Six Months Ended June 30, 2024 and 2023
INTERIM REPORT FOR THE SIX MONTHS ENDED JUNE 30, 2024
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Consolidated Balance Sheets
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1
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Consolidated Statements of Operations and Comprehensive Income (loss)
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2
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Consolidated Statements of Members’ Equity and Accumulated Other Comprehensive Income (loss)
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3
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Consolidated Statements of Cash Flows
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4
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Notes to Consolidated Financial Statements
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5
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Note A – Organization and Summary of Significant Accounting Policies
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5
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Note B – Concentration of Credit Risk
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11
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Note C – Related Party Transactions
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11
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Note D – Oil and Natural Gas Properties, Other Property and Equipment and Lease Information
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13
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Note E – Debt
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15
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Note F – Significant Customers
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17
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Note G – Asset Retirement Obligations (ARO)
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Note H – Derivative Contracts
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Note I – Commitments and Contingencies
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20
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Note J – Fair Value
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Note K – Employee Benefit Plans
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Note L – Employee Incentive Plans
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22
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Note M – Income Taxes
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23
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Note N – Members’ Equity
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23
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Note O – Subsequent Events
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23
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ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
(unaudited)
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Cash and cash equivalents
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Accrued oil and natural gas revenues
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Joint interest billings, net of allowance for credit loss accounts of
$12 million and $12 million, respectively
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Related parties (Note C), net of allowance for credit loss accounts of $1 million and $1 million, respectively
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Accounts receivable - other
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Derivative contracts - short-term (Note H)
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Prepaid expenses and other assets
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Oil and natural gas property and equipment, full cost method, net ($254 million and $176 million excluded from amortization, respectively)
(Note D)
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Other property and equipment, net (Note D)
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OTHER NON-CURRENT ASSETS:
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Derivative instruments - long-term (Note H)
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LIABILITIES AND MEMBERS' EQUITY
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-
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Derivative contracts (Note H)
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Asset retirement obligations (Note G)
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Other current liabilities
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Total current liabilities
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OTHER LONG-TERM LIABILITIES
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DERIVATIVE CONTRACTS (Note H)
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-
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ASSET RETIREMENT OBLIGATIONS (Note G)
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COMMITMENTS AND CONTINGENCIES (Note I)
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Accumulated other comprehensive (loss) income (Note H)
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Total Liabilities and Members' Equity
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The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(dollars in millions)
(unaudited)
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Six Months Ended June 30,
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Natural gas and NGL sales
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Service company operating expenses
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Depletion, depreciation, amortization and accretion
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General and administrative expense
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-
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Gain (loss) from derivative instruments, net
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Interest (expense) income, net
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-
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Total other income (expense)
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Provision for income taxes
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Other comprehensive income (loss)
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Commodity cash flow hedging derivative instruments (Note H):
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Change in fair value of cash flow hedges, net
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Total other comprehensive net income
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Total comprehensive income (loss)
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The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(dollars in millions)
(unaudited)
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Accumulated Other
Comprehensive
Income
(loss)
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Balance, December 31, 2022
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Accumulated Other
Comprehensive
Income
(loss)
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Balance, December 31, 2023
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The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
(unaudited)
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Six Months Ended June 30,
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Cash flows from operating activities:
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Adjustments to reconcile net (loss) income to net cash provided by operating activities:
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Depletion, depreciation, amortization and accretion
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Amortization of deferred debt costs
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Net (gain) loss on derivative instruments
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Net cash (payment) receipts from settled derivatives
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-
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Asset retirement expenditures
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Change in assets and liabilities:
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Prepaid expenses and other assets
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Accounts payables and accrued liabilities
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(Decrease) increase in taxes payable
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(Decrease) increase in long-term liabilities
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Net cash provided by operating activities
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Cash flows from investing activities:
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Oil and gas properties additions
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Proceeds from sales of assets
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Other property and equipment additions
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Contribution to equity method investments
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Net cash used in investing activities
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Cash flows from financing activities:
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Purchases of Senior Notes
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Cash distributions to members
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Net cash used in financing activities
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Net (decrease) increase in cash and cash equivalents
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Cash and cash equivalents at beginning of period
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Cash and cash equivalents at end of period
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Supplemental disclosures of cash flow information:
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Cash paid during the period for interest
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Cash paid during the period for taxes
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Supplemental disclosures of noncash investing and financing activities:
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Addition to oil and gas properties resulting from recognition of future abandonment costs
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Decrease in accrued capital expenditures
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Accrued distributions payable
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Net settlement of receivables for property and equipment
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The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
For purposes of the accompanying consolidated financial statements, for periods (i) prior to November 13, 2023, references to
“Endeavor,” the “Partnership” or the “Company” refer to Endeavor Energy Resources, L.P., and, as applicable, its consolidated subsidiaries, and (ii) on and after November 13, 2023, references to “Endeavor,” “Endeavor Parent” or the “Company”
refer to Endeavor Parent, LLC and, as applicable, its consolidated subsidiaries. Furthermore, for periods (i) prior to November 13, 2023, these financial statements reflect the balances and accounts of Endeavor Energy Resources, L.P. and, as
applicable, its consolidated subsidiaries, and (ii) on and after November 13, 2023, these financial statements reflect the balances and accounts of Endeavor Parent, LLC and, as applicable, its consolidated subsidiaries.
Founded in 2000 as the successor to the sole proprietorship of Autry C. Stephens, the Company is an independent oil and natural
gas producer with oilfield service operations, pipeline subsidiaries and a finance subsidiary based in Midland, Texas. The Company’s focus is on the acquisition, exploration, development and exploitation of long-lived oil, natural gas and NGL
reserves. The Company’s business activities are currently carried out primarily in the Permian Basin of West Texas.
On November 13, 2023, the Company underwent a reorganization,
wherein Autry C. Stephens contributed all the issued and outstanding membership interests in Endeavor GP to Endeavor Manager. Immediately thereafter, in a transaction intended to be treated as a reorganization described in Section 368(a)(1)(F)
of the Internal Revenue Code of 1986, as amended, (i) Endeavor Manager contributed its entire membership interest in Endeavor GP, and all limited partners in the Partnership contributed their entire limited partnership interests in the
Partnership, to Endeavor Parent, in exchange for membership interests in Endeavor Parent, and (ii) on the same date, Endeavor Parent filed an election to treat the Partnership as a qualified subchapter S subsidiary of Endeavor Parent effective
as of the same date. This reorganization did not alter the ownership of the Partnership’s properties or assets or impact the nature or scope of the Partnership’s operations. As part of this reorganization, the Board of Managers of Endeavor GP
was dissolved, and a Board of Managers of Endeavor Manager was put in place. The members of the Board of Managers of Endeavor Manager are the same individuals that served on the Board of Managers of Endeavor GP, immediately prior to the date
of the reorganization. Following the reorganization, the Partnership continues to operate its properties and assets. See Item 1. Our Business for a summary of the Company's organizational structure.
Endeavor Parent was formed in connection with the reorganization described above. Endeavor Parent is managed by its sole
manager, Endeavor Manager. Endeavor Manager is managed by the Board of Managers and is owned and controlled by the Autry Stephens Management Trust, the sole trustee of which is Autry C. Stephens.
Effective January 1, 2024, the Company's tax status for U.S. federal income tax purposes was converted from an S-Corporation to
a C-Corporation through a revocation of the Company's U.S. federal income tax status as an S-Corporation.
The oilfield service divisions of the Company are comprised of various Energy Services divisions, Bryant Ranch, Electrical
Maintenance and Construction, ACS Pump & Supply and a wholly owned subsidiary, Environmental Disposal Systems, LLC.
The pipeline subsidiaries of the Company are comprised of Natural Gas Gatherers, Ltd., its wholly owned subsidiary, NGG
Gathering Company, LLC, Barnett Gathering Company, LLC, Barnett Field Services, LLC and LCX Pipeline Company, LLC. The pipeline subsidiaries were formed or acquired to operate natural gas gathering systems.
DG Royalty, LLC, Wyatt Energy Partners, 1979 Royalties, LP and DRE Energy, LLC (the “Royalty Subsidiaries”) were formed to hold
mineral interests, royalty interests, overriding royalty interests, and non-working interests in oil and natural gas properties.
EER Finance, Inc., a Delaware corporation (“EER Finance”) is a
wholly owned subsidiary of the Company and was organized to serve as a co-issuer of the Senior Notes (see Note E - Debt). EER Finance does not have any operations, assets or liabilities other than with respect to the Senior Notes and other debt securities that may be issued in the future.
Sprouts Energy, LLC is a subsidiary of the Company and was formed in June 2022 for the purpose of jointly owning and operating a
daycare facility with Diamondback E&P LLC. The Company and Diamondback E&P LLC each own fifty percent (50%) of the issued and outstanding limited liability membership interests of Sprouts Energy, LLC. Employees of the Company and
Diamondback E&P LLC are eligible to apply for their children to attend the daycare.
Planned merger of the Company with Diamondback Energy, Inc.
On February 11, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Diamondback
pursuant to which, among other things, the Company will merge with and into a wholly owned subsidiary of Diamondback (the “Diamondback Merger”). As a result of the Diamondback Merger, Diamondback will acquire 100% of the issued and outstanding
equity interests of the Endeavor Parent, being the entity that directly and indirectly owns all the issued and outstanding equity interests of the Partnership. Subject to the terms and conditions of the Merger Agreement, all the Company’s equity
interests will be converted into the right to receive, in the aggregate, (i) cash consideration consisting of a base cash amount of $8.0 billion, subject to adjustments and (ii) approximately 117.3 million shares of Diamondback common stock. The
transaction was unanimously approved by the board of directors of Diamondback, and the Company has all necessary approvals. The Merger Agreement requires that the Company use commercially reasonable efforts to conduct the Company’s business in
the ordinary course and consistent with past practices. Accordingly, the Merger Agreement contains certain interim operating covenants which limit the Company’s ability to take certain material actions without Diamondback’s written consent (which
consent shall not be unreasonably withheld, conditioned or delayed), including, without limitation, making capital expenditures in excess of 115% of the Company’s approved capital budget, selling a material portion of the Company’s assets,
amending or changing the organizational documents of the Company, or entering into certain material contracts.
2. |
BASIS OF CONSOLIDATION
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The accompanying consolidated financial statements of the Company as of June 30, 2024 and for six months ended June 30, 2024 and
2023, present the accounts of the Company, the oilfield service divisions and subsidiaries, the pipeline subsidiaries, the Royalty Subsidiaries and EER Finance subsidiary. All significant inter-company balances and transactions have been
eliminated. The Company accounts for its interests in oil and natural gas ventures and working interests using the proportionate consolidation method. Under this method, the Company records its proportionate share of assets, liabilities, revenues
and expenses.
The preparation of our financial statements in conformity with GAAP requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. Management continually evaluates its estimates and assumptions based on available information and experience. Changes in facts and circumstances may result in revised
estimates and actual results may differ from these estimates. Normal recurring adjustments are made to the financial statements to ensure that the financial statements are presented fairly in all material respects in accordance with GAAP. Such
adjustments are of a routine nature and are reflected in the financial statements in the period in which they are made.
Areas of significance requiring the use of management’s judgments include the estimation of proved oil, natural gas and NGL
reserves used in calculating depletion, the estimation of future net revenues used in computing ceiling test limitations and the estimation of future abandonment obligations used in recording asset retirement obligations. Estimates and judgments
also are required in determining allowances for doubtful accounts, impairments of unproved properties and other assets, fair value measurements, deferred taxes and contingencies. We analyze our estimates and base them on historical experience and
various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The process of estimating quantities of oil, natural gas and NGL reserves is complex, requiring significant judgment in the
evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity,
evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort
is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial
statement disclosures.
4. |
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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The Company considers cash on hand, cash on deposit in banks and money market mutual funds with an original maturity of three
months or less to be cash and cash equivalents. The Company maintains its cash and cash equivalents at financial institutions that are insured by the Federal Deposit Insurance Corporation. At June 30, 2024 and December 31, 2023, our cash and cash
equivalents exceeded what is federally insured. The Company has not experienced any losses from such accounts.
The Company periodically enters into time deposits with financial institutions. Income related to these investments is recorded
in interest and other income in the Company's consolidated statements of operations. As of June 30, 2024 and December 31, 2023, the Company had $567 million and $266 million, respectively, in short-term money market funds, which was included in
the Company’s cash and cash equivalents. The following table summarizes the Company’s cash and cash equivalents for the periods presented (dollars in millions):
Cash and cash equivalents:
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Total cash and cash equivalents
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5. |
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
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Substantially all of the Company’s accounts receivable result from oil, natural gas and NGL sales and other joint activity with
other companies in the oil and natural gas industry. This concentration of customers may impact the Company’s overall credit risk, either positively or negatively, in that these entities may be similarly affected by industry-wide economic changes
or other conditions. Receivables are generally not collateralized. The Company's principal exposure to credit risk is through the sale of its oil, natural gas and NGL production and its receivables associated with billings to joint interest
owners. Accordingly, the Company classifies its receivables into two portfolio segments as depicted on the consolidated balance sheets as “Receivables—Accrued oil and natural gas revenues” and “Receivables—Joint interest billings.” Presented
below are applicable disclosures required by Accounting Standard Update (“ASU”) 2016-13 for each portfolio segment.
Receivables— Accrued oil and natural gas revenues
The Company’s crude oil, natural gas, and NGL production from operated properties is generally sold to energy marketing
companies, crude oil refining companies, and natural gas gathering and processing companies. The Company monitors its credit loss exposure to these counterparties primarily by reviewing credit ratings, financial statements and payment history.
Credit terms are extended based on an evaluation of each counterparty’s creditworthiness. The Company has not generally required its counterparties to provide collateral to secure its accrued oil and natural gas revenues.
Receivables associated with oil, natural gas, and NGL sales are short term in nature and range anywhere from one to three
months. There were no write-offs, recoveries or changes in the provision for credit losses on this portfolio segment during the six months ended June 30, 2024 and 2023.
Receivables—Joint interest billings
Joint interest and other receivables primarily arise from billing the individuals and entities who own a partial interest in the
wells the Company operates. Joint interest receivables are due within 30 days. We evaluate delinquent receivables and create an allowance for doubtful accounts as deemed necessary.
The Company’s allowance for credit losses on joint interest receivables totaled $13 million and $13 million as of June 30, 2024 and December 31, 2023, respectively. The allowance was determined by considering a number of factors, primarily including the Company’s history of credit losses with adjustment as
needed to reflect current conditions, the length of time accounts are past due, the ability to recoup amounts owed through netting of production proceeds, the balance of co-owner prepayments if any, and the co-owner’s ability to pay. There were
no significant write-offs or recoveries for credit losses on this portfolio segment during the six months ended June 30, 2024 and 2023.
Inventories consist of pipe and other production equipment. Inventories are stated at the lower of average cost or net
realizable value. For the six months ended June 30, 2024, the Company recorded a $1 million lower of cost or net realizable adjustment to inventories. For six months ended June 30, 2023, the Company did not record a lower of cost or net
realizable value adjustment.
7. |
OIL AND NATURAL GAS PROPERTIES
|
The Company follows the full cost method of accounting for oil and natural gas properties. Under this method of accounting all
costs associated with the acquisition, exploration and development, including certain internal costs of oil, natural gas and NGL reserves are capitalized. Internal costs that are capitalized to the full cost pool represent management’s estimate
of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. Internal costs, including employee costs,
related to production and operation of the properties are charged to expense as incurred. Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved reserves of oil, natural gas and NGL. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects
can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to amortization of capitalized costs. Depletion of proved oil and natural gas
properties is calculated using the unit-of-production method, whereby capitalized costs of oil and natural gas properties including the estimated future costs to develop proved reserves, are amortized over the total proved reserves.
In addition, the capitalized costs are subject to a “ceiling test,” which limits such capitalized costs to the aggregate of the
“estimated present value,” discounted at a 10 percent interest rate of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties. Unproved oil
and natural gas properties are periodically assessed for impairment on a project-by-project basis. These impairment assessments are affected by the results of exploration activities, commodity price outlook, planned future sales or expirations of
all or a portion of such projects. If the estimated future net cash flows attributable to such projects are not expected to be sufficient to fully recover the costs invested in each project, the Company will transfer all or a portion of the
leasehold costs to the full cost pool and such costs are then subject to amortization.
8. |
OTHER PROPERTY AND EQUIPMENT
|
Other property and equipment are carried at their cost basis. The cost of maintenance and repairs is charged to expense as paid;
significant renewals and improvements are capitalized.
Upon retirement or disposition of other property and equipment the cost and related accumulated depreciation are removed from
the accounts with the resulting gains or losses, if any, recognized in income. Depreciation of other property and equipment is computed using the straight-line method over the estimated useful lives of the property and equipment. The useful lives
of the properties are as follows:
|
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Buildings and leasehold improvements
|
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Automobiles and light trucks
|
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Heavy trucks and trailers
|
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Service company equipment, pipeline and other equipment
|
|
Periodically, the Company evaluates long-lived assets for impairment when indicators of possible impairment are present. If the
related asset exceeds the undiscounted cash flows, the carrying value is reduced to the asset’s fair value, and an impairment loss is recorded against long-lived assets. For the six months ended June 30, 2024 and 2023, the Company did not
recognize a material provision for impairment on other property and equipment.
Leases
The Company enters into leases for drilling rigs and buildings
and recognizes lease expenses on a straight-line basis over the lease term. Lease right-of-use assets and liabilities are initially recorded on the lease commencement date based on the present value of lease payments over the lease term. As
most of the Company's lease contracts do not provide an implicit discount rate, the Company uses its incremental borrowing rate, which is determined based on information available at the commencement date of a lease. Leases may include renewal,
purchase or termination options that can extend or shorten the term of the lease. The exercise of those options is at the Company's sole discretion and is evaluated at inception and throughout the contract to determine if a modification of the
lease term is required. Leases with an initial term of 12-months or less are not recorded as a lease right-of-use asset and liability. See Note D - Oil
and Natural Gas Properties, Other Property and Equipment and Lease Information for additional information.
The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which are
constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum, chemical or other substances at various sites.
Environmental costs that relate to current operations are expensed or capitalized as appropriate. Costs are expensed when they relate to an existing condition caused by past operations and will not contribute to current or future revenue
generation. Liabilities related to environmental assessments and/or remedial efforts are accrued when property or services are provided or can reasonably be estimated.
10. |
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
|
The Company follows the provisions of the Derivatives and Hedging topic of the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 815 to account for its derivative financial instruments. Under this topic, all derivative instruments, whether designated as hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in our results of operations and comprehensive income
(loss). If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the
hedged item affects results of operations and comprehensive income (loss). If the derivative is not designated as a hedge, changes in the fair value are recognized in other income (expenses).
Oil, natural gas and NGL sales under the Company’s contracts are generally considered performed when the Company sells oil,
natural gas and NGL production at the wellhead and receives an agreed-upon index price, net of any price differentials and costs to gather or transport the product, in some cases. The Company recognizes revenue when control transfers to the
purchaser, generally at the wellhead, based on the net price received.
Oil sales. Upon review of current contracts with crude oil purchasers, it was determined that oil production is sold at the outlet of the wellhead, and purchasers typically take custody, title and risk of loss of the product and, therefore,
control, as defined under ASC 606, Revenue from Contracts with Customers, typically passes at the delivery point.
Natural gas and NGL sales. The Company reviewed its natural gas contracts with natural gas purchasers. Based on the terms of the contracts, the majority of the Company’s natural gas production is sold at the wellhead, and the purchaser typically
takes custody, title and risk of loss of the product and, therefore, control, as defined under ASC 606, typically passes at the delivery point.
Service company revenues. The Company recognizes revenue during the normal course of business and performance obligations are generally considered performed when the Company sells products or completes services for customers.
Disaggregation of revenues. The Company recognizes revenues from the sale of oil, natural gas and NGL to customers and presents them disaggregated on the Company’s consolidated statements of operations. Substantially all of the Company’s revenues
are earned in the geographical region of the Permian Basin.
12. |
ASSET RETIREMENT OBLIGATIONS (ARO)
|
In accordance with the Asset Retirement and Environmental
Obligations topic of the FASB ASC 410, the Company recorded the present value of estimated future abandonment cost, represented by the summation of additional liabilities incurred and revisions of estimates as of June 30, 2024 and December 31,
2023. See Note G - Asset Retirement Obligations. The Company will
adjust the abandonment liability associated with its oil and natural gas wells as they are completed or abandoned, or as estimates of future abandonment costs fluctuate. We measure the future cost to retire our tangible long-lived assets and
recognize such cost as a liability for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction or normal operation of a long-lived asset.
We measure the future cost to retire our tangible long-lived assets and recognize such cost as a liability for legal obligations
associated with the retirement of long-lived assets that result from the acquisition, construction or normal operation of a long-lived asset. The fair value of a liability for an asset’s retirement obligation is recorded in the period in which it
is incurred if a reasonable estimate of fair value can be made, and the corresponding cost is capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, the difference is recorded in oil and natural gas properties. The Company’s asset retirement
obligations primarily relate to the future plugging and abandonment of wells and related facilities. The Company estimates the future plugging and abandonment costs of wells, the ultimate productive life of the properties, a risk-adjusted
discount rate and an inflation factor in order to determine the current present value of this obligation. To the extent future revisions to these assumptions impact the present value of the existing asset retirement obligation liability, a
corresponding adjustment is made to the oil and natural gas property balance.
The financial statements of the Company account for deferred tax assets and liabilities in accordance with ASC 740, Income
Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities.
For all periods prior to January 1, 2024, the Company (as the
continuation of the historical S-Corporation of the Partnership) was classified as an S-Corporation for U.S. federal income tax purposes and certain applicable state laws. S-Corporations are not subject to U.S. federal income tax at the entity
level. Effective January 1, 2024, Endeavor Parent revoked its classification as an S-Corporation for U.S. federal income tax purposes and became a C-Corporation subject to U.S. federal income taxes. U.S. federal and state taxes are assessed at
the entity level and deferred tax liabilities of $1,807 million and $57 million have been recorded as of June 30, 2024 and December 31, 2023, respectively, resulting from a book to tax difference in asset carrying amounts. Uncertain tax
positions may change in the next twelve months; however, the Company does not expect any possible changes to have a significant impact on our comprehensive income (loss) or financial position. See Note M - Income Taxes for additional information related to this conversion and other income tax
information.
14. |
LONG-TERM DEBT PREMIUM AND DEFERRED DEBT COSTS
|
The Company records premiums associated with the Senior Notes as a component of long-term debt which are amortized over the term
of the Senior Notes.
The Company's deferred debt costs related to its Senior Notes are reported as a direct reduction from the carrying amount of the
long-term debt liability. The Company amortizes deferred debt costs on a straight-line basis over the life of the respective long-term debt as a component of interest expense.
The Company's deferred debt costs related to its revolving credit facility are reported as other prepaid and other assets as of
June 30, 2024 and other noncurrent assets as of December 31, 2023. The Company amortizes deferred debt costs on a straight-line basis over the life of the revolving credit facility as a component of interest expense.
15. RECENTLY ADOPTED ACCOUNTING STANDARDS
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which is
effective for fiscal years beginning after December 15, 2024 with early adoption permitted. The amendments in this Accounting Standard Update are focused on income tax disclosure requirements, primarily related to income tax rate reconciliation
and income tax paid, with prospective application to a company's consolidated financial statements recommended. The Company is currently assessing the impact of this new accounting standard on its disclosures.
The Company values financial instruments as required by GAAP (ASC 820). The carrying amounts of cash and cash equivalents,
short-term investments, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments. The carrying amount of long-term debt approximates fair value because the interest rate on this instrument
is variable. The fair value of derivative financial instruments is the amount at which they could be settled, based on quoted market prices.
Certain of the Company’s financial and nonfinancial assets and
liabilities are reported at fair value on the accompanying consolidated balance sheets. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. To increase consistency
and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy that prioritizes the relative reliability of inputs used in fair value measurements. The hierarchy gives highest priority to Level
1 inputs that represent unadjusted quoted market prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are directly or indirectly observable
inputs other than quoted prices included within Level 1. Level 3 inputs are unobservable inputs and have the lowest priority in the hierarchy. ASC 820 requires that an entity give consideration to the credit risk of its counterparties, as well
as its own credit risk, when measuring financial assets and liabilities at fair value. See Note J - Fair Value for additional information.
NOTE B – CONCENTRATIONS OF CREDIT RISK
The Company’s accounts receivable consists principally of uncollateralized sales to customers in the oil and natural gas industry and working
interest owners. The concentration of credit risk in a single industry affects the Company’s overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions.
In addition, our cash and cash equivalents balances held at third-party financial institutions exceed amounts insured by the Federal Deposit
Insurance Corporation (“FDIC”), which could expose the Company to liquidity risk in the event that any such institutions are unable to deliver such amounts to the Company upon a withdrawal request as a result of insufficient cash reserves or
otherwise.
NOTE C – RELATED PARTY TRANSACTIONS
The Company either receives revenues or is billed for services provided by entities wholly or partially owned by Autry C. Stephens, a member of
Endeavor Parent, LLC and chairman of the Board of Managers.
Oasis Transportation and Marketing Corporation (“Oasis”), an entity in which Mr. Stephens is a majority owner, purchases a portion of our crude oil
under the terms of a written contract. The contract may be terminated by either party without penalty upon 30 days’ notice. Under the terms of this contract Oasis purchases and transports crude oil produced from some of our Midland Basin operated
wells at Oasis’s resale price less a transportation rate that is equal to or less than the rate that would be charged by unaffiliated parties.
Blue Streak Transportation, Inc., an entity indirectly controlled by Mr. Stephens, provides fuel and fuel delivery services to us under the terms of
a written contract. The contract may be terminated by either party without penalty upon 30 days’ notice. In April 2021, Advanced Stimulation Technologies, Inc., a related party, acquired Blue Streak Transportation, Inc.
Advanced Stimulation Technologies, Inc. (“AST”), an entity that was wholly owned and controlled by Mr. Stephens, provides well fracturing,
stimulation and cementing services to the Company at prices agreed upon by the parties from time to time, all in accordance with the terms of a written contract. In December 2023, the Company entered into an 18-month contract with AST for
hydraulic fracturing and related services. This contract may be terminated by Endeavor upon 90 days’ notice. Mr. Stephens sold his entire interest in AST to a third party in June of 2024, and as such, the Company will no longer consider
transactions after such date as related party.
ACME Energy Services, Inc. (“ACME”), an entity wholly owned by Mr. Stephens, has provided or provides oilfield services to the Company. The services
provided include drilling and natural gas pipeline services in Texas, Oklahoma and Kansas, at market rates and terms. The oilfield services contract that the Company has with ACME may be terminated by either party without penalty upon 30 days’
notice. ACME also purchases natural gas from the Company in Oklahoma and Texas. The Company, through its oilfield service companies and pipeline subsidiaries, also bills for services provided to ACME. During the second quarter of 2024, ACME sold
its interest to Endeavor in certain pipelines, compressor stations and surface facilities to settle certain receivables due to the Company. The Company has approximately $1 million in related party receivables due from ACME as of June 30, 2024.
The activities associated with related parties for the six months ended June 30, 2024 and 2023, respectively, are reflected in the table below (dollars in
millions).
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Six Months Ended June 30,
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Relationships with affiliates to purchase oil and natural gas (revenue)
|
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Oasis Transportation and Marketing Corporation
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ACME Energy Services, Inc
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-
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Relationships with affiliates to provide services (cost)
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Advanced Stimulation Technologies, Inc.
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Blue Streak Transportation, Inc.
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-
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|
|
|
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|
|
|
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The following tables summarize the current and non-current related party receivables and payables as of June 30, 2024 and December 31, 2023 (dollars in
millions).
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Oasis Transportation and Marketing Corporation - Oil and natural gas sales receivable
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Employee Joint Interest Billings, net of allowance of $1 million and $1 million, respectively
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ACME Energy Services, Inc.
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Total current related parties receivables
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Accounts and Notes Receivable
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ACME Energy Services, Inc.
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|
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Total related party receivables
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Related party investments
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Saltwater Partners #1 SWD, LLC
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Total related party investments
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Total other non-current related party assets
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Agreements and Relationships with Employees
Since our inception in 2000 until 2016, the Company granted certain of our employees working interests in virtually all of our new oil and natural
gas leases by allowing them to participate in our drilling activities. This practice was discontinued in 2016, and employees no longer participate in new leases. However, employees that were participants in the program prior to its discontinuance
are able to participate in new wells drilled on leases in which they own working interests, but only to the extent of such working interests. The total employee participation in any well does not exceed 15%. We are reimbursed for costs associated
with the employee joint working interest owners through the joint interest billing. Employees may defer payment of their joint interest billings beyond normal terms from time to time based on their individual financial circumstances. Ultimately,
joint interest billing payment is made through the combination of application of oil and natural gas sales revenues and employee payments. The amount due from employees on open joint interest billing account was $2 million and $2 million at June
30, 2024 and December 31, 2023, respectively, and is included in current receivables-related parties in the accompanying financial statements.
NOTE D – OIL AND NATURAL GAS PROPERTIES, OTHER PROPERTY AND EQUIPMENT AND LEASE INFORMATION
The following is a summary of oil and natural gas properties and other property and equipment and the related accumulated depletion and depreciation
as of June 30, 2024 and December 31, 2023, respectively (dollars in millions):
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Oilfield
Service
Companies
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Oil and natural gas property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Accumulated depletion and impairment
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Oil and natural gas property and equipment, net
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Automobiles and light trucks
|
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|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Service company, pipeline and other equipment
|
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Other property and equipment, net
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|
|
|
|
|
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-
|
|
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|
|
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Oilfield
Service
Companies
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Oil and natural gas property and equipment
|
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|
|
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|
|
|
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|
|
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|
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-
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-
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-
|
|
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|
-
|
|
|
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Accumulated depletion and impairment
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|
|
|
|
- |
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|
|
-
|
|
|
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|
|
Oil and natural gas property and equipment, net
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|
|
|
|
-
|
|
|
|
-
|
|
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|
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|
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|
|
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-
|
|
|
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Automobiles and light trucks
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|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Service company, pipeline and other equipment
|
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Other property and equipment, net
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|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
During January 2024, the Company closed an acquisition of deep leasehold rights for approximately $71 million. The Company funded the purchase price
with cash on hand. The assets acquired in this acquisition consisted of approximately 10,980 net acres in Midland County, Texas. This acquisition was accounted for as an asset acquisition of unproved properties.
In addition, during February 2024, the Company, through its wholly owned subsidiary 1979 Royalties, L.P., closed an acquisition of approximately
7,182 net royalty acres in the Midland and Delaware Basins from an unrelated third party for an aggregate purchase price of $62 million (subject to customary closing and post-closing adjustments). The aggregate consideration for this acquisition
consisted of approximately $62 million in cash paid to the seller. This acquisition was accounted for as an asset acquisition and the allocation of the purchase price, subject to customary post-closing adjustments, was approximately $34 million
to proved properties and $28 million to unproved properties.
The following table provides the components of our depletion, depreciation, amortization and accretion expense for the six months ended June 30, 2024
and 2023, respectively (dollars in millions, except per BOE amounts):
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Six Months Ended June 30,
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|
|
|
|
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|
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Depletion of proved oil and natural gas
properties
|
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Depreciation of other property and equipment
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Accretion of asset retirement obligations
|
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Total depletion, depreciation, amortization and accretion expense
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A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease
right-of-use assets and finance lease right-of-use assets (collectively “ROU Assets”) represent the Company’s right to use an underlying asset for the lease term. Operating lease liabilities and finance lease liabilities (collectively, “Lease
Liabilities”) represent the Company’s obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. ROU Assets and Lease Liabilities are recognized at the lease commencement date based
on the present value of lease payments over the lease term. The Company excludes short-term leases having initial terms of 12-months or less from ROU Assets and Lease Liabilities and recognizes rent expense on a straight-line basis over the lease
term. In addition, the Company has leases, primarily related to drilling rig commitments, that began in December 2023 and extend for approximately two years. As a result, the Company has recorded ROU Asset and ROU Liabilities associated with the
long-term contracts.
The Company has leases for its office spaces and certain equipment. Most operating leases contain renewal options that provide for rent increases
based on prevailing market conditions. The Company has lease extension terms for our office spaces that have either been extended or are likely to be extended. The terms used to calculate the ROU Assets and Lease Liabilities for these properties
include the renewal options that the Company is reasonably certain to exercise.
The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is
not readily determinable, the Company utilizes its secured borrowing rate. ROU Assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both ROU Assets and Lease Liabilities exclude variable
payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants.
Total operating lease drilling costs were approximately $55 million for the six months ended June 30, 2024. Maturities of Lease Liabilities as of
June 30, 2024 are as follows (dollars in millions):
The component of lease drilling costs, including amounts recoverable from joint operating partners, are as follows (dollars in millions):
|
|
Six Months Ended June 30,
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|
|
|
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|
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|
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-
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- |
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-
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|
(a) Represents costs associated with short-term leases (those with a contractual term of 12-months or less) that are not
included in the consolidated balance sheet.
(b) Represents costs associated with operating lease cost that are long-term lease (those with contractual terms of greater
than 12-months) that are included in the consolidated balance sheet.
Cash flow information related to leasing activity is as follows (dollars in millions):
|
|
Six Months Ended June 30,
|
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Cash payments for operating and short-term leases (a)
|
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|
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|
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-
|
|
(a) Represents costs associated with drilling operations that are capitalized as additions to oil and natural gas properties.
The following table provides the carrying value and fair value of the Company’s long-term financial debt instruments that are not recorded at fair
value in the consolidated balance sheets as of June 30, 2024 and December 31, 2023, respectively (dollars in millions):
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|
Premium on 2028 Senior Notes
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-
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-
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-
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-
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|
Long-term debt, net of deferred debt costs
|
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|
The fair value of the Company’s consolidated debt obligation is a Level 2 valuation based on the observable inputs used for similar liabilities. The
carrying amount of the Company’s revolving credit facility approximates its fair value as the applicable interest rates are variable and reflective of market rates.
Revolving Credit Facility
As of June 30, 2024, the borrowing base under our revolving credit facility was $5,000 million, and the Company had elected commitments of $1,500
million, with no advances outstanding and $2 million of letters of credit issued and outstanding, resulting in $1,498 million in available borrowing capacity. In addition, our revolving credit facility is current with a maturity date of March 12,
2025.
The revolving credit facility places limitations on excess cash balances, if amounts drawn on the revolving credit facility are outstanding, to the
greater of (i) $150 million and (ii) 10% of elected commitments. Additionally the revolving credit facility provides for the release of collateral, as well as adjustment to utilization pricing margins if the Company is rated as investment grade
by two out of the three major rating agencies (Moody’s, S&P or Fitch), referred to as an “Investment Grade Period.”
The revolving credit facility bears interest, at our option, based on Adjusted Term SOFR or the Base Rate, plus a margin. The following margins for
advances are only applicable during any time other than the Investment Grade Period. SOFR advances bear interest at the SOFR for the applicable period plus a margin of 175 basis points to 275 basis points based on utilizations. Base Rate advances
bear an interest rate at the prime rate (8.50 percent as of June 30, 2024) plus a margin of 75 basis points to 175 basis points based on our utilization of the facility.
During the Investment Grade Period, SOFR advances bear an interest rate at the SOFR for the applicable period plus a margin of 125 basis points to
187.5 basis points determined by reference to the Credit Rating applicable on such day. Base Rate advances bear an interest rate at the prime rate plus a margin of 25 basis points to 87.5 basis points determined by reference to the Credit Rating
applicable on such day. We pay commitment fees ranging from 37.5 basis points to 50 basis points dependent on utilization and ranging from 15 basis points to 27.5 basis points during an Investment Grade Period.
Distributions may be made by the borrower to purchase its equity interests from its members and to its members for any purposes and fund loans to
Autry C. Stephens or other members evidenced by a note containing current market provisions if the following conditions are met: no default or event of default exists, there is at least 20% of availability under the revolving credit facility, and
the ratio of Net Funded Debt to Adjusted EBITDA calculated on a pro forma basis is less than 3.0 to 1.0. Prior to the revocation of the Company’s election to be taxed as an S-corporation for U.S. federal income tax purposes, the revolving credit
facility permitted the Company to make cash distributions to the members up to the then applicable maximum combined federal income tax rate percentage of the quarterly taxable income of the Company; provided, however, that immediately before and
after giving effect thereto no (i) default or event of default or (ii) borrowing base deficiency or requirement to make any mandatory prepayment of principal shall exist
Our revolving credit facility has numerous affirmative covenants. The revolving credit facility required financial covenants are as follows: (i)
minimum Current Ratio of 1.00 to 1.00 calculated as a ratio of Current Assets to Current Liabilities on a quarterly basis (this ratio stood at 1.95 to 1.00 at June 30, 2024) and (ii) maximum Net Funded Debt to EBITDA ratio of 3.50 to 1.00
determined quarterly based on the ending net funded debt of that quarter divided by the previous four quarters’ EBITDA (this ratio stood at 0.00 to 1.00 at June 30, 2024). The Company was in compliance with all financial covenants under our
revolving credit facility as of June 30, 2024. The lenders may accelerate all of the indebtedness under our revolving credit facility upon the occurrence and during the continuance of any event of default. The Credit Agreement governing our
revolving credit facility contains customary events of default, including non-payment and breach of covenants. With certain specified exceptions, the terms and provisions of our revolving credit facility generally may be amended with the consent
of the lenders holding a majority of the outstanding loans or commitments to lend.
Senior Notes
As of June 30, 2024 and December 31, 2023, the Company had $907 million in outstanding 2028 Senior Notes. The Senior Notes are guaranteed by certain
of our subsidiaries, and interest on the Senior Notes is payable semi-annually. The following table summarizes the amount outstanding as of June 30, 2024, applicable interest rate and maturity date for the Senior Notes (dollars in millions):
During 2023, the Company entered into open market repurchases of its outstanding 2028 Senior Notes. As a result, the Company paid $71 million that
included principal, accrued interest payable offset by the market discount as of the respective repurchase dates. In addition, the Company recorded a net gain on repurchases of $0.4 million primarily due to discounts on the repurchase of the 2028
Senior Notes.
The Company may on any one or more occasion redeem all or part of the 2028 Senior Notes, upon notice as provided in the indenture governing, at the
redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest, if any, on the Senior Notes redeemed, to the applicable date of redemption, if redeemed during the twelve-month period beginning
January 30 of the years indicated below, subject to the rights of holders of the Senior Notes on the relevant record date to receive interest on the relevant interest payment date:
Maturities of debt at June 30, 2024, excluding deferred debt costs and premiums, were as follows (dollars in millions):
Interest (Expense) Income, Net
The following amounts have been incurred and charged to interest (expense) income, net for the six months ended June 30, 2024 and 2023 (dollars in
millions):
|
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Six Months Ended June 30,
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Cash payments for interest
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Amortization of issuance premium
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Amortization of deferred debt costs
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-
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Interest (expense) income, net
|
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NOTE F – SIGNIFICANT CUSTOMERS
Oil, natural gas and NGL sales to purchasers that accounted for more than ten percent of the Company’s revenue for the six months ended June 30, 2024
and 2023 were as follows:
|
|
Six Months Ended June 30,
|
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Enterprise Crude Oil, LLC
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Oasis Transportation and Marketing, Inc (a related party)
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* Purchaser did not represent 10% or more of the Company's revenues during the applicable period.
Because there are numerous other parties available to purchase the Company’s production, the Company believes that the loss of these purchasers would
not materially affect its ability to sell crude oil, natural gas or NGL.
NOTE G – ASSET RETIREMENT OBLIGATIONS (ARO)
The changes to ARO during the six months ended June 30, 2024 are as follows (dollars in millions):
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ARO additions and dispositions, net
|
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|
|
Asset retirement costs incurred
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|
NOTE H – DERIVATIVE CONTRACTS
The Company has entered into derivative instruments to mitigate a portion of its exposure to adverse market changes of hydrocarbon prices and
electricity prices. Swap instruments require a sale of the hedged commodity at a fixed price and a purchase at a floating market price, as defined in each instrument, to a counterparty.
Collar instruments are the simultaneous purchase of a put option or “floor” and sale of a call option or “ceiling” for the hedged commodity at
different fixed prices. Under the terms of these collar instruments, the Company generally does not pay or receive cash at inception of the instruments. Derivative instruments not designated as hedges are “marked to market” at each period end and
the increases or decreases in fair values are recorded to earnings. The following table summarizes our outstanding swaps and collars for crude oil WTI price, oil basis, natural gas Henry Hub price, Waha basis and Electric Reliability Council of
Texas (“ERCOT”) - ERCOT West 345 kV hub derivative contracts as of June 30, 2024:
Derivative Contracts - Oil
|
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Derivatives not designated as hedging instruments
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|
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|
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-
|
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|
|
-
|
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|
|
|
|
|
|
|
|
|
|
|
Weighted average ceiling price per Bbl
|
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|
-
|
|
|
|
-
|
|
|
|
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|
|
|
|
|
|
|
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|
|
Weighted average floor price per Bbl
|
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-
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-
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-
|
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-
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-
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|
|
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|
|
Weighted average ceiling price per Bbl
|
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|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
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|
|
Weighted average floor price per Bbl
|
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|
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|
|
-
|
|
|
|
-
|
|
|
|
-
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|
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|
|
Oil Basis Swaps - NYMEX WTI Midland - Argus
|
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|
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-
|
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|
|
-
|
|
|
|
|
|
|
|
|
|
|
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|
|
Weighted average price per Bbl
|
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-
|
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-
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- |
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-
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|
|
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|
|
Weighted average price per Bbl
|
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|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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|
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|
|
Derivative Contracts - Natural Gas
|
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|
Derivatives not designated as hedging instruments
|
Natural Gas Price Swaps - NYMEX Henry Hub
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-
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|
Weighted average price per MMBtu
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
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|
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|
|
Natural Gas Collars - NYMEX Henry Hub
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- |
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-
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|
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|
|
|
|
|
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|
|
Weighted average ceiling price per MMBtu
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average floor price per MMBtu
|
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|
-
|
|
|
|
-
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|
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|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Weighted average ceiling price per MMBtu
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Weighted average floor price per MMBtu
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
- |
|
|
|
|
|
|
Natural Gas Basis Swaps - Waha
|
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-
|
|
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|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average price per MMBtu
|
|
|
-
|
|
|
|
-
|
|
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-
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|
|
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|
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|
|
Weighted average price per MMBtu
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
Derivative Contracts - Electricity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
Electricity - Electric Reliability Council of Texas ("ERCOT") - ERCOT West 345 kV Hub
|
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|
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|
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-
|
|
|
|
-
|
|
|
|
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|
|
|
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|
|
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|
|
Weighted average swap price ($/MWh)
|
|
|
-
|
|
|
|
-
|
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|
|
Weighted average swap price ($/MWh)
|
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-
|
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|
-
|
|
|
|
- |
|
|
|
|
|
|
Weighted average swap price ($/MWh)
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
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|
|
Derivative Gains and Losses
Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the
contracted prices and the monthly settlements (if any) of the instruments. Certain of our hedge contracts have been designated as cash flow hedges and as a result, the change in the fair value is reported in other comprehensive income (loss) and
is reclassified to earnings when the forecasted transaction affects earnings. In addition, the Company has elected to not designate certain of our derivatives as hedging instruments for accounting purposes and, therefore, the Company does not
apply hedge accounting treatment on these derivative instruments. Consequently, changes in the fair value of our oil and natural derivative instruments not designed as hedges and cash settlements on the instruments are included as a component of
operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statement of cash flows. The following table presents the
components of the net gain (loss) on derivative instruments for the periods indicated (dollars in millions):
|
|
|
Six Months Ended June 30,
|
|
|
Recognized in Income on Derivative
|
|
|
|
|
|
|
Gain (loss) on derivative instruments, net
|
|
|
|
|
|
|
|
Gain (loss) from derivative instruments
|
|
|
|
|
|
|
|
|
|
Gain (loss) from derivative instruments
|
|
|
|
|
|
|
|
|
Total gain (loss) from derivative instruments not designated as hedges
|
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The following tables represents our net cash receipts from (payments on) derivatives for the periods presented (dollars in millions):
|
|
|
Six Months Ended June 30,
|
|
|
Recognized in Income on Derivative
|
|
|
|
|
|
|
Cash receipts (payments) on derivative instruments, net:
|
|
|
|
|
|
|
|
Gain (loss) from derivative instruments
|
|
|
|
|
|
|
|
|
|
Gain (loss) from derivative instruments
|
|
|
|
|
|
|
|
|
Total cash receipts (payments) on derivative not designated as hedges
|
|
|
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|
The following table presents the effect of our derivative instruments designated as cash flow hedges on our Consolidated Statements of Operations and
Comprehensive Income (Loss) for the periods presented.
|
|
Change in Value Recognized in Other
Comprehensive Income (Loss) on
Derivatives
|
|
|
|
Six Months Ended June 30,
|
|
Derivative in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
Commodity derivatives - Electricity, net
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to enforceable master netting
arrangements, which allow the Company to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our accounting policy is to not offset asset and liability positions in our balance sheets where
applicable. The following tables present the gross amounts and classifications of our derivative assets and liabilities as of June 30, 2024, and December 31, 2023 (dollars in millions):
|
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-
|
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-
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|
-
|
|
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|
-
|
|
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|
|
|
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|
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-
|
|
|
|
|
|
|
|
-
|
|
Total gross amounts presented in the balance sheet
|
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|
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|
|
|
|
|
|
|
|
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|
-
|
|
Less: gross amount offset in the balance sheet
|
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-
|
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-
|
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-
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- |
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Total gross amounts presented in the balance sheet
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Less: gross amount offset in the balance sheet
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Accumulated Other Comprehensive Income (loss)
Accumulated other comprehensive income (loss) primarily reflects cumulative gain or loss on derivative instruments designated and qualified as cash
flow hedges from inception less gains or losses previously reclassified from accumulated other comprehensive income (loss) into earnings. Gain or loss amounts related to cash flow hedges recorded in accumulated other comprehensive income (loss)
are reclassified to earnings in the same period(s) in which the underlying hedge forecasted transactions affect earnings. If it becomes probable that a forecasted transaction will not occur, the related net gain or loss in accumulated other
comprehensive income (loss) is immediately reclassified into earnings. The following tables present the components of accumulated other comprehensive income (loss) as reported on the Consolidated Balance Sheet at the dates indicated:
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Accumulated other comprehensive income, December 31, 2023
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Other comprehensive income for period, before reclassifications
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Reclassification of losses (gains) to net income during period
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Accumulated Other Comprehensive Income, June 30, 2024
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NOTE I – COMMITMENTS AND CONTINGENCIES
We are a party to proceedings and claims incidental to our business, including mineral trespass, oil and natural gas lease related title termination,
expiration and top leases, unauthorized land usage, breach of contract, property damage, unpaid liabilities and declaratory judgment alleging breach of contract. While many of these other matters involve inherent uncertainty, the Company believes
that the liability, if any, ultimately incurred with respect to such other proceedings and claims will not have a material adverse effect on our consolidated financial position as a whole or on our liquidity, capital resources or future results
of operations and comprehensive income (loss). The Company will continue to evaluate proceedings and claims involving the Company on a regular basis and will establish and adjust any reserves as appropriate to reflect our assessment of the then
current status of the matters.
The Company’s contractual obligations include long-term debt, asset retirement obligations, derivative liabilities, firm transportation commitments,
purchase commitments, drilling and completion, compressor and other commitments. At June 30, 2024, the Company had the following contractual obligations and material commitments (dollars in millions):
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Long-term debt - principal (1)
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Long-term debt - interest (1)
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Asset retirement obligations (2)
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Transportation Service Agreement (3)
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Drilling and completion commitments (5)
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Compressor commitments (6)
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(1) |
The interest and commitment payments presented above includes the accrued interest payable on our
long-term debt as of June 30, 2024 as well as future payments calculated using the long-term debt’s fixed rates, stated maturity dates and principal amounts outstanding as of June 30, 2024. See Note E - Debt to the consolidated financial statements for additional information regarding debt.
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(2) |
Amounts represent costs related to expected oil and natural gas property abandonments related to producing properties by period, net of any future accretion.
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(3) |
The Company has a firm transportation agreement for dedicated capacity on a pipeline that connects with regional gathering systems and transports oil to the Gulf Coast. We
have a long-term 21,000 Bbl per day average commitment.
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(4) |
The Company entered into purchase agreements for oil country tubular goods (“OCTG”) and materials that are expected to be used for the development of the Company’s oil and
natural gas properties. These agreements are at fixed prices and quantities of such materials during 2024.
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(5) |
The Company, as of June 30, 2024, has entered into drilling rig and completion contracts with
various third-party parties in the ordinary course of business to ensure rig and frac crew availability to complete the Company’s drilling and completions projects. As a result, certain of the Company's rig commitments being long-term,
the Company has recognized a right-of-use assets and liabilities under ASC 842. See Note D - Oil and Natural Gas Properties, Other Property and
Equipment and Lease Information for additional information related to the leases. In addition, certain of these commitments are not recorded in the
Company's consolidated balance sheets as a result of contracts having an initial term of 12-months or less. Future minimum commitments as of June 30, 2024 total approximately $28 million.
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(6) |
The Company has entered into commitments for compressor rentals in the normal course of business for operating oil and natural gas properties. As a result, the Company's
compressor rental commitments total $128 million. The Company's compressor rentals are subject to long-term contracts which are subject to substantive substitution rights and thus not considered a lease under ASC 842.
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(7) |
Other commitments related to a two-year lease of office space in Midland, Texas.
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The following table provides fair value measurement for the Company’s financial assets or liabilities carried at fair value as of June 30, 2024
(dollars in millions).
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Fair value measurement using
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Crude oil contract assets
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-
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Crude oil contract liabilities
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Natural gas contract assets
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Natural gas contract liabilities
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Electricity price swap assets
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Marketable securities held in Trust(1)
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The following table provides fair value measurement information within the hierarchy for the Company’s financial assets and liabilities carried at
fair value as of December 31, 2023 (dollars in millions):
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Fair value measurement using
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Crude oil contract assets
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Crude oil contract liabilities
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Natural gas contract assets
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Natural gas contract liabilities
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Electricity price swap assets
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Electricity price swap liabilities
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Marketable securities held in trust (1)
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(1) The Company has selected investments held in a trust
related to certain Non-Qualified Deferred Compensation Plan liabilities. These securities are classified as other noncurrent assets and
other noncurrent liabilities in the consolidated balance sheets because funds are restricted and are not available for the Company to use in its operations. See Note L - Employee Incentive Plan for additional discussion.
The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal
estimates of future retirement costs associated with oil and natural gas properties. Significant Level 3 inputs used in the calculation of asset retirement obligations include plugging costs and reserve lives. Financial instruments which
potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable and derivative financial instruments. The Company places its cash and cash equivalents with creditworthy
institutions. With respect to accounts receivable, these financial instruments primarily pertain to oil, natural gas and NGL sales and joint interest billings. These receivables are due from small to large companies engaged principally in oil and
natural gas activities. Ongoing credit evaluations are performed. Payment terms are on a short‑term basis and in accordance with industry practices.
NOTE K – EMPLOYEE BENEFIT PLANS
The Company’s qualified 401(k) profit sharing plan is the Endeavor Parent, LLC 401(k) Plan (the “401(k) Plan”), which is open to all eligible
employees of the Company. Eligible employees may elect to defer compensation through voluntary contributions to their 401(k) Plan accounts, subject to plan limits and those set by the Internal Revenue Service. The Company matches voluntary
employee contributions at a rate of 100% for each dollar contributed up to 8% of an employee’s eligible compensation each payroll period, subject to certain limits. The Company may also make discretionary contributions each year. Total
contributions made by the Company were $5 million and $4 million for the six months ended June 30, 2024 and 2023, respectively.
NOTE L – EMPLOYEE INCENTIVE PLANS
The Company maintains the Endeavor Energy Resources, L.P. Amended and Restated Incentive Compensation Plan (the “Incentive Plan”), which provides for
the award of both short-term incentive compensation and long-term incentive compensation in the form of cash awards to eligible employees based on the Company's attainment of certain performance goals coupled with individual performance
objectives each calendar year and the eligible employee's designated target percentage. As of June 30, 2024 and December 31, 2023, the Company accrued $17 million and $32 million, respectively, for the short-term incentive plan.
The long-term compensation cash awards granted pursuant to the Incentive Plan generally vest over a 3-year period and are payable on an annual basis,
contingent on continued employment through the applicable payment date. As of June 30, 2024 and December 31, 2023, the Company accrued $4 million and $6 million, respectively, for the long-term incentive plan.
The Company maintains the Phantom Unit Plan, which provides for grants of phantom unit awards to certain eligible employees. The awards generally
vest over a three-year period, contingent on continued employment, and provide for a cash payment equal to the unit value (calculated based upon the annual value of the Company’s proved reserves) multiplied by the number of phantom units subject
to each award upon vesting, or under a change of control, in certain cases. As of June 30, 2024 and December 31, 2023, the Company had accrued $13 million and $33 million, respectively, related to these arrangements.
During the first quarter of 2024, the Company amended the Company's long-term incentive plan and Phantom Unit Plan in order to modify the treatment
of outstanding awards upon certain qualifying “change of control” transactions.
The Company offers a Non-Qualified Deferred Compensation Plan (“NQDC Plan”) to a select group of our management and highly compensated employees. The
NQDC Plan provides participants the opportunity to defer payment of certain compensation as defined in the NQDC Plan. As of June 30, 2024, the NQDC Plan obligations were $23 million and were included in other long-term liabilities in the
consolidated balance sheets. The assets held by the NQDC Plan's trust are included in other noncurrent assets in the consolidated balance sheets. The NQDC Plan is managed by a third-party institution, and the deferred compensation and investment
earnings are held as Company assets in a trust (the “Trust”). The assets in the Trust are restricted unless the Company becomes insolvent, in which case the Trust assets are subject to the claims of the Company's creditors.
Effective January 1, 2024, the Company's Board of Managers elected to revoke the Company's status as an S-Corporation and convert the Company to a
C-Corporation for U.S. federal income tax purposes. As a result, the Company will be taxed for U.S. federal income tax purposes as a C-Corporation after this effective date. The Company has recorded a federal deferred tax liability of $1,630
million and associated deferred tax expense. This amount represents the difference between the book basis of its assets and tax basis as determined as of January 1, 2024 primarily attributable to oil and natural gas properties. The following
summarizes the Company's provision for income taxes for the periods indicated (dollars in millions):
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Six Months Ended June 30,
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Deferred taxes - C-Corporation conversion effect
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Provision for income taxes
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During the six months ended June 30, 2024 and 2023, the Company recorded $422 million and $13 million, respectively, provision for income taxes. The
Company income tax rate, excluding one-time deferred tax expense related to the C-Corporation conversion, was 22% and 1% for the six months ended June 30, 2024 and 2023, respectively.
As of December 31, 2023, the Company amended certain Texas Franchise tax returns to assert certain tax positions on certain drilling and experimental
expenditures related to horizontal drilling and completion innovations, which reduced the Company's effective tax rate as a result of the Company recognizing $12 million, net of allowance of $3 million, in research and development tax credits
during 2023. The Company anticipates that all research and development tax credits will be used on the 2023 Texas Franchise tax return, as such, no amounts have been included as deferred tax assets.
For the six months ended June 30, 2024, the Company made $690 million cash distributions to the members. In addition, in June 2024, the Company
approved a $231 million distribution to be paid in July 2024. As a result, the Company accrued $231 million as distributions payable as of June 30, 2024.
For the six months ended June 30, 2023, the Company made $265 million in distributions to the members.
NOTE O – SUBSEQUENT EVENTS
In July 2024, the Company paid out $231 million in distributions to its members that was previously declared and accrued for in June 2024.
In July 2024, the Company amended multiple contracts with its largest natural gas and Natural gas liquids (“NGL”) purchaser, such that the Company is
now obligated to take-in-kind approximately 30% of the Company’s current operated NGL production that is contractually committed to such purchaser. These volumes were previously sold to such purchaser at the wellhead. The contract amendments
stipulate that the Company will take in-kind future NGL volumes produced within the committed acreage described in the amendments. Additionally, the contract amendments provide the Company with natural gas take-in-kind option rights allowing the
Company to take-in-kind up to 100% of its' current and future natural gas volumes processed by such purchaser. Both the NGL and natural gas take in-kind volumes will be sold at market centers outside of the Permian Basin, which the Company
believes will enhance price realizations. The amendments added approximately 18,000 net dedicated acres to the Company's contracts with the purchaser and extended the term of the Company's purchase contracts with the purchaser through 2038.
Management has evaluated subsequent events through August 13, 2024, the date the consolidated financial statements were available to be issued.
23