Mar 1, 2024 |
|
|
Nov 15, 2023 |
|
|
Oct 15, 2027 |
|
|
Jul 15, 2030 |
|
|
January 1. 2032 |
|
|
Dec 1, 2043 |
|
(1)At any time prior to the indicated dates, the Company has the option to redeem all or a portion of its senior notes of the applicable series at the “make-whole” redemption amounts specified in the respective senior note indentures plus any accrued and unpaid interest to the date of redemption. On or after the indicated dates, the Company may redeem all or a portion of its senior notes at a redemption amount equal to 100% of the principal amount of the senior notes being redeemed plus any accrued and unpaid interest to the date of redemption.
The Company’s senior notes are not subject to any mandatory redemption or sinking fund requirements.
The indentures governing the Company’s senior notes contain covenants that, among other things, limit the Company’s ability to create liens securing certain indebtedness, enter into certain sale-leaseback transactions, or consolidate, merge or transfer certain assets. These covenants are subject to a number of important exceptions and qualifications. The Company was in compliance with these covenants at March 31, 2023.
The senior notes are obligations of Continental Resources, Inc. Additionally, certain of the Company’s wholly-owned subsidiaries (Banner Pipeline Company, L.L.C., CLR Asset Holdings, LLC, The Mineral Resources Company, SCS1 Holdings LLC, Continental Innovations LLC, Jagged Peak Energy LLC, and Parsley SoDe Water LLC) fully and unconditionally guarantee the senior notes on a joint and several basis. The financial information of the guarantor group is not materially different from the consolidated financial statements of the Company. The Company’s other subsidiaries, whose assets, equity, and results of operations attributable to the Company are not material, do not guarantee the senior notes.
Term Loan
In November 2022, the Company borrowed $750 million under a three-year term loan agreement, the proceeds of which were used to fund a portion of the Hamm Family’s November 2022 take-private transaction. The term loan matures in November 2025 and bears interest at market-based interest rates plus a margin based on the terms of the borrowing and the credit ratings assigned to the Company’s senior, unsecured, long-term indebtedness. The interest rate on the term loan was 6.3% at March 31, 2023.
The term loan contains certain restrictive covenants including a requirement that the Company maintain a consolidated net debt to total capitalization ratio of no greater than 0.65 to 1.0, consistent with the covenant requirement in the Company’s revolving credit facility. The Company was in compliance with the term loan covenants at March 31, 2023.
Note 9. Commitments and Contingencies
Transportation, gathering, and processing commitments – The Company has entered into transportation, gathering, and processing commitments to guarantee capacity on crude oil and natural gas pipelines and natural gas processing facilities. Certain of the commitments, which have varying terms extending as far as 2031, require the Company to pay per-unit transportation, gathering, or processing charges regardless of the amount of capacity used. Future commitments remaining as of March 31, 2023 under the arrangements amount to approximately $1.06 billion, of which $249 million is expected to be incurred in the remainder of 2023, $291 million in 2024, $164 million in 2025, $139 million in 2026, $136 million in 2027, and $78 million thereafter. A portion of these future costs will be borne by other interest owners. The Company is not committed under the above contracts to deliver fixed and
13
Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
determinable quantities of crude oil or natural gas in the future. These commitments do not qualify as leases under ASC Topic 842 and are not recognized on the Company's balance sheet.
Litigation pertaining to take-private transaction – Transactions such as the Hamm Family’s take-private transaction described in Note 1. Organization and Nature of Business—2022 Take-Private Transaction often attract litigation and demands from minority shareholders.
On April 17, 2023, the following previously filed putative class actions were consolidated under the caption In re Continental Resources, Inc. Shareholder Litigation, Case No. CJ-2022-4162, in the District Court of Oklahoma County, Oklahoma (the “Consolidated Action”):
1.Walter T. Doggett v. Continental Resources, Inc., et al., Case No. CJ-2022-4162, District Court of Oklahoma County, Oklahoma (originally filed August 25, 2022);
2.Ralph Donald Turlington, et al. v. Continental Resources, Inc., et al., Case No. CJ-2022-5758, District Court of Oklahoma County, Oklahoma (originally filed November 23, 2022); and
3.Pembroke Pines Firefighters & Police Officers Pension Fund and Kerry Panozzo v. Harold G. Hamm, et al., Case No. CJ-2023-0831, District Court of Oklahoma County, Oklahoma (originally filed February 14, 2023).
In each of the foregoing cases, the plaintiffs, on behalf of themselves and all other similarly situated former shareholders of the Company, allege that Mr. Hamm, certain trusts established for the benefit of Mr. Hamm and/or his family members, and the Company’s other directors breached their fiduciary duties in the connection with the take-private transaction and seek: (i) monetary damages; (ii) the costs and expenses associated with the lawsuits; and (iii) other equitable relief. A new consolidated petition will be filed or designated by the plaintiffs in the Consolidated Action by May 17, 2023.
In November 2022, the Company received letters from FourWorld Deep Value Opportunities Fund I, LLC, FourWorld Event Opportunities, LP, FW Deep Value Opportunities I, LLC, FourWorld Global Opportunities Fund, Ltd., FourWorld Special Opportunities Fund, LLC, Corbin ERISA Opportunity Fund Ltd., and Quadre Investments, L.P. (collectively, “FourWorld”) demanding appraisal of their respective shares of the Company’s common stock in connection with the take-private transaction. On January 5, 2023, FourWorld filed a petition in the District Court of Oklahoma County, Oklahoma, seeking appraisal of their respective shares of the Company’s common stock in connection with the take-private transaction. On April 28, 2023, the court denied the Company’s request to consolidate the FourWorld action with the Consolidated Action.
On August 11 and October 20, 2022, Pembroke Pines Firefighters & Police Officers Pension Fund (“Pembroke”), a former shareholder, delivered demands (collectively, the “Pembroke Demands”) to the Company requesting the inspection of certain Company books and records purportedly to investigate potential breaches of fiduciary duties by the Company’s directors and senior management in connection with the take-private transaction (the “Pembroke Allegations”). On November 17, 2022, Pembroke filed a petition in the District Court of Pottawatomie County, Oklahoma, against the Company seeking the production of certain Company books and records identified in the Pembroke Demands. The Company produced certain information to Pembroke identified in the Pembroke Demands and on February 17, 2023, Pembroke dismissed its books and records lawsuit without prejudice.
On November 2, 2022, Kevin Barry (“Barry”), a former shareholder, delivered a demand (the “Barry Demand”) to the Company requesting the inspection of certain Company books and records purportedly to investigate the same matters identified in the Pembroke Allegations. On November 18, 2022, Barry filed a petition in the District Court of Oklahoma County, Oklahoma, against the Company seeking the production of certain Company books and records identified in the Barry Demand. The Company produced certain information to Barry identified in the Barry Demand and on March 27, 2023, Barry dismissed his books and records lawsuit without prejudice.
On November 10, 2022, Kerry Panozzo (“Panozzo”), a former shareholder, delivered a demand (the “Panozzo Demand”) to the Company requesting the inspection of certain Company books and records purportedly to investigate the same matters identified in the
14
Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Pembroke Allegations. On November 21, 2022, Panozzo filed a petition in the District Court of Oklahoma County, Oklahoma, against the Company seeking the production of certain Company books and records identified in the Panozzo Demand. The Company produced certain information to Panozzo identified in the Panozzo Demand and on February 27, 2023, Panozzo dismissed his books and records lawsuit without prejudice.
Note 10. Incentive Compensation
Prior to the Hamm Family’s November 2022 take-private transaction, the Company granted restricted stock to employees and directors pursuant to the Continental Resources, Inc. 2013 Long-Term Incentive Plan as amended (“2013 Plan”) and 2022 Long-Term Incentive Plan (“2022 Plan”). As of the November 22, 2022 effective time of the take-private transaction, each unvested restricted stock award previously issued under the 2013 Plan and 2022 Plan that was outstanding immediately prior to the effective time was replaced with a long-term incentive award that provides the holder of such previous award with the right to receive, on the date that such restricted stock award otherwise would have been settled, and at the Company’s sole discretion, either a share of the Company, a cash award designed to provide substantially equivalent value, or any combination of the two. During the three months ended March 31, 2023, the Company granted long-term incentive awards to employees under the 2022 Plan that vest in the first quarter of 2026.
The Company intends to settle all outstanding long-term incentive awards vesting in the future in cash and, thus, the awards are classified as liability awards pursuant to ASC Topic 718, Compensation—Stock Compensation. At March 31, 2023, the Company had recorded a current liability of $81.0 million and a non-current liability of $16.4 million in the captions “Current portion of incentive compensation liability” and “Incentive compensation liability, net of current portion,” respectively, in the consolidated balance sheets associated with the awards. Such amounts reflect the Company’s estimate of expected future cash payments multiplied by the percentage of requisite service periods that employees have completed as of March 31, 2023.
The Company’s incentive compensation liability will be remeasured each reporting period leading up to the applicable award vesting dates to reflect additional services rendered by employees and to reflect changes in expected cash payments arising from underlying changes in the value of the Company based on independent third party appraisals. Changes in the liability will be recorded as increases or decreases to compensation expense. The Company has estimated the number of forfeitures expected to occur in determining the amount of liability and expense to recognize.
Compensation expense associated with the Company’s awards totaled $1.0 million and $29.3 million for the three months ended March 31, 2023 and 2022, respectively, which is included in the caption “General and administrative expenses” in the consolidated statements of income. As of March 31, 2023, there was approximately $166 million of unrecognized liabilities and compensation expense related to unvested awards, which are expected to be recognized over a weighted average period of 1.8 years.
Note 11. Subsequent Events
On April 14, 2023, the Company repaid its outstanding $636 million of 2023 Notes that were scheduled to mature on April 15, 2023. The redemption price was equal to 100% of the principal amount plus accrued and unpaid interest to the redemption date. The aggregate of the principal amount and accrued interest paid upon redemption was $650.3 million.
On April 14, 2023, the Company made cash payments for federal and state income taxes totaling $230 million, representing payments associated with 2022 tax return filing extensions and estimated quarterly payments for 2023 federal and state income taxes based on estimates of taxable income for 2023.
The redemption of the Company's 2023 Notes and cash tax payments described above were funded through the use of cash on hand and credit facility borrowings. As of April 30, 2023, the Company had $1.76 billion of outstanding borrowings on its credit facility.
15
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report and our historical consolidated financial statements and notes included in our Form 10-K for the year ended December 31, 2022.
The following discussion and analysis includes forward-looking statements and should be read in conjunction with the risk factors described in Part II, Item 1A. Risk Factors included in this report, if any, and in our Form 10-K for the year ended December 31, 2022, along with Cautionary Statement for the Purpose of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 at the beginning of this report, for information about the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements.
Overview
We are an independent crude oil and natural gas company engaged in the exploration, development, management, and production of crude oil and natural gas and associated products with properties primarily located in four leading basins in the United States – the Bakken field of North Dakota and Montana, the Anadarko Basin of Oklahoma, the Permian Basin of Texas, and the Powder River Basin of Wyoming. Additionally, we pursue the acquisition and management of perpetually owned minerals located in certain of our key operating areas. We derive the majority of our operating income and cash flows from the sale of crude oil, natural gas, and natural gas liquids and expect this to continue in the future. Our corporate internet website is www.clr.com. As discussed in Note 1. Organization and Nature of Business—2022 Take-Private Transaction in Notes to Unaudited Condensed Consolidated Financial Statements, effective November 22, 2022 Continental Resources, Inc. became a privately held corporation and has no publicly available common shares outstanding.
First Quarter 2023 Financial and Operating Metrics
The following table contains financial and operating metrics for the first quarter periods of 2023 and 2022. Average net sales prices exclude any effect of derivative transactions. Per-unit expenses have been calculated using sales volumes.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Average daily production: |
|
|
|
|
|
|
Crude oil (Bbl per day) |
|
|
206,232 |
|
|
|
194,767 |
|
Natural gas (Mcf per day) (1) |
|
|
1,205,772 |
|
|
|
1,074,255 |
|
Crude oil equivalents (Boe per day) |
|
|
407,194 |
|
|
|
373,810 |
|
Average net sales prices (2): |
|
|
|
|
|
|
Crude oil ($/Bbl) |
|
$ |
72.32 |
|
|
$ |
90.83 |
|
Natural gas ($/Mcf) (1) |
|
$ |
3.61 |
|
|
$ |
6.34 |
|
Crude oil net sales price discount to NYMEX ($/Bbl) |
|
$ |
(3.74 |
) |
|
$ |
(3.47 |
) |
Natural gas net sales price premium to NYMEX ($/Mcf) (1) |
|
$ |
0.17 |
|
|
$ |
1.43 |
|
Production expenses ($/Boe) |
|
$ |
5.00 |
|
|
$ |
4.09 |
|
Production and ad valorem taxes (% of net crude oil and natural gas sales) |
|
|
7.9 |
% |
|
|
7.2 |
% |
Depreciation, depletion, amortization and accretion ($/Boe) |
|
$ |
13.10 |
|
|
$ |
13.67 |
|
Total general and administrative expenses ($/Boe) |
|
$ |
1.74 |
|
|
$ |
2.23 |
|
(1)Natural gas production volumes, sales volumes, and net sales prices presented throughout management's discussion and analysis reflect the combined value for natural gas and natural gas liquids.
(2)See the subsequent section titled Non-GAAP Financial Measures for a discussion and calculation of net sales prices, which are non-GAAP measures.
16
Three months ended March 31, 2023 compared to the three months ended March 31, 2022
Results of Operations
The following table presents selected financial and operating information for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
In thousands |
|
2023 |
|
|
2022 |
|
Crude oil, natural gas, and natural gas liquids sales |
|
$ |
1,791,720 |
|
|
$ |
2,274,261 |
|
Gain (loss) on derivative instruments, net |
|
|
382,779 |
|
|
|
(475,938 |
) |
Crude oil and natural gas service operations |
|
|
19,354 |
|
|
|
17,915 |
|
Total revenues |
|
|
2,193,853 |
|
|
|
1,816,238 |
|
Operating costs and expenses |
|
|
(969,853 |
) |
|
|
(950,021 |
) |
Other expenses, net |
|
|
(97,927 |
) |
|
|
(73,782 |
) |
Income before income taxes |
|
|
1,126,073 |
|
|
|
792,435 |
|
Provision for income taxes |
|
|
(239,756 |
) |
|
|
(191,084 |
) |
Income before equity in net loss of affiliate |
|
|
886,317 |
|
|
|
601,351 |
|
Equity in net loss of affiliate |
|
|
(663 |
) |
|
|
— |
|
Net income |
|
|
885,654 |
|
|
|
601,351 |
|
Net income attributable to noncontrolling interests |
|
|
1,357 |
|
|
|
3,594 |
|
Net income attributable to Continental Resources |
|
$ |
884,297 |
|
|
$ |
597,757 |
|
Production volumes: |
|
|
|
|
|
|
Crude oil (MBbl) |
|
|
18,561 |
|
|
|
17,529 |
|
Natural gas (MMcf) |
|
|
108,519 |
|
|
|
96,683 |
|
Crude oil equivalents (MBoe) |
|
|
36,647 |
|
|
|
33,643 |
|
Sales volumes: |
|
|
|
|
|
|
Crude oil (MBbl) |
|
|
18,286 |
|
|
|
17,461 |
|
Natural gas (MMcf) |
|
|
108,519 |
|
|
|
96,683 |
|
Crude oil equivalents (MBoe) |
|
|
36,372 |
|
|
|
33,575 |
|
Production
The following table summarizes the changes in our average daily Boe production by major operating area for the first quarter period.
|
|
|
|
|
|
|
|
|
|
|
|
|
Boe production per day |
|
1Q 2023 |
|
|
1Q 2022 |
|
|
% Change |
|
Bakken |
|
|
179,280 |
|
|
|
171,401 |
|
|
|
5 |
% |
Anadarko Basin |
|
|
152,554 |
|
|
|
143,963 |
|
|
|
6 |
% |
Powder River Basin |
|
|
23,333 |
|
|
|
11,653 |
|
|
|
100 |
% |
Permian Basin |
|
|
46,152 |
|
|
|
40,248 |
|
|
|
15 |
% |
All other |
|
|
5,875 |
|
|
|
6,545 |
|
|
|
(10 |
)% |
Total |
|
|
407,194 |
|
|
|
373,810 |
|
|
|
9 |
% |
The following table summarizes the changes in our production by product for the first quarter period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
Volume |
|
|
|
2023 |
|
|
2022 |
|
|
Volume |
|
|
percent |
|
|
|
Volume |
|
|
Percent |
|
|
Volume |
|
|
Percent |
|
|
increase |
|
|
increase |
|
Crude oil (MBbl) |
|
|
18,561 |
|
|
|
51 |
% |
|
|
17,529 |
|
|
|
52 |
% |
|
|
1,032 |
|
|
|
6 |
% |
Natural gas (MMcf) |
|
|
108,519 |
|
|
|
49 |
% |
|
|
96,683 |
|
|
|
48 |
% |
|
|
11,836 |
|
|
|
12 |
% |
Total (MBoe) |
|
|
36,647 |
|
|
|
100 |
% |
|
|
33,643 |
|
|
|
100 |
% |
|
|
3,004 |
|
|
|
9 |
% |
The 6% increase in crude oil production in the 2023 first quarter was primarily driven by our property acquisitions and subsequent new well completions in the Permian Basin and Powder River Basin over the past year, which contributed to an increase in our 2023 first quarter production by 950 MBbls compared to the 2022 first quarter. Additionally, our crude oil production in the Bakken field increased 461 MBbls, or 4%, in the 2023 first quarter due to new well completions over the past year. These increases were partially offset by a 327 MBbls, or 11%, decrease in crude oil production in the Anadarko Basin due to 2022 capital spending being allocated primarily to gas-weighted projects in the play.
17
The 12% increase in natural gas production in the 2023 first quarter was due in part to the previously described property acquisitions over the past year. Properties acquired in the Permian Basin, Powder River Basin, and subsequent new well completions increased our 2023 first quarter production by 3,798 MMcf compared to the 2022 first quarter. Additionally, natural gas production in the Anadarko Basin increased 6,605 MMcf, or 11%, and Bakken natural gas production increased 1,489 MMcf, or 5%, over the 2022 first quarter due to new well completions over the past year.
Revenues
Net crude oil, natural gas, and natural gas liquids sales and related net sales prices presented below are non-GAAP measures. See the subsequent section titled Non-GAAP Financial Measures for a discussion and calculation of these measures.
Net crude oil, natural gas, and natural gas liquids sales. Net sales totaled $1.71 billion for the first quarter of 2023, a 22% decrease compared to net sales of $2.20 billion for the 2022 first quarter due to decreases in net sales prices, partially offset by increases in sales volumes as discussed below.
Total sales volumes for the first quarter of 2023 increased 2,797 MBoe, or 8%, compared to the 2022 first quarter due to additional drilling and completion activities and new wells added from property acquisitions over the past year. For the first quarter of 2023, our crude oil sales volumes increased 5% and our natural gas sales volumes increased 12% compared to the 2022 first quarter.
Our crude oil net sales prices averaged $72.32 per barrel in the 2023 first quarter compared to $90.83 per barrel for the 2022 first quarter due to a significant decrease in market prices resulting from changes in various macroeconomic conditions between periods. The differential between NYMEX West Texas Intermediate calendar month prices and our realized crude oil net sales prices averaged $3.74 per barrel for the 2023 first quarter compared to $3.47 per barrel for the 2022 first quarter.
Our natural gas net sales prices averaged $3.61 per Mcf for the 2023 first quarter compared to $6.34 per Mcf for the 2022 first quarter due to a significant decrease in market prices and price realizations. The difference between our net sales prices and NYMEX Henry Hub calendar month natural gas prices was a premium of $0.17 per Mcf for the 2023 first quarter compared to a premium of $1.43 per Mcf for the 2022 first quarter. We sell the majority of our operated natural gas production to midstream customers at lease locations based on market prices in the field where the sales occur. The field markets are impacted by residue gas and natural gas liquids (“NGLs”) prices at secondary, downstream markets. NGL prices in 2023 have decreased from first quarter 2022 levels in conjunction with decreased crude oil prices and other factors, resulting in reduced price realizations for our natural gas sales stream relative to benchmark prices.
Derivatives. Reduced commodity prices during the first quarter of 2023 had a significant favorable impact on the fair value of our derivatives, which resulted in positive revenue adjustments totaling $382.8 million for the period, representing $51.7 million of cash gains and $331.1 million of unsettled non-cash gains, compared to negative revenue adjustments totaling $475.9 million in the first quarter of 2022.
Operating Costs and Expenses
Production Expenses. Production expenses increased $44.7 million, or 33%, to $182.0 million for the first quarter of 2023 compared to $137.3 million for the first quarter of 2022 due to an increase in the number of producing wells from drilling activities and property acquisitions, cost inflation for services and materials, costs associated with adverse winter weather conditions in the Bakken and Powder River Basin, and higher workover-related activities aimed at enhancing production from producing properties. Production expenses on a per-Boe basis averaged $5.00 per Boe for the 2023 first quarter compared to $4.09 per Boe for the 2022 first quarter, the increase of which primarily reflects higher workover-related activities, cost inflation, and an increase in oil-weighted production from the Permian and Powder River basins over the past year which typically have higher per-unit operating costs compared to gas-weighted properties in the Anadarko Basin.
18
Production and Ad Valorem Taxes. Production and ad valorem taxes decreased $22.2 million, or 14%, to $136.2 million for the first quarter of 2023 compared to $158.4 million for the first quarter of 2022 due to the previously described decrease in crude oil and natural gas revenues. Our production taxes as a percentage of net sales averaged 7.9% for the first quarter of 2023, an increase compared to 7.2% for the first quarter of 2022. This increase was the result of changes in sales mix of crude oil and natural gas in the Company’s operating areas between periods.
Depreciation, Depletion, Amortization and Accretion. Total DD&A increased $17.5 million, or 4%, to $476.5 million for the first quarter of 2023 compared to $459.0 million for the first quarter of 2022 primarily due to the previously described 8% increase in total sales volumes largely offset by a decrease in our DD&A rate per Boe as further discussed below. The following table shows the components of our DD&A on a unit of sales basis for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
$/Boe |
|
2023 |
|
|
2022 |
|
Crude oil and natural gas |
|
$ |
12.57 |
|
|
$ |
13.37 |
|
Other equipment |
|
|
0.43 |
|
|
|
0.21 |
|
Asset retirement obligation accretion |
|
|
0.10 |
|
|
|
0.09 |
|
Depreciation, depletion, amortization and accretion |
|
$ |
13.10 |
|
|
$ |
13.67 |
|
Estimated proved reserves are a key component in our computation of DD&A expense. Proved reserves are determined using the unweighted arithmetic average of the first-day-of-the-month commodity prices for the preceding twelve months as required by SEC rules. Holding all other factors constant, if proved reserves are revised downward due to commodity price declines or other reasons, the rate at which we record DD&A expense increases. Conversely, if proved reserves are revised upward, the rate at which we record DD&A expense decreases.
Our proved reserves have been revised upward over the past year prompted by significant increases in first-day-of-the-month commodity prices and other factors, which, when coupled with improvements in capital efficiency and strong well productivity, resulted in a decrease in our DD&A rate for crude oil and natural gas properties in the first quarter of 2023 compared to the first quarter of 2022 and helped offset the additional DD&A recognized in 2023 from increased sales volumes.
Property Impairments. Total property impairments decreased $11.1 million to $13.1 million for the first quarter of 2023 compared to $24.2 million for the first quarter of 2022. The decrease is primarily due to $11.8 million of proved property impairments recognized in the first quarter of 2022 with no proved property impairments recognized in the first quarter of 2023.
General and Administrative Expenses. Total G&A expenses decreased $11.5 million, or 15%, to $63.3 million for the first quarter of 2023 compared to $74.8 million for the first quarter of 2022.
Total G&A expenses include charges for incentive compensation/prior equity awards of $1.0 million and $29.3 million for the first quarters of 2023 and 2022, respectively. This decrease reflects the reversal of previously recognized expense associated with (i) incentive compensation awards that are no longer expected to vest and (ii) a decrease in estimated incentive compensation payment obligations arising from changes in the value of the Company, which resulted in an aggregate decrease in expense of $23.6 million ($0.65 per Boe) in the 2023 first quarter.
G&A expenses other than incentive compensation/prior equity awards totaled $62.3 million for the 2023 first quarter, an increase of $16.7 million compared to $45.5 million for the 2022 first quarter primarily due to the growth of our operations and increases in payroll costs and employee benefits, partially offset by higher overhead recoveries from joint interest owners driven by increased drilling, completion, and production activities compared to the 2022 first quarter.
The following table shows the components of G&A expenses on a unit of sales basis for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
$/Boe |
|
2023 |
|
|
2022 |
|
General and administrative expenses |
|
$ |
1.71 |
|
|
$ |
1.36 |
|
Incentive compensation/prior equity awards |
|
|
0.03 |
|
|
|
0.87 |
|
Total general and administrative expenses |
|
$ |
1.74 |
|
|
$ |
2.23 |
|
19
Interest Expense. Interest expense increased $27.1 million, or 37%, to $99.7 million for the first quarter of 2023 compared to $72.6 million for the first quarter of 2022 due to an increase in our weighted average outstanding debt balance from $6.8 billion for the first quarter of 2022 to $8.2 billion for the first quarter of 2023. This increase was driven by debt incurred in the fourth quarter of 2022 to fund a portion of the Hamm Family's November 2022 take-private transaction.
Income Taxes. For the first quarters of 2023 and 2022 we provided for income taxes at a combined federal and state tax rate of 23.5% and 24.5%, respectively, of our pre-tax income. We recorded an income tax provision of $239.8 million for the 2023 first quarter and an income tax provision of $191.1 million for the 2022 first quarter, which resulted in effective tax rates of 21.3% and 24.1%, respectively, after taking into account the application of statutory tax rates, permanent taxable differences, estimated tax credits, tax effects from equity/incentive compensation, and other items.
Liquidity and Capital Resources
Our primary sources of liquidity have historically been cash flows generated from operating activities, financing provided by our credit facility and the issuance of debt securities. Additionally, asset dispositions and joint development arrangements have provided a source of cash flow for use in reducing debt and enhancing liquidity.
As of March 31, 2023, we had $961 million of outstanding borrowings and $1.29 billion of borrowing availability under our credit facility. At April 30, 2023, we had $1.76 billion of outstanding borrowings and $493 million of borrowing availability under our credit facility. The increase in outstanding credit facility borrowings relative to March 31, 2023 resulted from borrowings incurred to fund the repayment of our 2023 Notes and cash tax payments in April 2023 as described in Note 11. Subsequent Events. Our credit facility, which is unsecured and has no borrowing base subject to redetermination, does not mature until October 2026. We remain committed to reducing debt and plan to continue prioritizing the repayment of credit facility borrowings over the next 12 months using available cash flows and expect our credit facility borrowing availability and liquidity to improve from current levels based on current market conditions. As discussed in Note 6. Derivative Instruments, we have hedged a significant portion of our forecasted future production to reduce exposure to adverse price volatility and help secure cash flows to support our capital program, debt reduction plans, and general corporate needs.
Based on our planned capital spending, our forecasted cash flows and projected levels of indebtedness, we expect to maintain compliance with the covenants under our credit facility, term loan, and senior note indentures. Further, based on current market indications, we expect to meet our contractual cash commitments to third parties as of March 31, 2023, including those subsequently described under the heading Future Capital Requirements, recognizing we may be required to meet such commitments even if our business plan assumptions were to change. We monitor our capital spending closely based on actual and projected cash flows and have the ability to reduce spending or dispose of assets if needed to preserve liquidity and financial flexibility to fund our operations.
Cash Flows
Cash flows from operating activities
Net cash provided by operating activities decreased $354.8 million, or 24%, to $1.15 billion for the first quarter of 2023 compared to $1.50 billion for the first quarter of 2022. The decrease was driven by a $482.5 million decrease in crude oil, natural gas, and NGL revenues due to the previously described decrease in commodity prices and increases in certain other cash operating expenses associated with increased sales volumes and the growth of our Company over the past year. Increased cash operating expenses included a $44.7 million increase in production expenses, a $3.0 million increase in transportation, gathering, processing, and compression expenses, a $28.1 million increase in cash paid for interest, and $129.4 million of cash payments for vested incentive compensation awards. These increases were partially offset by a $73.9 million increase in realized cash gains on matured commodity derivatives and a $22.2 million decrease in production and ad valorem taxes associated with lower revenues.
20
Cash flows from investing activities
Net cash used in investing activities totaled $1.02 billion for the first quarter of 2023, consistent with $1.04 billion for the first quarter of 2022. Our investing cash flows for first quarter 2023 included $864.0 million of exploration and development costs compared to $523.7 million of exploration and development costs for first quarter 2022, reflecting a planned increase in budgeted spending. This increase in spending was partially offset by lower acquisitions of producing crude oil and natural gas properties, with $97.6 million acquired in first quarter of 2023 compared to $441.9 million acquired in first quarter of 2022.
Cash flows from financing activities
Net cash used in financing activities for the first quarter of 2023 totaled $211 million, primarily consisting of $199 million of net repayments on our credit facility and $11 million of cash distributed to noncontrolling interests.
Net cash used in financing activities for the first quarter of 2022 totaled $480 million, primarily consisting of $265 million of net repayments on our credit facility, $83 million of cash dividends paid on common stock, and $100 million of cash used to repurchase shares of our common stock.
Future Sources of Financing
Although we cannot provide any assurance, we believe funds from operating cash flows, our cash balance, and availability under our credit facility should be sufficient to meet our normal operating needs, debt service obligations, budgeted capital expenditures, and cash payments for income taxes for at least the next 12 months and to meet our contractual cash commitments to third parties described under the heading Future Capital Requirements beyond 12 months.
Based on current market indications supported by cash flow protection provided by our hedge portfolio against commodity price declines, our budgeted capital spending plans for 2023 are expected to be funded from operating cash flows. Any deficiencies in operating cash flows relative to budgeted spending are expected to be funded by borrowings under our credit facility. If cash flows are materially impacted by declines in commodity prices, we have the ability to reduce our capital expenditures or utilize the availability of our credit facility if needed to fund our operations.
We may choose to access banking or debt capital markets for additional financing or capital to fund our operations or take advantage of business opportunities that may arise. Further, we may sell assets or enter into strategic joint development opportunities in order to obtain funding if such transactions can be executed on satisfactory terms. However, no assurance can be given that such transactions will occur.
Credit facility
We have an unsecured credit facility, maturing in October 2026, with aggregate lender commitments totaling $2.255 billion. The commitments are from a syndicate of 13 banks and financial institutions. We believe each member of the current syndicate has the capability to fund its commitment.
The commitments under our credit facility are not dependent on a borrowing base calculation subject to periodic redetermination based on changes in commodity prices and proved reserves. Additionally, downgrades or other negative rating actions with respect to our credit rating do not trigger a reduction in our current credit facility commitments, nor do such actions trigger a security requirement or change in covenants. Downgrades of our credit rating will, however, trigger increases in our credit facility's interest rates and commitment fees paid on unused borrowing availability under certain circumstances.
Our credit facility contains restrictive covenants that may limit our ability to, among other things, incur additional indebtedness, incur liens, engage in sale and leaseback transactions, or merge, consolidate or sell all or substantially all of our assets. Our credit facility also contains a requirement that we maintain a consolidated net debt to total capitalization ratio of no greater than 0.65 to 1.00. See Notes to Unaudited Condensed Consolidated Financial Statements–Note 8. Debt for a discussion of how this ratio is calculated pursuant to our credit agreement.
21
We were in compliance with our credit facility covenants at March 31, 2023 and expect to maintain such compliance. At March 31, 2023, our consolidated net debt to total capitalization ratio was 0.47. We do not believe the credit facility covenants are reasonably likely to limit our ability to undertake additional debt financing if needed to support our business.
Future Capital Requirements
Our material future cash requirements are summarized below. Based on current market indications, we expect to meet our contractual cash commitments to third parties as of March 31, 2023, recognizing we may be required to meet such commitments even if our business plan assumptions were to change.
Senior notes
Our debt includes outstanding senior note obligations totaling $5.7 billion at April 30, 2023, exclusive of interest payment obligations thereon. Our senior notes are not subject to any mandatory redemption or sinking fund requirements. The earliest scheduled senior note maturity is our $893 million of 2024 Notes due in June 2024. We expect to be able to generate or obtain sufficient funds necessary to fully redeem our 2024 Notes by the maturity date. For further information on the face values, maturity dates, semi-annual interest payment dates, optional redemption periods and covenant restrictions related to our senior notes, refer to Note 8. Debt in Notes to Unaudited Condensed Consolidated Financial Statements.
We were in compliance with our senior note covenants at March 31, 2023 and expect to maintain such compliance. We do not believe the senior note covenants will materially limit our ability to undertake additional debt financing. Downgrades or other negative rating actions with respect to the credit ratings assigned to our senior unsecured debt do not trigger additional senior note covenants.
Credit facility borrowings
As of April 30, 2023, we had $1.76 billion of outstanding borrowings on our credit facility. Our credit facility matures in October 2026.
Term loan
We have a $750 million term loan that matures in November 2025. The covenant requirements in the term loan are consistent with the covenants in our revolving credit facility, including the requirement that we maintain a consolidated net debt to total capitalization ratio of no greater than 0.65 to 1.0. We were in compliance with the term loan covenants at March 31, 2023 and expect to maintain compliance. Downgrades or other negative rating actions with respect to the credit ratings assigned to our senior unsecured debt do not trigger a security requirement or change in covenants for the term loan. Downgrades of our credit rating will, however, trigger an increase in our term loan's interest rate.
Transportation, gathering, and processing commitments
We have entered into transportation, gathering, and processing commitments to guarantee capacity on crude oil and natural gas pipelines and natural gas processing facilities that require us to pay per-unit charges regardless of the amount of capacity used. Future commitments remaining as of March 31, 2023 under the arrangements amount to approximately $1.06 billion. See Note 9. Commitments and Contingencies in Notes to Unaudited Condensed Consolidated Financial Statements for additional information.
Capital expenditures
Our capital expenditures budget for 2023 is expected to be $3.25 billion. Costs of acquisitions and investments are not budgeted, with the exception of planned levels of spending for mineral acquisitions.
For the three months ended March 31, 2023, we invested $898.7 million in our capital program excluding $240.7 million of unbudgeted acquisitions and $2.3 million of mineral acquisitions attributable to Franco-Nevada, and including $114.8 million of capital costs associated with increased accruals for capital expenditures as compared to December 31, 2022. Our 2023 first quarter capital expenditures were allocated as shown in the table below.
22
|
|
|
|
|
In millions |
|
1Q 2023 |
|
Exploration and development drilling |
|
$ |
740.6 |
|
Land costs |
|
|
42.5 |
|
Mineral acquisitions attributable to Continental |
|
|
0.6 |
|
Capital facilities, workovers, water infrastructure, and other corporate assets |
|
|
115.0 |
|
Capital expenditures attributable to Continental, excluding unbudgeted acquisitions |
|
|
898.7 |
|
Unbudgeted acquisitions |
|
|
240.7 |
|
Total capital expenditures attributable to Continental |
|
$ |
1,139.4 |
|
Mineral acquisitions attributable to Franco-Nevada |
|
|
2.3 |
|
Total capital expenditures |
|
$ |
1,141.7 |
|
Our drilling and completion activities and the actual amount and timing of our capital expenditures may differ materially from our budget as a result of, among other things, available cash flows, unbudgeted acquisitions, actual drilling and completion results, operational process improvements, the availability of drilling and completion rigs and other services and equipment, cost inflation, the availability of transportation, gathering and processing capacity, changes in commodity prices, and regulatory, technological and competitive developments. We monitor our capital spending closely based on actual and projected cash flows and may adjust our spending should commodity prices materially change from current levels. We expect to continue participating as a buyer of properties when and if we have the ability to increase our position in strategic plays at attractive terms.
Cash payments for income taxes
On April 14, 2023, we made cash payments for federal and state income taxes totaling $230 million, representing payments associated with 2022 tax return filing extensions and estimated quarterly payments for 2023 federal and state income taxes based on estimates of taxable income for 2023. Significant judgment is involved in estimating future taxable income as we are required to make assumptions about future commodity prices, projected production, development activities, capital spending, profitability, and general economic conditions, all of which are subject to material revision in future periods as better information becomes available. If commodity prices remain at current levels, we expect to continue generating significant taxable income through at least year-end 2023, which would result in us continuing to make estimated tax payments on a quarterly basis in 2023. Because of the significant uncertainty inherent in numerous factors utilized in projecting taxable income, we cannot predict the amount of future income tax payments with certainty.
Long-term incentive compensation awards
As discussed in Note 10. Incentive Compensation in Notes to Unaudited Condensed Consolidated Financial Statements, at March 31, 2023 we have recognized a current liability of $81.0 million and a non-current liability of $16.4 million in the consolidated balance sheets associated with unvested incentive compensation awards granted to employees that are scheduled to vest in 2024, 2025, and 2026. We intend to settle these awards in cash at the time vesting occurs. Our recognized liabilities will be remeasured each reporting period leading up to the applicable award vesting dates to reflect additional services rendered by employees and to reflect changes in expected cash payments arising from underlying changes in the value of the Company based on independent third party appraisals.
Senior note redemptions and repurchases
In recent periods we have redeemed or repurchased a portion of our outstanding senior notes. From time to time, we may execute additional redemptions or repurchases of our senior notes for cash in open market transactions, privately negotiated transactions, or otherwise. The timing and amount of any such redemptions or repurchases will depend on prevailing market conditions, our liquidity and prospects for future access to capital, and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material. Our $893 million of 2024 Notes is due in June 2024. We expect to be able to generate or obtain sufficient funds necessary to fully redeem our 2024 Notes by the maturity date.
Derivative Instruments
The fair value of our derivative instruments at March 31, 2023 was a net asset of $152.4 million. See Note 6. Derivative Instruments in Notes to Unaudited Condensed Consolidated Financial Statements for further discussion of our hedging activities, including a summary of derivative contracts in place as of March 31, 2023. The estimated fair value of our derivatives is highly sensitive to
23
market price volatility and therefore subject to significant fluctuations from period to period. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information on how hypothetical changes in commodity prices would impact the fair value of our derivatives as of March 31, 2023.
Critical Accounting Policies and Estimates
There have been no changes in our critical accounting policies and estimates from those disclosed in our 2022 Form 10-K.
Non-GAAP Financial Measures
Net crude oil, natural gas, and natural gas liquids sales and net sales prices
Revenues and transportation expenses associated with production from our operated properties are reported separately. For non-operated properties, we receive a net payment from the operator for our share of sales proceeds which is net of costs incurred by the operator, if any. Such non-operated revenues are recognized at the net amount of proceeds received. As a result, the separate presentation of revenues and transportation expenses from our operated properties differs from the net presentation from non-operated properties. This impacts the comparability of certain operating metrics, such as per-unit sales prices, when such metrics are prepared in accordance with U.S. GAAP using gross presentation for some revenues and net presentation for others.
In order to provide metrics prepared in a manner consistent with how management assesses the Company's operating results and to achieve comparability between operated and non-operated revenues, we have presented crude oil, natural gas, and natural gas liquids sales net of transportation expenses in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which we refer to as "net crude oil, natural gas, and natural gas liquids sales," a non-GAAP measure. Average sales prices calculated using net sales are referred to as "net sales prices," a non-GAAP measure, and are calculated by taking revenues less transportation expenses divided by sales volumes. Management believes presenting our revenues and sales prices net of transportation expenses is useful because it normalizes the presentation differences between operated and non-operated revenues and allows for a useful comparison of net realized prices to NYMEX benchmark prices on a Company-wide basis.
The following tables present a reconciliation of crude oil, natural gas, and natural gas liquids sales (GAAP) to net crude oil, natural gas, and natural gas liquids sales and related net sales prices (non-GAAP) for the three months ended March 31, 2023 and 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2023 |
|
|
Three months ended March 31, 2022 |
|
In thousands |
|
Crude oil |
|
|
Natural gas
and NGLs |
|
|
Total |
|
|
Crude oil |
|
|
Natural gas
and NGLs |
|
|
Total |
|
Crude oil, natural gas, and NGL sales (GAAP) |
|
$ |
1,385,436 |
|
|
$ |
406,284 |
|
|
$ |
1,791,720 |
|
|
$ |
1,643,847 |
|
|
$ |
630,414 |
|
|
$ |
2,274,261 |
|
Less: Transportation expenses |
|
|
(62,976 |
) |
|
|
(14,893 |
) |
|
|
(77,869 |
) |
|
|
(57,887 |
) |
|
|
(16,962 |
) |
|
|
(74,849 |
) |
Net crude oil, natural gas, and NGL sales (non-GAAP) |
|
$ |
1,322,460 |
|
|
$ |
391,391 |
|
|
$ |
1,713,851 |
|
|
$ |
1,585,960 |
|
|
$ |
613,452 |
|
|
$ |
2,199,412 |
|
Sales volumes (MBbl/MMcf/MBoe) |
|
|
18,286 |
|
|
|
108,519 |
|
|
|
36,372 |
|
|
|
17,461 |
|
|
|
96,683 |
|
|
|
33,575 |
|
Net sales price (non-GAAP) |
|
$ |
72.32 |
|
|
$ |
3.61 |
|
|
$ |
47.12 |
|
|
$ |
90.83 |
|
|
$ |
6.34 |
|
|
$ |
65.51 |
|
24