UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 001-14039
Callon Petroleum Company
(Exact Name of Registrant as Specified in Its Charter)
_______________________________________________
Delaware
State or Other Jurisdiction of
Incorporation or Organization
One Briarlake Plaza
2000 W. Sam Houston Parkway S., Suite 2000
Houston, Texas
Address of Principal Executive Offices
64-0844345
I.R.S. Employer Identification No.
77042
Zip Code
Title of Each Class
Common Stock, $0.01 par value
281-589-5200
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol
CPE
Securities registered pursuant to section 12(g) of the Act: None
Name of Each Exchange on Which Registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Smaller reporting company
Accelerated filer
Emerging growth company
Non-accelerated filer
☒
☐
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the
Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued
financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the
relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2023 was approximately $2.1 billion.
The registrant had 66,508,277 shares of common stock outstanding as of February 16, 2024.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of Callon Petroleum Company relating to the 2024 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K. Such definitive proxy statement or an
amendment to this Annual Report on Form 10-K will be filed no later than 120 days after December 31, 2023
Special Note Regarding Forward-Looking Statements
Glossary of Certain Terms
Part I
Items 1 and 2.
Business and Properties
TABLE OF CONTENTS
Proved Oil and Gas Reserves
Drilling Activity
Productive Wells
Production Volumes, Average Sales Prices and Operating Costs
Major Customers
Leasehold Acreage
Human Capital
Other
Regulations
Commitments and Contingencies
Available Information
Risk Factors
Unresolved Staff Comments
Cybersecurity
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 1A.
Item 1B.
Item 1C.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
General
Financial and Operational Highlights
Results of Operations
Liquidity and Capital Resources
Critical Accounting Estimates
Item 7A.
Item 8.
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Supplemental Information on Oil and Natural Gas Operations (Unaudited)
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
2
Item 9.
Item 9A.
Item 9B.
Item 9C.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV.
Item 15.
Item 16.
Signatures
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3
6
9
13
13
14
15
15
15
16
17
26
26
27
47
48
49
49
50
51
51
51
51
52
56
57
59
61
62
66
67
68
69
70
100
105
105
106
106
106
106
106
106
106
107
109
110
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking
statements. In some cases, you can identify forward-looking statements in this Form 10-K by words such as “anticipate,” “project,” “intend,” “estimate,” “expect,” “believe,”
“predict,” “budget,” “projection,” “goal,” “plan,” “forecast,” “target” or similar expressions.
All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect or anticipate will or may occur in
the future are forward-looking statements, including statements about:
•
•
•
•
•
•
•
•
•
•
our oil and natural gas reserve quantities and the discounted present value of these reserves;
the amount and nature of our capital expenditures;
our future drilling and development plans and our potential drilling locations;
the timing and amount of future capital and operating costs;
production decline rates from our wells being greater than expected;
commodity price risk management activities and the impact on our average realized prices;
business strategies and plans of management;
our ability to efficiently integrate recent acquisitions;
prospect development and property acquisitions; and
the pending merger with APA Corporation.
We caution you that the forward-looking statements contained in this Annual Report on Form 10-K (this “2023 Annual Report on Form 10-K”) are subject to all of the risks and
uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil and natural gas. We disclose these and other
important factors that could cause our actual results to differ materially from our expectations under “Risk Factors” in Part I, Item 1A of this 2023 Annual Report on Form 10-
K.
Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those
expressed in any forward-looking statements. Additional risks or uncertainties that are not currently known to us, that we currently deem to be immaterial, or that could apply to
any company could also materially adversely affect our business, financial condition, or future results. Any forward-looking statement speaks only as of the date of which such
statement is made and the Company undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or
otherwise, except as required by applicable law.
In addition, we caution that reserve engineering is a process of estimating oil and natural gas accumulated underground and cannot be measured exactly. Accuracy of reserve
estimates depend on a number of factors including data available at the point in time, engineering interpretation of the data, and assumptions used by the reserve engineers as it
relates to price and cost estimates and recoverability. New results of drilling, testing, and production history may result in revisions of previous estimates and, if significant,
would impact future development plans. As such, reserve estimates may differ from actual results of oil and natural gas quantities ultimately recovered.
Except as required by applicable law, all forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement. This cautionary
statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
GLOSSARY OF CERTAIN TERMS
All defined terms under Rule 4-10(a) of Regulation S-X shall have their prescribed meanings when used in this report. As used in this document:
•
•
•
•
•
•
•
12-Month Average Realized Price: Average realized prices for sales of oil, NGLs, and natural gas on the first calendar day of each month during a trailing 12-month
period.
ASU: Accounting standards update.
Bbl or Bbls: Barrel or barrels of oil or NGLs.
Boe: Barrel of oil equivalent, determined by using the ratio of one Bbl of oil or NGLs to six Mcf of natural gas. The ratio of one barrel of oil or NGLs to six Mcf of
natural gas is commonly used in the industry and represents the approximate energy equivalence of oil or NGLs to natural gas and does not represent the economic
equivalency of oil and NGLs to natural gas.
Boe/d: Boe per day.
Btu: British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit.
Completion: The installation of permanent equipment for the production of oil or natural gas or, in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
3
Development well: A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
EPA: United States Environmental Protection Agency.
ESG: Environmental, social and governance.
Exploratory well: A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir.
Extension well: A well drilled to extend the limits of a known reservoir.
FASB: Financial Accounting Standards Board.
•
•
•
•
•
•
• GAAP: Accounting principles generally accepted in the United States.
• GHG: Greenhouse gases.
• Henry Hub: Natural gas pipeline delivery point that serves as the benchmark natural gas price underlying NYMEX natural gas futures contracts.
• Horizontal drilling: A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at an angle within a specified
interval.
• HSC: Houston Ship Channel, a delivery point in Houston, Texas that serves as a benchmark price for natural gas.
•
LIBOR: London Interbank Offered Rate.
LOE: Lease operating expense.
•
• MBbls: Thousand barrels of oil.
• MBoe: Thousand Boe.
• Mcf: Thousand cubic feet of natural gas.
• MMBoe: Million Boe.
• MMBtu: Million Btu.
• MMcf: Million cubic feet of natural gas.
•
•
NGL or NGLs: Natural gas liquids, such as ethane, propane, butanes and natural gasoline that are extracted from natural gas production streams.
Non-productive well: A well that is found to be incapable of producing oil or gas in sufficient quantities to justify completion, or upon completion, the economic
operation of an oil or gas well.
NYMEX: New York Mercantile Exchange.
•
• Oil: Includes crude oil and condensate.
• OPEC: Organization of Petroleum Exporting Countries.
•
•
•
•
•
Productive well: A well that is found to be capable of producing oil or gas in sufficient quantities to justify completion as an oil or gas well.
Proved developed producing reserves (“PDPs”): Proved reserves that can be expected to be recovered through existing wells with existing equipment and operating
methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well.
Proved reserves: Those reserves which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—
from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations—prior to the time at which
contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic
methods are used for the estimation. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The
price shall be the average price during the 12‑month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average
of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future
conditions.
Proved undeveloped reserves (“PUDs”): Proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are
reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at
greater distances. Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled
to be drilled within five years, unless specific circumstances justify a longer time.
PV-10 (Non-GAAP): Present value of estimated future gross revenue to be generated from the production of estimated net proved reserves, net of estimated
production and future development costs, using prices and costs in effect as of the date indicated (unless such prices or costs are subject to change pursuant to
contractual provisions), without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax
expenses or to depreciation, depletion and amortization, discounted using an annual discount rate of 10 percent. While this measure does not include the effect of
income taxes as it would in the use of the standardized measure of discounted future net cash flows calculation, it does provide an indicative representation of the
relative value of the Company on a comparative basis to other
4
companies from period to period. See “Items 1 and 2. Business and Properties — Proved Oil and Gas Reserves — Reconciliation of Standardized Measure of
Discounted Future Net Cash Flows (GAAP) to PV-10 (Non-GAAP)”.
Realized price: The cash market price less all expected quality, transportation and demand adjustments.
Royalty interest: An interest that gives an owner the right to receive a portion of the resources or revenues without having to carry any costs of development.
SEC: United States Securities and Exchange Commission.
SOFR: Secured Overnight Financing Rate
•
•
•
•
• Waha: A natural gas delivery point in West Texas that serves as the benchmark for natural gas.
• Working interest: An operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of
production and requires the owner to pay a share of the costs of drilling and production operations.
• WTI: West Texas Intermediate grade crude oil, used as a pricing benchmark for sales contracts and NYMEX oil futures contracts.
With respect to information relating to our working interest in wells or acreage, “net” oil and gas wells or acreage is determined by multiplying gross wells or acreage by our
working interest therein. Unless otherwise specified, all references to wells and acres are gross.
5
PART I.
ITEMS 1 and 2. Business and Properties
Overview
Callon Petroleum Company has been engaged in the exploration, development, acquisition and production of oil and natural gas properties since 1950. As used herein, the
“Company,” “Callon,” “we,” “us,” and “our” refer to Callon Petroleum Company and its predecessors and subsidiaries unless the context requires otherwise.
We are an independent oil and natural gas company focused on the acquisition, exploration and sustainable development of high-quality assets in the Permian Basin in West
Texas. Our activities are primarily focused on horizontal development in the Midland and Delaware Basins, both of which are part of the larger Permian Basin in West Texas.
Our primary operations in the Permian reflect a high-return, oil-weighted drilling inventory with multiple prospective horizontal development intervals.
In the first quarter of 2023, we voluntarily changed our method of accounting for oil and gas exploration and development activities from the full cost method to the successful
efforts method of accounting. Accordingly, the financial information for prior periods has been recast to reflect retrospective application of the successful efforts method of
accounting, as prescribed by the FASB ASC 932 “Extractive Activities — Oil and Gas.” See “Note 2 — Summary of Significant Accounting Policies” and “Note 3 — Change
in Accounting Principle” of the Notes to our Consolidated Financial Statements for additional discussion.
Merger Agreement
On January 3, 2024, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with APA Corporation (“APA”) and Astro Comet Merger Sub Corp., a wholly
owned subsidiary of APA (“Merger Sub”). The Merger Agreement provides that, among other things and subject to the terms and conditions of the Merger Agreement, (i)
Merger Sub will be merged with and into Callon (the “Merger”), with Callon surviving and continuing as the surviving corporation in the Merger, and (ii) at the effective time
of the Merger (the “Effective Time”), each outstanding share of common stock of Callon (other than Excluded Shares (as defined in the Merger Agreement)) will be converted
into the right to receive, without interest, 1.0425 shares of common stock of APA (the “Exchange Ratio”), with cash in lieu of fractional shares.
Our board of directors (the “Board of Directors”) has unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby are in the best interests
of, and advisable to, Callon and Callon shareholders, (ii) approved and declared advisable the Merger Agreement and the transactions contemplated thereby, (iii) resolved to
recommend that Callon stockholders approve the Merger Agreement and the transactions contemplated thereby, and (iv) approved the execution, delivery and performance by
Callon of the Merger Agreement and the consummation of the transactions contemplated thereby.
The completion of the Merger is subject to satisfaction or waiver of certain customary mutual closing conditions, including (i) the receipt of the required approvals from Callon
shareholders and APA shareholders, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
“HSR Act”), (iii) the absence of any governmental order or law prohibiting consummation of the Merger, (iv) the effectiveness of the registration statement on Form S-4 to be
filed by APA, pursuant to which the shares of APA common stock to be issued in connection with the Merger will be registered with the SEC, and (v) the APA common stock to
be issued pursuant to the Merger Agreement being authorized for listing on the Nasdaq Stock Market. The obligation of each party to consummate the Merger is also
conditioned upon the other party’s representations and warranties being true and correct (subject to certain materiality exceptions), the other party having performed in all
material respects its obligations under the Merger Agreement and the non-occurrence of any material adverse effect with respect to the other party since the date of the Merger
Agreement.
The Merger Agreement contains certain termination rights for each of APA and Callon, and in certain circumstances, a termination fee would be payable by the terminating
party.
If the Merger is consummated, our common stock will be delisted from the New York Stock Exchange (the “NYSE”) and deregistered under the Exchange Act, and Callon will
cease to be a publicly traded company.
For additional information related to the Merger, refer to the filings made with the SEC in connection with such transaction. We have prepared this 2023 Annual Report on
Form 10-K as if we are going to remain an independent company. If the Merger is consummated, many of the forward-looking statements contained in this 2023 Annual Report
on Form 10-K will no longer be applicable.
Major Developments in 2023
Financing and Liquidity Highlights
•
Decreased our total outstanding long-term debt principal balance by approximately 14% to $1.9 billion as of December 31, 2023, from $2.3 billion as of December 31,
2022.
6
•
•
•
On August 2, 2023, we used borrowings under the Credit Facility to redeem all $187.2 million of our outstanding 8.25% Senior Notes due 2025 (“8.25% Senior
Notes”). We recognized a gain on extinguishment of debt of approximately $1.2 million in our consolidated statements of operations, which primarily related to the
remaining unamortized premium.
On October 31, 2023, the borrowing base of $2.0 billion and elected commitment amount of $1.5 billion were reaffirmed as part of the Company’s fall 2023
redetermination.
Reduced the borrowings outstanding under our Credit Facility from $503.0 million as of December 31, 2022 to $365.0 million as of December 31, 2023.
See “Note 8 – Borrowings” of the Notes to our Consolidated Financial Statements for further discussion.
Eagle Ford Divestiture. On July 3, 2023, we closed on the sale of all our oil and gas properties in the Eagle Ford to Ridgemar Energy Operating, LLC (the “Eagle Ford
Divestiture) for total consideration of approximately $549.6 million, and up to $45.0 million of incremental contingent consideration.
Percussion Acquisition. Concurrent with the closing of the Eagle Ford Divestiture, we completed the acquisition of certain producing oil and gas properties, undeveloped
acreage and associated infrastructure assets in the Delaware Basin from Percussion Petroleum Management II, LLC (the “Percussion Acquisition”) for total consideration of
$457.3 million, and up to $62.5 million of incremental contingent consideration.
See “Note 5 – Acquisitions and Divestitures” of the Notes to our Consolidated Financial Statements for further discussion of both the Percussion Acquisition and Eagle Ford
Divestiture.
Share Repurchase Program. During 2023, we initiated a share repurchase program (the “Share Repurchase Program”) whereby we repurchased and retired approximately 1.7
million shares of common stock in the third and fourth quarters at a weighted average purchase price of $33.59 per common share for a total cost of $55.5 million. See “Note 12
— Stockholders’ Equity” of the Notes to our Consolidated Financial Statements for additional details. Pursuant to the Merger Agreement, we are restricted from making further
repurchases under such program without APA’s approval.
Operational Activity. The following tables present our net daily production, as well as our operated drilling and completion activity for the year ended December 31, 2023 along
with our drilled but uncompleted and producing wells as of December 31, 2023.
Production volumes
Crude oil (Bbls/d)
Natural gas (Mcf/d)
NGLs (Bbls/d)
Total production volumes (Boe/d)
Percent of total production
Operated Well Data
Drilled
Turned In-Line
As of December 31, 2023
Drilled But Uncompleted
Producing
Our Business Strategy
Permian
Eagle Ford
Total
53,858
119,007
20,695
94,388
6,117
7,320
1,252
8,589
59,975
126,327
21,947
102,977
92 %
8 %
100 %
Permian
Eagle Ford
Total
Gross
Net
Gross
Net
Gross
Net
97
105
32
917
86.8
94.0
29.6
815.1
9
3
—
—
6.0
2.4
—
—
106
108
32
917
92.8
96.4
29.6
815.1
Our strategy is to create value for our shareholders through the safe and capital-efficient development of our oil and gas properties, which we call our “Life of Field” co-
development model. Our people work to safely reduce our operating costs, maximize our cash flows and empower the communities in which our people live and work. The key
elements of our strategy include:
• We employ a “Life of Field” co-development model that enhances the value of our asset base and helps ensure capital efficiency, free cash flow generation, and
ultimately long-term value creation. Utilizing our extensive database of subsurface information, we have demonstrated an ability to enhance returns today, while
mitigating risks associated with future infill developments;
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• We strive to create new capital efficiencies across the enterprise. Human, technology, and capital resources are carefully applied to our highest long-term return
opportunities and our teams are incentivized to create value by safely lowering costs, improving well productivity and improving our returns on capital;
• We integrate sustainable business practices that aim to minimize our impact on the environment, empower and develop a diverse workforce, and enrich our
communities; and
• We enhance our financial position, focus on appropriate capital allocation decisions under various commodity pricing scenarios, effectively manage risks to ensure
cash flows to fund our development programs and maintain and improve our balance sheet.
Our Strengths
The following attributes position us to achieve our objectives:
• Oily Asset Portfolio – We have a deep inventory of high-quality drilling locations in the Permian with a high percentage of oil and liquids hydrocarbons. We operate
solely in Texas, which has a regulatory environment that encourages the timely development of the state’s natural resources. In addition, our developments are located
in proximity to infrastructure as well as long haul take-away pipeline capacity which allows us to achieve advantaged pricing;
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•
•
Proven Operator with a History of Maximizing Value – We are stewards of the resource and believe our “Life of Field” co-development model has been a
differentiator in the industry. We believe it optimizes the long-term value of our inventory, mitigates future degradation risks associated with infill drilling and
generates capital efficiencies. We consistently deploy our capital to large-scale projects and carefully select the dedicated service providers required to execute our
programs effectively. In addition, we have proven our ability to identify, acquire, and integrate acquisitions in our areas of focus while creating incremental value
through realizing synergies;
Returns-Driven Strategy to Generate Free Cash Flow – We have a demonstrated track record of capital discipline, investing less than our annual cash flow with
capital spending governed by defined economic thresholds focused on capital efficiencies to enhance long-term returns. We proactively hedge a portion of our
production to manage the variability in cash flows and have also secured capacity on oil and natural gas pipelines to improve our ability to market our production; and
ESG Focus – We have proven our ability to create value responsibly. We believe our compensation programs incentivize the right behaviors to help ensure a safe
workplace while mitigating the impact of our operations on the environment.
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◦
◦
Environment. We are committed to environmental stewardship and have established goals to achieve meaningful reductions for certain carbon and methane
emissions.
Social. We foster an entrepreneurial workplace where individuals are encouraged and empowered to share their ideas and perspectives and to develop and
implement plans to bring those ideas to fruition. We embrace a culture of diversity and inclusion, where individuals feel respected, heard, and empowered.
Governance. We are committed to effective and sustainable corporate governance, which we believe promotes the long-term interests of stakeholders. We
have a board with a high level of diversity, including in skills and perspectives, that allows them to perform their strategic and oversight roles satisfactorily for
our stakeholders. In addition, our compensation programs incorporate metrics that align with our ESG goals.
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Proved Oil and Gas Reserves
The following table sets forth summary information with respect to our estimated proved reserves, standardized measure of discounted future net cash flows and PV-10 for the
years ended December 31, 2023, 2022, and 2021. The estimated proved reserves in the table below were prepared by DeGolyer and MacNaughton (“D&M”), Callon’s
independent third-party reserve engineers. For further information concerning D&M’s estimates of our proved reserves as of December 31, 2023, see the reserve report
included as an exhibit to this 2023 Annual Report on Form 10-K. In accordance with SEC rules, we used the 12-Month Average Realized Price of oil, NGLs, and natural gas in
the calculation of our estimated proved reserves and PV-10.
2023
As of December 31,
2022
2021
Proved developed reserves
Crude oil (MBbls)
Natural gas (MMcf)
NGLs (MBbls)
Total proved developed reserves (MBoe)
Proved undeveloped reserves
Crude oil (MBbls)
Natural gas (MMcf)
NGLs (MBbls)
Total proved undeveloped reserves (MBoe)
Total proved reserves
Crude oil (MBbls)
Natural gas (MMcf)
NGLs (MBbls)
Total proved reserves (MBoe)
Proved developed reserves %
Proved undeveloped reserves %
12-Month Average Realized Prices
Crude oil ($/Bbl)
Natural gas ($/Mcf)
NGLs ($/Bbl)
Standardized measure of discounted future net cash flows (GAAP) (in millions)
PV-10 (Non-GAAP) (in millions):
Proved developed PV-10
Proved undeveloped PV-10
Total PV-10 (Non-GAAP)
149,898
376,070
65,891
278,467
89,362
185,423
34,777
155,043
239,260
561,493
100,668
433,510
64 %
36 %
$78.17
$1.53
$22.27
$5,434.2
$4,294.9
1,594.7
$5,889.6
170,866
351,278
63,788
293,200
104,743
241,565
41,321
186,325
275,609
592,843
105,109
479,525
61 %
39 %
$95.02
$5.75
$36.40
$9,004.1
$7,122.9
3,411.9
$10,534.8
162,886
332,266
55,720
273,983
127,410
245,061
42,384
210,638
290,296
577,327
98,104
484,621
57 %
43 %
$65.44
$3.31
$29.19
$6,250.8
$4,502.6
2,548.7
$7,051.3
Reconciliation of Standardized Measure of Discounted Future Net Cash Flows (GAAP) to PV-10 (Non-GAAP)
We believe that the presentation of PV-10 provides greater comparability when evaluating oil and gas companies due to the many factors unique to each individual company
that impact the amount and timing of future income taxes. In addition, we believe that PV-10 is widely used by investors and analysts as a basis for comparing the relative size
and value of our proved reserves to other oil and gas companies. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future
net cash flows or any other measure of a company’s financial or operating performance presented in accordance with GAAP. Neither PV-10 nor the standardized measure of
discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves.
Standardized measure of discounted future net cash flows (GAAP)
Add: present value of future income taxes discounted at 10% per annum
PV-10 (Non-GAAP)
9
2023
$5,434.2
455.4
$5,889.6
As of December 31,
2022
(In millions)
$9,004.1
1,530.7
$10,534.8
2021
$6,250.8
800.5
$7,051.3
Proved Reserves
Our reserve estimates are conducted from fundamental petrophysical, geological, engineering, financial and accounting data. Reserves are estimated based on production
decline analysis, analogy to producing offsets, detailed reservoir modeling, volumetric calculations or a combination of these methods, in all cases having regard to economic
considerations and using technologies that have been demonstrated in the field to yield repeatable and consistent results as defined in the SEC regulations. To establish
reasonable certainty of our proved reserves estimates, including material additions to our proved reserves, we use certain technologies and economic data, including production
and well test data, historical well costs and operating data, geologic and seismic data, and subsurface information obtained through wellbores such as electrical logs, radioactive
logs, reservoir core samples, fluid samples, and static and dynamic pressure information. Non-producing reserves are estimated by analogy to producing offsets, with
consideration given to a development plan approved by Callon’s management.
The following table presents our estimated proved reserves of December 31, 2023.
Proved reserves
Crude oil (MBbls)
Natural gas (MMcf)
NGLs (MBbls)
Total proved reserves (MBoe)
The following table provides a summary of the changes in our proved reserves for the year ended December 31, 2023.
Proved reserves as of December 31, 2022
Extensions and discoveries
Revisions to previous estimates
Purchase of reserves in place
Sales of reserves in place
Removed for five-year rule
Production
Proved reserves as of December 31, 2023
Total
239,260
561,493
100,668
433,510
Total
(MBoe)
479,525
68,005
(23,927)
55,352
(65,759)
(42,099)
(37,587)
433,510
Further details of the changes in our proved reserves for the year ended December 31, 2023 are as follows:
•
Extensions and Discoveries. We added 68.0 MMBoe of new reserves in extensions and discoveries through our development efforts in our operating areas. See the
table below for the impact of extensions and discoveries on total proved and proved undeveloped reserves for 2023:
Extensions and discoveries
Total proved
Proved undeveloped
Difference (Proved developed producing)
(1)
Total
(MBoe)
68,005
65,502
2,503
(1) These extensions and discoveries were not recognized as proved undeveloped reserves in a prior period, but rather were recognized directly as proved developed producing reserves
in 2023 as there was not a directly offsetting proved developed producing location at the time of drilling to allow classification as a proved undeveloped location.
We incurred costs of $54.9 million for the extensions and discoveries associated with proved developed producing wells during 2023.
•
Revisions to Previous Estimates. Net negative revisions of previous estimates of 23.9 MMBoe primarily consist of:
◦
◦
10.8 MMBoe reduction from the removal of PUD locations due to revised development spacing and changes in lateral lengths, primarily in our Delaware
West operating area, as we focus on the ongoing optimization of the value of the reservoir system through co-development of multiple target zones within the
system utilizing larger scale projects and extended lateral lengths;
10.7 MMBoe reduction primarily due to the change in 12-Month Average Realized Price of crude oil which decreased by approximately 18% as compared to
December 31, 2022; and
10
◦
2.4 MMBoe reduction primarily due to higher operating costs as well as lower than expected recoveries from wells turned to production during 2023
primarily in the Delaware West portion of our Permian acreage.
•
•
•
Purchase of Reserves in Place. The 55.4 MMBoe of purchase of reserves in place was associated with the Percussion Acquisition.
Sales of Reserves in Place. The 65.8 MMBoe of sales of reserves in place were primarily associated with the Eagle Ford Divestiture.
Removed due to five-year rule. 42.1 MMBoe reduction due to PUD locations that were reclassified to unproved reserve categories as we adjusted our future Permian
Basin development and capital allocation plans following the Eagle Ford Divestiture and the concurrent Percussion Acquisition, resulting in previously scheduled
PUDs, primarily in the Delaware West operating area that is more weighted to natural gas volumes, now forecast to be developed outside of the five-year period from
initial booking.
Proved Undeveloped Reserves
Annually, we review our PUDs to ensure appropriate plans exist for development of this reserve category. PUD reserves are recorded only if we have plans to convert these
reserves into PDPs within five years of the date they are first recorded. Our development plans include the allocation of capital to projects included within our 2024 Capital
Budget, as defined below, and, in subsequent years, the allocation of capital within our long-range business plan to convert PUDs to PDPs within this five-year period. The
following table provides a summary of the changes in our PUDs for the year ended December 31, 2023.
PUDs as of December 31, 2022
Extensions and discoveries
Revisions to previous estimates
Purchases of reserves in place
Sales of reserves in place
Removed for five-year rule
Converted to proved developed
PUDs as of December 31, 2023
Total
(MBoe)
186,325
65,502
(4,664)
22,358
(15,470)
(42,099)
(56,909)
155,043
•
•
•
•
•
•
Extensions and Discoveries. We added 65.5 MMBoe of new reserves in extensions and discoveries as a result of additional offset locations associated with our drilling
program.
Revisions to Previous Estimates. Net negative revisions of previous estimates of 4.7 MMBoe primarily consist of:
◦
◦
◦
10.8 MMBoe reduction from the removal of PUD locations due to revised development spacing and changes in lateral lengths, primarily in our Delaware
West operating area, as we focus on the ongoing optimization of the value of the reservoir system through co-development of multiple target zones within the
system utilizing larger scale projects and extended lateral lengths;
1.7 MMBoe decrease primarily due to the change in 12-Month Average Realized Price of crude oil which decreased by approximately 18% as compared to
December 31, 2022; offset by
7.8 MMBoe increase primarily due to increased anticipated hydrocarbon recoveries resulting from observed well performance over longer production
timeframes during the testing of various full field development plan concepts.
Purchase of Reserves in Place. The 22.4 MMBoe of purchase of reserves in place was associated with the Percussion Acquisition.
Sales of Reserves in Place. The 15.5 MMBoe of sales of reserves in place were primarily associated with the Eagle Ford divestiture.
Removed for five-year rule. 42.1 MMBoe reduction due to PUDs that were reclassified to unproved reserve categories as described above.
Converted to Proved Developed. During 2023, we converted 56.9 MMBoe of PUDs that were booked as PUDs as of December 31, 2022 to proved developed at a cost
of $578.0 million, or $10.16 per Boe.
During 2023, we also incurred $119.4 million on PUDs, representing an estimated 17.3 MMBoe, that were drilled but uncompleted as of December 31, 2023. All of the
reserves associated with these drilled but uncompleted wells are scheduled to be completed in 2024, and we expect to incur approximately $121.1 million of additional capital
expenditures to complete these wells. Separately, we
11
incurred $73.2 million primarily on additional wells that were in the process of being drilled at year end 2023 as well as $47.5 million on the Eagle Ford properties before the
divestiture date.
At December 31, 2023, we did not have any reserves that have remained undeveloped for five or more years since the date of their initial booking and all PUD locations are
scheduled to be developed within five years of their initial booking.
Qualifications of Technical Persons
In accordance with the Standards Pertaining to Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers, D&M
prepared 100% of our estimates of proved reserves as of December 31, 2023, 2022, and 2021. D&M is a respected company in the reservoir engineering field and provides
petroleum property analysis for other upstream companies. The technical persons responsible for preparing the reserves estimates meet the requirements regarding
qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to Estimating and Auditing of Oil and Gas Reserves Information promulgated
by the Society of Petroleum Engineers. D&M does not own an interest in our properties and is not employed on a contingent fee basis.
Our internal director of reserves has over 20 years of experience in the petroleum industry and extensive experience in the estimation of reserves and the review of reserve
reports prepared by third-party engineering firms. Compliance as it relates to reporting our reserves is the responsibility of our Chief Operating Officer, who is also our
principal engineer. He has over 20 years of operations and industry experience and holds a B.S. degree in Petroleum and Geosystems Engineering.
Internal Controls Over Reserve Estimation Process
The primary inputs to the reserve estimation process are comprised of technical information, financial data, production data, and ownership interest. All field and reservoir
technical information is assessed for validity when the internal reserve engineer holds technical meetings with our geoscientists, operations, and land personnel to discuss field
performance and to validate future development plans. The other inputs used in the reserve estimation process, including, but not limited to, future capital expenditures,
commodity price differentials, production costs, and ownership percentages are subject to internal controls over financial reporting and are assessed for effectiveness annually.
To further enhance the control environment over the reserve estimation process, our Operations and Reserves Committee, an independent committee of the Board of Directors,
assists management and the Board of Directors with its oversight of the integrity of the determination of our oil and natural gas reserves and the work of the independent third-
party reserve engineers. The Operations and Reserves Committee’s charter also specifies that it shall perform, in consultation with the Company’s management and senior
reserves and reservoir engineering personnel, the following responsibilities:
•
•
•
•
Oversee the appointment, qualification, independence, compensation and retention of the independent third-party reserve engineers engaged by the Company
(including resolution of material disagreements between management and the independent third-party reserve engineers regarding reserve determination) for the
purpose of preparing or issuing an annual reserve report. The Operations and Reserves Committee shall review any proposed changes in the appointment of the
independent third-party reserve engineers, determine the reasons for such proposal, and whether there have been any disputes between the independent third-party
reserve engineers and management.
Review the Company’s significant reserves engineering principles and any material changes thereto, and any proposed changes in reserves engineering standards and
principles which have, or may have, a material impact on the Company’s reserves disclosure.
Review with management and the independent third-party reserve engineers the proved reserves of the Company, and, if appropriate, the probable reserves, possible
reserves and the total reserves of the Company, including: (i) reviewing significant changes from prior period reports; (ii) reviewing key assumptions used or relied
upon by the independent third-party reserve engineers; (iii) evaluating the quality of the reserve estimates prepared by the independent third-party reserve engineers
and the Company relative to the Company’s peers in the industry; and (iv) reviewing any material reserves adjustments and significant differences
between the Company’s and independent third-party reserve engineers’ estimates.
If the Operations and Reserves Committee deems it necessary, it shall meet in executive session with the independent third-party reserve engineers to discuss the oil
and gas reserve determination process and related public disclosures, and any other matters of concern in respect of the evaluation of the reserves.
During our last fiscal year, we filed no reports with other federal agencies which contain an estimate of proved reserves.
See “Note 20 – Supplemental Information on Oil and Natural Gas Operations” of the Notes to our Consolidated Financial Statements for additional information regarding our
estimated proved reserves and the present value of estimated future net revenues from these proved reserves.
12
Drilling Activity
The following table sets forth our operated and non-operated drilling activity for the years ended December 31, 2023, 2022, and 2021. As defined by the SEC, the number of
wells drilled refers to the number of wells completed at any time during the respective year, regardless of when drilling was initiated. For definitions of exploratory wells,
extension wells, development wells, productive wells, and non-productive wells, see “Glossary of Certain Terms.”
Extension Wells - Productive
Extension Wells - Non-productive
Development Wells - Productive
Development Wells - Non-productive
Productive Wells
2023
Years Ended December 31,
2022
2021
Gross
Net
Gross
Net
Gross
Net
7
—
122
—
5.5
—
92.6
—
20
—
86
—
17.7
—
76.8
—
19
—
93
—
17.2
—
86.7
—
The following table sets forth the number of productive crude oil and natural gas wells in which we owned an interest as of December 31, 2023.
Operated
Non-operated
Total
Crude Oil
Natural Gas
Total
Gross
Net
Gross
Net
Gross
Net
1,115
236
1,351
1,002.1
11.9
1,014.0
128
—
128
109.4
—
109.4
1,243
236
1,479
1,111.5
11.9
1,123.4
13
Production Volumes, Average Sales Prices and Operating Costs
The following tables set forth certain information regarding the production volumes and average sales prices received for, and average production costs associated with, our
sales of oil, natural gas and NGLs for the periods indicated. For further details, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Results of Operations”.
2023
Years Ended December 31,
2022
2021
Total production
Oil (MBbls)
Permian
Eagle Ford
Total oil
Natural gas (MMcf)
Permian
Eagle Ford
Total natural gas
NGLs (MBbls)
Permian
Eagle Ford
Total NGLs
Total production (MBoe)
Permian
Eagle Ford
Total barrels of oil equivalent
Average realized sales price (excluding impact of derivative settlements)
Oil (per Bbl)
Natural gas (per Mcf)
NGL (per Bbl)
Total average realized sales price (per Boe)
Operating costs per Boe
Lease operating expense
Production and ad valorem taxes
Gathering, transportation and processing
14
19,658
2,233
21,891
43,437
2,672
46,109
7,554
457
8,011
34,452
3,135
37,587
$77.52
1.79
21.77
$51.98
$8.07
$3.02
$2.88
18,041
5,598
23,639
35,519
6,108
41,627
6,424
1,052
7,476
30,385
7,668
38,053
$95.72
5.59
34.84
$72.42
$7.63
$4.20
$2.55
14,475
7,749
22,224
29,682
7,704
37,386
5,155
1,284
6,439
24,577
10,317
34,894
$68.22
3.78
30.11
$53.06
$5.82
$2.87
$2.32
Major Customers
We market the majority of the production from properties we operate on account of both ourselves and that of the other working interest owners in these properties. We
generally sell our production to purchasers at prevailing market prices, which in certain cases are adjusted for contractual differentials, under contracts ranging from terms of
one month to multiple years. The following table presents customers that represented 10% or more of our oil, natural gas and NGL revenues for at least one of the periods
presented:
Vitol Inc.
Plains Marketing, L.P.
Rio Energy International, Inc.
BP Products North America, Inc.
Valero Marketing and Supply Company
Shell Trading Company
Trafigura Trading, LLC
Occidental Energy Marketing, Inc.
(1)
2023
13%
12
12
12
*
*
*
*
(1)
Years Ended December 31,
2022
*
*
12%
*
15
*
*
*
(1)
2021
*
*
*
*
13%
20
15
13
(1) The customers that represented over 10% of our sales of purchased oil and gas were Vitol Inc. and Plains Marketing, L.P., for the years ended December 31, 2023, and 2022, and Vitol Inc., for
the year ended December 31, 2021.
* - Less than 10% for the respective years.
Because alternative purchasers of oil and natural gas are readily available, we believe that the loss of any of these purchasers would not result in a material adverse effect on our
ability to sell future oil and natural gas production. In order to mitigate potential exposure to credit risk, we may require our customers to provide financial security.
Leasehold Acreage
The following table shows our approximate developed and undeveloped leasehold acreage as of December 31, 2023. Developed acreage refers to acreage on which wells have
been completed to a point that would permit production of oil and gas in commercial quantities. Undeveloped acreage refers to acreage on which wells have not been drilled or
completed to a point that would permit production of oil and gas in commercial quantities whether or not the acreage contains proved reserves.
(1)
Permian
(2)
Other
Total
Developed Acreage
Net
Gross
131,619
34
131,653
159,881
1,983
161,864
Undeveloped Acreage
Gross
Net
12,561
8,957
21,518
9,084
4,022
13,106
Total Acreage
Gross
172,442
10,940
183,382
Net
140,703
4,056
144,759
Net Undeveloped Acreage Expiring
2026
2025
2024
737
2,994
3,731
6,062
—
6,062
1,218
—
1,218
(1)
(2)
Based on our current plans, approximately 100%, 97% and 28% of the acreage expiring in the Permian in 2024, 2025 and 2026, respectively, will be developed prior to expiration or
extended by lease extension payments.
Consists of non-core acreage principally located in Presidio County, Texas. We have no current development plans, no proved undeveloped reserves, and no unproved property costs
associated with this acreage as of December 31, 2023.
Our lease agreements generally terminate if producing wells have not been drilled on the acreage within their primary term or an extension thereof (a period that is generally
from three to five years depending on the area). The percentage of net undeveloped acreage expiring in 2024, 2025 and 2026 assumes that no producing wells have been drilled
on acreage within their primary term or have been extended. We manage our lease expirations to ensure that we do not experience unintended material loss of acreage or depths.
Our leasehold management efforts include scheduling drilling in order to hold leases by production or timely exercising our contractual rights to extend the terms of leases by
continuous operations or the payment of lease extension payments and delay rentals. We may choose to allow some leases to expire that are no longer part of our development
plans.
The proved undeveloped reserves associated with acreage expiring over the next three years are not material to the Company.
Human Capital
Callon employs a talented workforce that is integral to our success, and we are committed to the safety, health, and development of each team member. The Callon culture is
defined by our values of responsibility, integrity, drive, respect and excellence. These core values are a reflection of our ideals as individuals and direct our actions as a
company.
15
Callon’s key human capital management objectives are to attract, retain and develop talent to deliver on our strategy. Due to the technical nature of our business, our success
depends on a highly skilled workforce in multiple disciplines including engineering, geology, operations, land, information technology, accounting and various other corporate
functions. To support the attraction and retention of top talent, our human resources programs are designed to keep our employees safe and healthy, engage employees with an
inclusive workplace, reward and support employees through competitive pay and benefit programs, and develop talent to support personal growth and prepare employees for
high impact roles and leadership positions.
As of December 31, 2023, Callon had 281 permanent, full-time employees. None of our employees are currently represented by a union, and we believe that we have good
relations with our employees.
We focus on the following in supporting our human capital:
•
Inclusion and Diversity – We believe that diversity of backgrounds and perspectives contributes to an innovative workforce and an enriching environment for our
employees. Callon is firmly committed to fostering an inclusive, respectful environment and providing equal opportunity to all qualified persons in our hiring,
development, and compensation practices. As of December 31, 2023, approximately 43% of our permanent, full-time employees identified as a racial or ethnic
minority, 25% were female, and 33% of non-field employees were female. We seek to support diversity in our workforce, and in 2023, 53% of our newly hired
employees identified as a racial or ethnic minority and 27% were female.
• Health and Safety – Protecting our employees, contractors and communities is a core value at Callon and a top priority. Our Operations Management System
(“OMS”) establishes clear expectations for operating safely and responsibly throughout the lifecycle of our business. We seek to identify and mitigate safety risks and
integrate a culture of safety by operating according to OMS standards, processes, and procedures. Additionally, we share our Safety and Environmental Policy with all
employees and contractors; the policy includes each individual’s authorization and responsibility to stop work on any activity for safety reasons without the threat or
fear of job reprisal. To reinforce accountability for safety results, our Board of Directors included safety performance as a factor in our 2023 annual bonus program.
•
•
Employee Compensation, Benefits and Wellness – Our compensation and benefits programs provide a package designed to attract, retain and motivate employees.
In addition to competitive base salaries, we provide a variety of short-term and long-term incentive compensation programs to reward performance relative to key
financial, operational, and ESG metrics. Callon invests in the health and well-being of our employees and their families by paying 100% of the premiums for our
health care plan. We also offer comprehensive benefit options including a retirement savings plan, life and disability insurance, health savings accounts, flexible
spending accounts, and a charitable matching program.
Employee Development – We believe that ongoing investment in the development of our team members is key to our future success, as well as the retention of our
employees. Callon fosters an entrepreneurial workplace where employees can expand their skill sets and experience by direct engagement and collaboration with
leaders at all levels. Additionally, we offer tuition assistance and access to various training programs, including a monthly in-house leadership development program.
Our leaders seek to support all of our employees in reaching their personal goals through ongoing feedback and development conversations.
For additional information, please see our Sustainability Report published on our company website (www.callon.com). Information contained in our Sustainability Report is not
incorporated by reference into, and does not constitute a part of, this 2023 Annual Report on Form 10-K.
Other
Industry Segment and Geographic Information
For segment reporting purposes, Callon considers all of the current development and operating areas to be one reportable segment: the development and production of oil and
natural gas. All of our assets are located within the United States and all operations are located within Texas.
Title to Properties
We believe that the title to our oil and natural gas properties is good and defensible in accordance with standards generally accepted in the oil and gas industry, subject to such
exceptions which, in our opinion, are not so material as to detract substantially from the use or value of such properties. Nevertheless, we can be involved in title disputes from
time to time which may result in litigation. Our properties are potentially subject to burdens such as royalty, overriding royalty, working and other outstanding interests
customary in the industry. To the extent that such burdens and obligations affect our rights to production revenues, these characteristics have been taken into account in
calculating our net revenue interests and in estimating the size and value of our estimated proved reserves. We
16
believe that the burdens and obligations affecting our properties are typical within the industry for properties of the kind owned by Callon.
Seasonality of Business
Weather conditions and seasonality affect our ability to produce, the demand for, and prices of, oil and natural gas. Due to these fluctuations, results of operations for quarterly
interim periods may not be indicative of the results realized on an annual basis.
Competition
We operate in the oil and natural gas industry, which is highly competitive. Our business experiences strong competition from a number of parties that may range from small
independent producers to major integrated companies. Competition affects our ability to acquire additional properties and resources necessary to develop assets. In higher
commodity pricing environments, competition also exists in the form of contracting for drilling, pumping, and workover equipment, and securing skilled personnel to both
develop and operate existing assets. Many of our competitors may be able to pay for more sought-after properties or access equipment, infrastructure, or personnel. The
industry also experiences, from time to time, shortages in resources such as the availability of drilling and workover rigs, other equipment, pipes and materials, infrastructures,
and skilled personnel, all of which can delay development, exploration, and workover activities as well as result in significant cost increases.
Insurance
In accordance with industry practice, we maintain insurance against some of the operating risks to which our business is exposed. While not all inclusive, our insurance policies
generally protect against bodily injury and property damage, pollution and other environmental damages, employee benefits, employee injury and control of well insurance for
our exploration and production operations.
We enter into master service agreements with our third-party contractors, including hydraulic fracturing contractors, in which they agree to indemnify us for injuries and deaths
of the service provider’s employees, as well as contractors and subcontractors hired by the service provider. Similarly, we generally agree to indemnify each third-party
contractor against claims made by our employees and our other contractors. Additionally, each party generally is responsible for damage to its own property. We reevaluate the
purchase of insurance, coverage limits and deductibles annually. Future insurance coverage for the oil and natural gas industry could increase in cost and may include higher
deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that are economically acceptable. While we
believe that we are properly insured based on our risk analysis, no assurance can be given that we will be able to maintain insurance in the future at rates that we consider
reasonable. In such circumstances, we may elect to self-insure or maintain only catastrophic coverage for certain risks in the future.
Corporate Offices
Our headquarters are located in Houston, Texas, in office space that we lease. We own office buildings in Pecos, Texas and lease and own offices in the Midland, Texas area.
Because alternative locations to our leased spaces are readily available, the replacement of any of our leased offices would not result in material expenditures.
Regulations
General. Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities at
the federal, state, and local levels. Some of these requirements carry substantial penalties for failure to comply. Legislation and regulation affecting the entire oil and natural gas
industry is continuously being reviewed for potential revision, and various proposals and proceedings that might affect the industry are pending before Congress, federal
administrative agencies such as the Federal Energy Regulatory Commission (“FERC”), various state and administrative agencies and legislatures, and the courts. We cannot
predict what effect such proposals or proceedings may have on our operations, capital expenditures, earnings or competitive position.
Exploration and Production. Our operations are subject to federal, state and local regulations that include requirements for permits to drill and to conduct other operations and
for provision of financial assurances (such as bonds and letters of credit) covering drilling and well operations. Other activities subject to regulation are:
•
•
•
•
•
•
•
•
•
the location and spacing of wells;
the method of drilling and completing and operating wells;
the rate and method of production;
the surface use and restoration of properties upon which wells are drilled and other exploration activities;
notice to surface owners and other third parties;
the venting or flaring of natural gas;
the plugging and abandoning of wells;
the discharge of contaminants into water and the emission of contaminants into air;
the disposal of fluids used or other wastes obtained in connection with operations;
17
•
•
the marketing, transportation and reporting of production; and
the valuation and payment of royalties.
We do not currently anticipate that compliance with existing laws and regulations governing exploration and production will have a significantly adverse effect upon our capital
expenditures, operations, earnings or competitive position.
Environmental Matters and Regulation. Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the
discharge of materials into the environment or otherwise relating to the protection of the environment and natural resources. Numerous federal, state and local governmental
agencies, such as the U.S. Environmental Protection Agency (the “EPA”), issue regulations which often require difficult and costly compliance measures. These laws and
regulations may require the acquisition of a permit before drilling commences; restrict the types, quantities and concentrations of various substances that can be released into
the environment in connection with drilling and production activities; limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands,
ecologically sensitive and other protected areas; require action to prevent, monitor for or remediate pollution from current or former operations, such as plugging abandoned
wells or closing pits; result in the suspension or revocation of necessary permits, licenses and authorizations; require that additional pollution controls be installed and impose
substantial liabilities for pollution resulting from our operations or relating to our owned or operated facilities. Violations of environmental laws could result in administrative,
civil or criminal fines and injunctive relief. The strict and joint and several liability nature of certain such laws and regulations could impose liability upon us regardless of fault.
Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of
hazardous substances, hydrocarbons, air emissions or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any
changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our
operations and financial position, as well as the oil and natural gas industry in general. In recent years, the oil and natural gas exploration and production industry has been the
subject of increasing scrutiny and regulation by environmental authorities. Our management believes that we are in substantial compliance with applicable environmental laws
and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. Although such laws and regulations can
increase the cost of planning, designing, installing and operating our facilities, it is anticipated that, absent the occurrence of an extraordinary event, compliance with them will
not have a material effect upon our operations, capital expenditures, earnings or competitive position in the marketplace.
Waste Handling. The Resource Conservation and Recovery Act (“RCRA”), as amended, and comparable state statutes and regulations promulgated thereunder, affect oil and
natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of
hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own,
more stringent requirements. Although most wastes associated with the exploration, development and production of oil and natural gas are exempt from regulation as hazardous
wastes under RCRA and its state analogs, it is possible that some wastes we generate presently or in the future may be subject to regulation under RCRA and state analogs.
Additionally, we cannot assure you that the EPA or state or local governments will not adopt more stringent requirements for the handling of non-hazardous wastes or
categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and
natural gas exploration, development and production wastes as “hazardous wastes.” If the EPA proposes a rulemaking for revised oil and gas waste regulations in the future, any
such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses.
Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with
applicable requirements related to waste handling and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations
require them under such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or
regulatory reclassification of wastes associated with oil and natural gas exploration and production could increase our costs to manage and dispose of such wastes.
Comprehensive Environmental Response, Compensation and Liability Act. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”),
imposes strict, joint and several liability for costs of investigation and remediation and for natural resource damages without regard to fault or legality of the original conduct,
on certain classes of persons with respect to the release into the environment of substances designated under CERCLA as hazardous substances. These classes of persons, or
potentially responsible parties (“PRPs”) include the current and past owners or operators of a site where the release occurred and anyone who disposed of or arranged for the
disposal of a hazardous substance found at the site. CERCLA also authorizes the EPA and, in some instances, third parties to take actions in response to threats to public health
or the environment and to seek to recover from the PRPs the costs of such action. Many states have adopted comparable or more stringent state statutes.
Although CERCLA generally exempts “petroleum” from the definition of hazardous substance, in the course of our operations, we have generated and will generate wastes that
may fall within CERCLA’s definition of hazardous substance and may have disposed of
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these wastes at disposal sites owned and operated by others. Comparable state statutes may not provide a comparable exemption for petroleum. We may also be the owner or
operator of sites on which hazardous substances have been released. To our knowledge, neither we nor our predecessors have been designated as a PRP by the EPA under
CERCLA; we also do not know of any prior owners or operators of our properties that are named as PRPs related to their ownership or operation of such properties. In the
event contamination is discovered at a site on which we are or have been an owner or operator or to which we sent hazardous substances, we could be liable for the costs of
investigation and remediation and natural resources damages.
We currently own, lease, or operate numerous properties that have been used for oil and natural gas exploration and production for many years. Although we believe we have
utilized operating, waste disposal, and water disposal practices that were standard in the industry at the time, hazardous substances, wastes or hydrocarbons may have been
released on or under the properties owned or leased by us, or on or under other locations, including offsite locations, where such substances have been taken for disposal. In
addition, some of these properties have been operated by third parties or by previous owners or operators whose treatment and disposal of hazardous substances, wastes, or
hydrocarbons were not under our control. These properties and the substances disposed or released on them may be subject to CERCLA, RCRA and analogous state laws. In
the future, we could be required to remediate property, including groundwater, containing or impacted by previously disposed wastes (including wastes disposed or released by
prior owners or operators, or property contamination or groundwater contamination by prior owners or operators) or to perform remedial plugging operations to prevent future
or mitigate existing contamination.
Water Discharges. The Federal Water Pollution Control Act of 1972, as amended, also known as the Clean Water Act, the Safe Drinking Water Act, the Oil Pollution Act
(“OPA”), and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including
produced waters and other gas and oil wastes, into waters of the United States (“WOTUS”) (a term broadly defined to include, among other things, certain wetlands), as well as
state waters for analogous state programs. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or
applicable state analog. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including
jurisdictional wetlands, unless authorized by an appropriately issued permit from the U.S. Army Corps of Engineers (the “Corps”). The EPA and the Corps issued a final rule on
the federal jurisdictional reach over waters of the United States in 2015 that never took effect before being replaced by the Navigable Waters Protection Rule (the “NWPR”) in
2020. A coalition of states and cities, environmental groups, and agricultural groups challenged the NWPR, and it was vacated by a federal district court in August 2021. In
January 2023, the EPA and the Corps issued a final rule that based the definition of WOTUS on the pre-2015 definition. Separately, in May 2023, the U.S. Supreme Court’s
decision in Sackett v. EPA narrowed federal jurisdiction over wetlands to “traditional navigable waters” and wetlands or other waters that have a “continuous surface
connection” with or are otherwise indistinguishable from traditional navigable water. In September 2023, the EPA and the Corps published a direct-to-final rule that conforms
the regulatory definition of WOTUS to the Supreme Court’s May 2023 decision in Sackett.
The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits
for storm water discharges. Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for
monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or
operations that may impact groundwater conditions.
The Oil Pollution Act is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases
into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and
maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The
OPA subjects owners of facilities to strict, joint and several liability for all containment and cleanup costs and certain other damages arising from a release, including, but not
limited to, the costs of responding to a release of oil to surface waters.
Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are
in material compliance with the requirements of each of these laws.
Air Emissions. The federal Clean Air Act, as amended (the “CAA”), and comparable state and local laws and regulations, regulate emissions of various air pollutants through
the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants
at specified sources. New facilities may be required to obtain permits before work can begin, and modified and existing facilities may be required to obtain additional permits.
As a result, we may need to incur capital costs in order to remain in compliance. Obtaining or renewing permits also has the potential to delay the development of oil and
natural gas projects. Federal and state regulatory agencies can impose administrative, civil and criminal penalties and seek injunctive relief for non-compliance with air permits
or other requirements of the CAA and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and
that we hold all necessary and valid construction and operating permits for our operations.
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In November 2021, the EPA issued a proposed rule under the CAA’s New Source Performance Standards, known as Subpart OOOOa, intended to reduce methane emissions
from new and existing oil and gas sources. The proposed rule would make the existing regulations in Subpart OOOOa more stringent and create a Subpart OOOOb to expand
reduction requirements for new, modified, and reconstructed oil and gas sources, including standards focusing on certain source types that have never been regulated under the
CAA (including intermittent vent pneumatic controllers, associated gas, and liquids unloading facilities). In addition, the proposed rule would establish “Emissions Guidelines,”
creating a Subpart OOOOc that would require states to develop plans to reduce methane emissions from existing sources that must be at least as effective as presumptive
standards set by the EPA. In November 2022, the EPA issued a proposed rule supplementing the November 2021 proposed rule. Among other things, the November 2022
supplemental proposed rule removes an emissions monitoring exemption for small wellhead-only sites and creates a new third-party monitoring program to flag large emissions
events, referred to in the proposed rule as “super emitters.” In December 2023, the EPA announced a final rule, which, among other things, requires the phase out of routine
flaring of natural gas from newly constructed wells (with some exceptions) and routine leak monitoring at all well sites and compressor stations. Notably, the EPA updated the
applicability date for Subparts OOOOb and OOOOc to December 6, 2022, meaning that sources constructed prior to that date will be considered existing sources with later
compliance deadlines under state plans. The final rule gives states, along with federal tribes that wish to regulate existing sources, two years to develop and submit their plans
for reducing methane emissions from existing sources. The final emissions guidelines under Subpart OOOOc provide three years from the plan submission deadline for existing
sources to comply.
Compliance with these or any new regulations could result in stricter permitting requirements, which in turn could delay or impair our ability to obtain air emission permits and
could result in increased expenditures for pollution control equipment, the costs of which could be significant.
Climate Change. Numerous reports from scientific and governmental bodies such as the Sixth Assessment Report of the Intergovernmental Panel on Climate Change have
expressed heightened concerns about the impacts of human activity, especially fossil fuel combustion, on the global climate. In turn, governments and civil society are
increasingly focused on limiting the emissions of GHGs, including emissions of carbon dioxide from the use of oil and natural gas.
At the international level, the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change (“UNFCCC”) resulted in nearly 200 countries,
including the United States, coming together to develop the Paris Agreement, intended to nationally determine their contributions and set GHG emission reduction goals every
five years beginning in 2020. In February 2021, as a party to the Paris Agreement, the U.S. announced a target to achieve a 50% to 52% reduction from 2005 levels in
economy-wide GHG emissions by 2030. In addition, in September 2021, President Biden publicly announced the Global Methane Pledge, a pact that aims to reduce global
methane emissions at least 30% below 2020 levels by 2030, including “all feasible reductions” in the energy sector. Since its formal launch at the 26th Conference of the Parties
of the UNFCCC (“COP26”), over 150 countries have joined the pledge. At the 27th conference of parties (“COP27”), President Biden announced the EPA’s supplemental
proposed rule to reduce methane emissions from existing oil and gas sources, and agreed, in conjunction with the European Union and a number of other partner countries, to
develop standards for monitoring and reporting methane emissions to help create a market for low methane-intensity natural gas. Most recently, at the 28th conference of the
parties (“COP28”), nearly 200 countries, including the United States, agreed to transition away from fossil fuels while accelerating action in this decade to achieve net zero
greenhouse gas emissions by 2050. Various state and local governments have also publicly committed to furthering the goals of the Paris Agreement. International
commitments, re-entry into the Paris Agreement and President Biden’s executive orders may result in the development of additional regulations or changes to existing
regulations.
While the Biden Administration has pursued executive actions to address climate change, and while Congress has from time to time considered legislation to reduce emissions
of GHGs, no new comprehensive federal laws regulating the emission of GHGs or directly imposing a price on carbon have been adopted in recent years. However, such
legislation has periodically been introduced in the U.S. Congress and may be proposed or adopted in the future, and energy legislation and other regulatory initiatives have been
proposed that are relevant to GHG emissions issues. For example, the Inflation Reduction Act of 2022 (“IRA”), which appropriates significant funding for renewable energy
initiatives and, for the first time, imposes a fee on GHG emissions from certain oil and gas facilities, was signed into law in August 2022. The IRA amends the CAA to include
a Methane Emissions and Waste Reduction Incentive Program, which requires the EPA to impose a “waste emissions charge” on certain natural gas and oil sources that are
already required to report under the EPA’s Greenhouse Gas Reporting Program. To implement the program, the IRA requires revisions to GHG reporting regulations for
petroleum and natural gas systems (Subpart W) by 2024. In July 2023, the EPA proposed to expand the scope of the Greenhouse Gas Reporting Program for petroleum and
natural gas facilities, as required by the IRA. Among other things, the proposed rule would expand the emissions events that are subject to reporting requirements to include
“other large release events” and apply reporting requirements to certain new sources and sectors. The rule is expected to be finalized in the spring of 2024 and become effective
on January 1, 2025 in advance of the deadline for GHG reporting for 2024 (March 2025). The fee imposed under the Methane Emissions and Waste Reduction Incentive
Program for 2024 would be $900 per ton emitted over annual methane emissions thresholds, and would increase to $1,200 in 2025, and $1,500 in 2026. In addition, many state
and local governments have intensified or stated their intent to intensify efforts to support international climate commitments and treaties, in addition to developing programs
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that are aimed at reducing GHG emissions by means of cap and trade programs, carbon taxes, the development of greenhouse gas inventories or encouraging the use of
renewable energy or alternative low-carbon fuels.
Any legislation or regulatory programs at the federal, state, or city levels designed to reduce GHG emissions could increase the cost of consuming, and thereby reduce demand
for, the oil and natural gas we produce. Consequently, legislation and regulatory programs to reduce emissions of GHGs could have an adverse effect on our business, financial
condition and results of operations.
The EPA has established GHG reporting requirements for certain sources in the petroleum and natural gas industry, requiring those sources to monitor, maintain records on, and
annually report their GHG emissions. Although these requirements do not limit the amount of GHGs that can be emitted, they do require us to incur costs to monitor, keep
records of, and report GHG emissions associated with our operations.
Additionally, in March 2022, the SEC issued a proposed rule regarding the enhancement and standardization of mandatory climate-related disclosures for investors. The
proposed rule would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including, but not limited to,
information about the registrant’s governance of climate-related risks and relevant risk management processes; climate-related risks that are reasonably likely to have a material
impact on the registrant’s business, results of operations, or financial condition and their actual and likely climate-related impacts on the registrant’s business strategy, model,
and outlook; climate-related targets, goals and transition plan (if any); certain climate-related financial statement metrics in a note to their audited financial statements; Scope 1
and Scope 2 GHG emissions; and Scope 3 GHG emissions and intensity, if material, or if the registrant has set a GHG emissions reduction target, goal or plan that includes
Scope 3 GHG emissions. A final rule is anticipated in April 2024. Although the proposed rule’s ultimate date of effectiveness and the final form and substance of these
requirements is not yet known and the ultimate scope and impact on our business is uncertain, compliance with the proposed rule, if finalized, may result in increased legal,
accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place strain on our personnel, systems and resources.
Regulation of Hydraulic Fracturing. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas,
from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and
stimulate production. The federal Safe Drinking Water Act (“SDWA”) regulates the underground injection of substances through the Underground Injection Control (“UIC”)
program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas
commissions and not at the federal level, as the SDWA expressly excludes regulation of these fracturing activities (except where diesel is a component of the fracturing fluid, as
further discussed below). Legislation to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection” and require federal
permitting and regulatory control of hydraulic fracturing has been proposed in past legislative sessions but has not passed.
The EPA, however, issued guidance on permitting hydraulic fracturing that uses fluids containing diesel fuel under the UIC program, specifically as “Class II” UIC wells. The
EPA evaluated the potential impacts of hydraulic fracturing on drinking water resources and concluded that “water cycle” activities associated with hydraulic fracturing may
impact drinking water resources “under some circumstances,” including water withdrawals for fracturing in times or areas of low water availability; surface spills during the
management of fracturing fluids, chemicals or produced water; injection of fracturing fluids into wells with inadequate mechanical integrity; injection of fracturing fluids
directly into groundwater resources; discharge of inadequately treated fracturing wastewater to surface waters; and disposal or storage of fracturing wastewater in unlined pits.
Further, the EPA prohibits the discharge of wastewater from onshore unconventional oil and natural gas extraction facilities to publicly owned wastewater treatment plants.
Several states, including Texas, and some municipalities, have adopted, or are considering adopting, regulations that could restrict or prohibit hydraulic fracturing in certain
circumstances and/or require the disclosure of the composition of hydraulic fracturing fluids. For example, Texas law requires that the well operator disclose the list of chemical
ingredients subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”) for disclosure on a website and also file the list of chemicals with the
Texas Railroad Commission (the “RRC”) with the well completion report. The total volume of water used to hydraulically fracture a well must also be disclosed to the public
and filed with the RRC.
Additionally, some states, localities and local regulatory districts have adopted or have considered adopting regulations to limit, and in some cases impose a moratorium on,
hydraulic fracturing or other restrictions on drilling and completion operations, including requirements regarding casing and cementing of wells; testing of nearby water wells;
or restrictions on access to, and usage of, water. Further, there has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids,
impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and
enforcement actions have been initiated across the U.S. implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are
adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties
opposing the hydraulic fracturing process to initiate legal proceedings based on allegations of harm. In addition, if hydraulic fracturing is further regulated at the federal or state
level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased
monitoring, reporting and recordkeeping obligations, plugging and
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abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance
costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time,
it is not possible to estimate the impact on our business of potential federal or state legislation governing hydraulic fracturing. In light of concerns about seismic activity being
triggered by the injection of produced waters into underground wells, certain regulators are also considering additional requirements related to seismic safety for hydraulic
fracturing activities. For example, the RRC has created several “seismic response areas” in west Texas and limited certain deep oil and gas wastewater disposal activities in
portions of west Texas due to seismicity concerns. The U.S. Geological Survey has identified eight states with areas of increased rates of induced seismicity that could be
attributed to fluid injection or oil and gas extraction. Any regulation that restricts our ability to dispose of produced waters or increases the cost of doing business could cause
curtailed or decreased demand for our services and have a material adverse effect on our business.
Surface Damage Statutes (“SDAs”). In addition, a number of states and some tribal nations have enacted SDAs. These laws are designed to compensate for damage caused by
oil and gas development operations. Most SDAs contain entry notification and negotiation requirements to facilitate contact between operators and surface owners/users. Most
also contain binding requirements for payments by the operator to surface owners/users in connection with exploration and operating activities in addition to bonding
requirements to compensate for damages to the surface as a result of such activities. Costs and delays associated with SDAs could impair operational effectiveness and increase
development costs.
National Environmental Policy Act. Oil and natural gas exploration and production activities requiring federal permits may be subject to the National Environmental Policy Act
(“NEPA”), which requires federal agencies to evaluate major federal actions having the potential to significantly impact the human environment. In the course of such
evaluations, an agency will evaluate the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a detailed Environmental Impact
Statement that must be made available for public review and comment. Recent litigation by environmental non-governmental organizations has alleged that the Environmental
Assessments for certain oil and natural gas projects violated NEPA by failing to account for climate change and the greenhouse gas emissions impacts of such projects. In July
2020, the Council on Environmental Quality revised NEPA’s implementing regulations in an effort designed to streamline project approvals. The new regulations were subject
to litigation in several federal district courts and were stayed pending an ongoing review of the 2020 rule. In October 2021, the Council on Environmental Quality announced
its Phase 1 rule, the first of two planned rules to roll back the 2020 rule, which was finalized in April 2022. The Phase 1 final rule generally restores certain regulatory
provisions that were in effect prior to the 2020 rule. In July 2023, the Council on Environmental Quality proposed a Phase 2 rule that would accelerate NEPA reviews while
maintaining consideration of relevant environmental, climate change and environmental justice effects. The final rule is expected in April 2024. To the extent that our current
exploration and production activities, as well as proposed exploration and development plans, require federal permits that are subject to the requirements of NEPA, this process
has the potential to delay or impose additional conditions upon the development of oil and natural gas projects.
Endangered Species Act and Migratory Bird Treaty Act. The Endangered Species Act (“ESA”) was established to protect endangered and threatened species. Pursuant to that
act, if a species is listed as threatened or endangered, restrictions may be imposed on activities adversely affecting that species or its habitat. The U.S. Fish and Wildlife Service
(the “FWS”) must also designate the species’ critical habitat and suitable habitat as part of the effort to ensure survival of the species. A critical habitat or suitable habitat
designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. Similar protections are
offered to migratory birds under the Migratory Bird Treaty Act (the “MBTA”), which makes it illegal to, among other things, hunt, capture, kill, possess, sell, or purchase
migratory birds, nests, or eggs without a permit. This prohibition covers most bird species in the U.S. In January 2021, the Department of the Interior finalized a rule limiting
application of the MBTA; however, the Department of the Interior revoked the rule in October 2021 and issued an advance notice of proposed rulemaking seeking comment on
the Department’s plan to develop regulations that authorize incidental take under certain prescribed conditions. The notice of proposed rulemaking was anticipated in November
2023, with final action expected in April 2024, but the FWS instead announced in November 2023 that it had received additional technical comments that require further
review. As a result, future amendments to the rules implementing the ESA and the MBTA are uncertain. If the Company was to have a portion of its leases designated as critical
or suitable habitat or a protected species were located on a lease, it may adversely impact the value of the affected leases. There is also increasing interest in nature-related
matters beyond protected species, such as general biodiversity, which may similarly require us or our customers to incur costs or take other measures which may adversely
impact our business or operations.
Other Regulation of the Oil and Natural Gas Industry. The oil and natural gas industry is extensively regulated by numerous federal, state and local agencies and authorities.
Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous
departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual
members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing
business and, consequently, affects our profitability, these burdens generally do not affect us any
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differently or to any greater or lesser extent than they affect other similar companies in the industry with similar types, quantities and locations of production.
The availability, terms, conditions and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation of oil and natural gas is subject to
federal regulation by FERC which regulates the terms, conditions and rates for interstate transportation and storage service and various other matters. State regulations govern
the rates, terms, and conditions of service associated with access to intrastate oil and natural gas pipeline transportation. FERC’s regulations for interstate oil and natural gas
transportation in some circumstances may also affect the intrastate transportation of oil and natural gas.
Although oil, natural gas, condensate, and NGL sales prices are currently unregulated, the federal government historically has been active in the area of oil and natural gas sales
regulation. We cannot predict whether new legislation to regulate oil and natural gas sales might be proposed, what proposals, if any, might actually be enacted by Congress or
the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of natural gas, condensate, oil and NGLs are not currently regulated and
are made at market prices.
Exports of U.S. Oil Production and Natural Gas Production. In December 2015, the federal government ended its decades-old prohibition of exports of oil produced in the
lower 48 states of the U.S. As a result, exports of U.S. oil have increased significantly, reinforcing the general perception in the industry that the end of the U.S. export ban was
positive for producers of U.S. oil. In addition, the U.S. Department of Energy authorizes exports of natural gas, including exports of natural gas by pipelines connecting U.S.
natural gas production to pipelines in Mexico, and the export of liquefied natural gas (“LNG”) through LNG export facilities, the construction and operation of which are
regulated by FERC. Since 2016, natural gas produced in the lower 48 states of the U.S. has been exported as LNG from export facilities in the U.S. Gulf Coast region. LNG
export capacity has steadily increased in recent years and is expected to continue increasing due to numerous export facilities that are currently being developed. The industry
generally believes that this sustained growth in exports will be a positive development for producers of U.S. natural gas.
Drilling and Production. State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some
states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or
unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of
production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas without a permit and impose requirements regarding the ratability of
production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells or may limit the number of wells or the locations at which
we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and NGLs within its jurisdiction.
States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future
regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affecting the economics of production from these wells or to
limit the number of locations we can drill.
Federal, state and local regulations provide detailed requirements for the abandonment of wells, closure or decommissioning of production facilities and pipelines and for site
restoration in areas where we operate. The U.S. Army Corps of Engineers and many other state and local authorities also have regulations for plugging and abandonment,
decommissioning and site restoration. Some state agencies and municipalities require bonds or other financial assurances to support those obligations.
Natural Gas Sales and Transportation. Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which
we market our production and have it transported. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas
companies under the Natural Gas Act of 1938 (“NGA”) and the Natural Gas Policy Act of 1978 (“NGPA”). Since 1978, various federal laws have been enacted that have
resulted in the complete removal of all price and non-price controls for “first sales” of natural gas, which include all of our sales of our own production.
Under the Energy Policy Act of 2005 (“EPAct 2005”) Congress amended the NGA and NGPA to give FERC substantial enforcement authority to prohibit the manipulation of
natural gas markets and enforce its rules and orders, including the ability to assess civil penalties up to $1.0 million per day for each violation. This maximum penalty authority
has been and will continue to be adjusted periodically to account for inflation. FERC also has authority to order the disgorgement of any ill-gotten gains. EPAct 2005 also
amended the NGA to authorize FERC to facilitate transparency in markets for the sale or transportation of physical natural gas in interstate commerce, pursuant to which
authorization FERC now requires natural gas wholesale market participants, including a number of entities that may not otherwise be subject to FERC’s traditional NGA
jurisdiction, to report information annually to FERC concerning their natural gas sales and purchases. FERC requires any wholesale market participant that sells or purchases
2.2 million MMBtus or more annually in “reportable” natural gas sales to provide a report, known as FERC Form 552, to FERC. Reportable natural gas sales include sales of
natural gas that utilize a daily or monthly gas price index, contribute to index price formation, or could contribute to index price formation, such as fixed price transactions for
next-day or next-month delivery.
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FERC also regulates interstate natural gas transportation rates, terms and conditions of service, and the terms under which we as a shipper may use interstate natural gas
pipeline capacity. Such regulations affect the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and for the release of our
excess, if any, natural gas pipeline capacity. In 1985, FERC began promulgating a series of orders, regulations and rule makings that significantly fostered competition in the
business of transporting and marketing gas. Today, interstate natural gas pipeline companies are required to provide non-unduly discriminatory transportation services to all
shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC’s initiatives have led to the development of a competitive, open access
market for natural gas purchases, sales, and transportation that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However,
the natural gas industry historically has been very heavily regulated. We cannot determine what effect, if any, future regulatory changes might have on our natural gas related
activities.
Under FERC’s current regulatory regime, interstate transportation services must be provided on an open-access, not unduly discriminatory basis at cost-based rates or
negotiated rates, both of which are subject to FERC approval. FERC also allows jurisdictional gas pipeline companies to charge market-based rates if the transportation market
at issue is sufficiently competitive. The FERC-regulated tariffs, under which interstate pipelines provide such open-access transportation service, contain strict limits on the
means by which a shipper releases its pipeline capacity to another potential shipper, and provisions under such tariffs include compliance with FERC’s “shipper-must-have-
title” rule. Violations by a shipper (i.e., a pipeline customer) of FERC’s capacity release rules, including the shipper-must-have-title rule, could subject a shipper to substantial
penalties and disgorgement of any ill-gotten gains.
With respect to its regulation of natural gas pipelines under the NGA, FERC traditionally has not required the applicant for construction and operation of a new interstate
natural gas pipeline to provide information concerning the GHG emissions resulting from the activities of the proposed pipeline’s customers. In August 2017, the U.S. Circuit
Court of Appeals for the D.C. Circuit issued a decision remanding a natural gas pipeline certificate application to FERC and required FERC to revise its environmental impact
statement for the proposed pipeline to analyze potential GHG emission from the specific downstream power plants that the pipeline was designed to serve. In March 2021,
FERC assessed the significance of a project’s GHG emissions and those emissions’ contribution to climate change. FERC compared the project’s reasonably foreseeable GHG
emissions to the total GHG emissions of the United States to assess the project’s share of contribution to national GHG levels. FERC announced that it will also consider state
GHG emission reduction targets, to the extent a state has such targets. Finally, FERC noted that it will consider “all appropriate evidence” in future proceedings. In February
2022, as redesignated in March 2022, FERC issued a draft interim policy statement on the consideration of GHG emissions in natural gas certification proceedings, which
would consider reasonably foreseeable emissions. The draft interim policy statement proposed a significant shift and expansion in FERC’s review of GHG emissions in pipeline
certificate proceedings. FERC has not issued a final order on the draft interim policy statement. The scope of FERC’s obligation to analyze the environmental impacts of
proposed interstate natural gas pipeline projects, including the upstream indirect impacts of related natural gas production activity, remains subject to ongoing litigation and
contested administrative proceedings at FERC and in the courts.
Gathering service, which occurs on pipeline facilities located upstream of FERC-jurisdictional interstate transportation services, is regulated by the states onshore and in state
waters. Under NGA section 1(b), gathering facilities are exempt from FERC’s jurisdiction. FERC has set forth a general test for determining whether facilities perform a non-
jurisdictional gathering function or a jurisdictional transportation function, and FERC applies this test on a case-by-case basis. Depending on changes in the function performed
by particular pipeline facilities, FERC has in the past reclassified certain FERC-jurisdictional transportation facilities as non-jurisdictional gathering facilities and FERC has
reclassified certain non-jurisdictional gathering facilities as FERC-jurisdictional transportation facilities. Any such changes could result in an increase to our costs of
transporting gas to point-of-sale locations.
The pipelines used to gather and transport natural gas being produced by the Company are also subject to regulation by the U.S. Department of Transportation (“DOT”) under
the Natural Gas Pipeline Safety Act of 1968, as amended, the Pipeline Safety Act of 1992, as reauthorized and amended, the Pipeline Safety, Regulatory Certainty, and Job
Creation Act of 2011, the Securing America’s Future Energy: Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2016, and the Protecting our Infrastructure
of Pipelines and Enhancing Safety Act of 2019. The DOT Pipeline and Hazardous Materials Safety Administration (“PHMSA”) has established a risk-based approach to
determine which gathering pipelines are subject to regulation and what safety standards regulated gathering pipelines must meet. In addition, PHMSA had initially considered
regulations regarding, among other things, the designation of additional high consequence areas along pipelines, minimum requirements for leak detection systems, installation
of emergency flow restricting devices, and revision of valve spacing requirements. In October 2019, PHMSA finalized new safety regulations for hazardous liquid pipelines,
including a requirement that operators inspect affected pipelines following extreme weather events or natural disasters, that all hazardous liquid pipelines have a system for
detecting leaks and that pipelines in high consequence areas be capable of accommodating in-line inspection tools within twenty years. In addition, PHMSA is in the process of
finalizing a rulemaking with respect to gathering lines, but the contents and timing of any final rule for gathering lines are uncertain. In December 2020, Congress passed the
Protecting Our Infrastructure of Pipelines and Enhancing Safety Act of 2020 (“PIPES Act of 2020”). In addition to reauthorizing PHMSA, the PIPES Act of 2020 directs the
Secretary of Transportation to update or promulgate regulations
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addressing the safety of certain gas pipeline, gathering, distribution and LNG facilities. On November 15, 2021, PHMSA issued a final rule that expands PHMSA’s safety
regulations to more than 400,000 miles of onshore gas gathering pipelines that were previously exempt from PHMSA’s rules. While PHMSA has issued final rules for some of
the regulations stemming from the PIPES Act of 2020, others are still proceeding through the rulemaking process.
Oil, Condensate and NGLs Sales and Transportation. Sales of oil, condensate and NGLs are not currently regulated and are made at negotiated prices. Nevertheless, Congress
could reenact price controls in the future. The Federal Trade Commission does have anti-market manipulation authority with respect to wholesale sales of oil under the Energy
Independence and Security Act of 2007 and its petroleum market manipulation rule.
The Company’s sales of oil and NGLs are affected by the availability, terms, conditions and costs of transportation. The rates, terms, and conditions applicable to the interstate
transportation of oil and NGLs by pipelines are regulated by FERC under the Interstate Commerce Act (“ICA”). FERC has implemented a simplified and generally applicable
ratemaking methodology for interstate oil and NGL pipelines to fulfill the requirements of Title XVIII of the Energy Policy Act of 1992 comprised of an indexing system to
establish ceilings on interstate oil and NGL pipeline rates. Intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for
intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. If the regulations relating to
the price, terms and conditions for access to pipeline transportation change, we could face higher transportation costs for our production and, possibly, reduced access to
transportation capacity. To the extent it may be necessary for new interstate natural gas pipelines to be built, there may be a more stringent regulatory approach at FERC, which
could impact our ability to obtain new interstate pipeline transportation capacity. Insofar as effective interstate and intrastate rates are equally applicable to all comparable
shippers, we believe that the regulation of oil and NGL transportation rates will not affect our operations in any materially different way than such regulation will affect the
operations of our competitors.
Further, interstate common carrier oil pipelines must provide service on a not unduly discriminatory basis under the ICA, which is administered by FERC. Under this open
access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity,
access is governed by prorationing provisions set forth in the pipelines’ published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally
will be available to us to the same extent as to our competitors.
In addition, FERC issued a declaratory order in November 2017, involving a marketing affiliate of an oil pipeline, and such order held that certain arrangements between an oil
pipeline and its marketing affiliate would violate the ICA’s anti-discrimination provisions. FERC held that providing transportation service to affiliates at what is essentially the
variable cost of the movement, while requiring non-affiliated shippers to pay the filed tariff rate, would violate the ICA. In December 2022, FERC issued an order denying
rehearing and clarifying the scope of its holding in the November 2017 declaratory order and how it will assess whether future marketing affiliate transactions violate the ICA.
Concurrently with the December 2022 order, FERC issued a proposed policy statement to revise its policy for evaluating whether contractual committed transportation service
between oil pipelines and their affiliates complies with the ICA. At this time, the Company cannot currently determine the impact this FERC order and proposed policy
statement may have on oil pipelines, their marketing affiliates, and the price of oil and other liquids transported by such pipelines.
State Regulation. Texas regulates the drilling for, and the production, gathering and sale of, oil and natural gas, including imposing severance taxes and requirements for
obtaining drilling permits. Texas currently imposes a 4.6% severance tax on oil production and a 7.5% severance tax on natural gas production. States also regulate the method
of developing new fields, the spacing and operation of wells and the prevention of waste of oil and natural gas resources. States may regulate rates of production and may
establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead
prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the
amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill.
The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and
equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us.
Financial Regulations, Including Regulations Enacted Under the Dodd-Frank Act. The U.S. Commodities and Futures Exchange Commission (the “CFTC”) holds authority to
monitor certain segments of the physical and futures energy commodities market including oil and natural gas. With regard to physical purchases and sales of natural gas and
other energy commodities, and any related hedging activities that the Company undertakes, the Company is thus required to observe anti-market manipulation and disruptive
trading practices laws and related regulations enforced by the CFTC. The CFTC also holds substantial enforcement authority, including the ability to assess civil penalties.
Congress adopted comprehensive financial reform legislation in 2010, establishing federal oversight and regulation of the over-the-counter derivative market and entities that
participate in that market. The legislation, known as the Dodd-Frank Wall Street Reform
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and Consumer Protection Act (“Dodd-Frank Act”), required the CFTC and the SEC to promulgate rules and regulations implementing the legislation, including regulations that
affect derivatives contracts that the Company uses to hedge its exposure to price volatility.
While the CFTC and the SEC have issued final regulations in certain areas, final rules in other areas remain pending. The Company cannot, at this time, predict the timing or
contents of any final rules the CFTC may enact with regard to any applicable rulemaking proceeding. Any final rule in either proceeding could impact the Company’s ability to
enter into financial derivative transactions to hedge or mitigate exposure to commodity price volatility and other commercial risks affecting our business.
Worker Health and Safety. We are subject to a number of federal and state laws and regulations, including OSHA, and comparable state statutes, the purpose of which are to
protect the health and safety of workers. In addition, OSHA’s hazard communication standard, the EPA community right-to-know regulations under Title III of the federal
Superfund Amendment and Reauthorization Act and comparable state statutes require that information be maintained concerning hazardous materials used or produced in our
operations, and that this information be provided to employees, state and local government authorities and citizens.
Commitments and Contingencies
Our activities are subject to federal, state and local laws and regulations governing environmental quality and pollution control. Although no assurances can be made, we
believe that, absent the occurrence of an extraordinary event, compliance with existing federal, state and local laws, rules and regulations governing the release of materials into
the environment or otherwise relating to the protection of the environment will not have a material effect upon our capital expenditures, earnings or our competitive position
with respect to our existing assets and operations. We cannot predict what effect additional regulation or legislation, enforcement policies included, and claims for damages to
property, employees, other persons, and the environment resulting from our operations could have on its activities. See “Note 18 – Commitments and Contingencies” of the
Notes to our Consolidated Financial Statements for additional information.
Available Information
We make available free of charge on our website (www.callon.com) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
other filings pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and amendments to such filings, as soon as reasonably practicable after each are
electronically filed with, or furnished to, the SEC.
We also make available within the “About Callon — Governance” section of our website our Code of Business Conduct and Ethics, Corporate Governance Guidelines, and
Audit, Compensation, Nominating and ESG, and Operations and Reserves Committee Charters, which have been approved by our Board of Directors. We will make timely
disclosure on our website of any change to, or waiver from, the Code of Business Conduct and Ethics for our principal executive and senior financial officers. A copy of our
Code of Business Conduct and Ethics is also available, free of charge by writing us at: General Counsel, Callon Petroleum Company, 2000 W. Sam Houston Parkway South,
Suite 2000, Houston, TX 77042.
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ITEM 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including but not limited to those described below. Our business could also be affected by
additional risks and uncertainties not currently known to us or that we currently deem to be immaterial. If any of these risks actually occur, it could materially harm our
business, financial condition or results of operations or impair our ability to implement business plans or complete development activities as scheduled. In that case, the market
price of our common stock could decline. Below is a summary of the principal risks associated with an investment in the Company. This summary should not be relied upon as
an exhaustive list of the material risks facing our business.
Risks Related to the Merger
• While the Merger Agreement is in effect, we are subject to certain interim covenants.
•
•
•
•
The announcement and pendency of the Merger may result in disruptions to our business, and the Merger could divert management’s attention, disrupt our relationships with third
parties and employees, and result in negative publicity or legal proceedings, any of which could negatively impact our operating results and ongoing business.
The Merger may not be completed within the expected timeframe, or at all, for a variety of reasons, including the possibility that the Merger Agreement is terminated, and the
failure to complete the Merger could adversely affect our business, results of operations, financial condition and the market price of our common stock.
The Merger Agreement limits Callon’s ability to pursue alternatives to the Merger, may discourage certain other companies from making a favorable alternative transaction
proposal, and, in specified circumstances, could require Callon to pay APA a termination fee.
Because the market price of APA common stock will fluctuate, Callon shareholders cannot be sure of the value of the shares of APA common stock they will receive in the
Merger. In addition, because the Exchange Ratio is fixed, the number of shares of APA common stock to be received by Callon shareholders in the Merger will not change
between now and the time the Merger is completed to reflect changes in the trading prices of APA common Stock or Callon common stock.
Risks Related to the Oil & Natural Gas Industry
•
•
•
•
•
•
•
•
Oil and natural gas prices are volatile, and substantial or extended declines in prices may adversely affect our results of operations and financial condition.
If oil and natural gas prices remain depressed for extended periods of time, we may be required to make significant downward adjustments to the net book value of our oil and
natural gas properties.
Our business is subject to climate-related transition risks, including evolving climate change legislation, fuel conservation measures, technological advances and negative shift in
market perception towards the oil and natural gas industry, which could result in increased operating expenses and capital costs, financial risks and potential reduction in demand
for oil and natural gas.
Negative public perception of the oil and gas industry could have a material and adverse effect on us.
Increased scrutiny of ESG matters could have an adverse effect on our business, financial condition and results of operations and damage our reputation.
The unavailability or high cost of drilling rigs, pressure pumping equipment and crews, other equipment, supplies, water, personnel and oil field services could adversely affect
our ability to execute our exploration and development plans on a timely basis and within our budget, which could materially and adversely affect our operations and profitability.
An excess supply of oil and natural gas in the market may in the future cause us to reduce production and shut-in our wells, any of which could adversely affect our business,
financial condition, results of operations, liquidity, and ability to finance planned capital expenditures.
Operational Risks
•
Our operations are dependent on third-party service providers.
Our operations are subject to operating hazards inherent to our industry that may adversely impact our ability to conduct business, and we may not be fully insured against all such
operating risks.
• We are subject to physical risks arising from climate change, which may have a negative impact on our business and results of operations.
•
Our exploration and development drilling efforts and the operation of our wells may not be profitable or achieve our targeted returns.
• Multi-well pad drilling may result in volatility in our operating results.
•
Risks Related to Marketing and Transportation
Restrictions on our ability to obtain, recycle and dispose of water may impact our ability to execute our drilling and development plans in a timely or cost-effective manner.
•
Factors beyond our control, including the availability and capacity of gas processing facilities and pipelines and other transportation operations owned and operated by third
parties, affect the marketability of our production.
• We have entered into firm transportation contracts that require us to pay fixed sums of money regardless of quantities actually shipped. If we are unable to deliver the minimum
quantities of production, such requirements could adversely affect our results of operations, financial position, and liquidity.
Risks Related to Our Reserves and Drilling Locations
•
•
•
Our estimated reserves are based on interpretations and assumptions that may be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will
materially affect the quantities and present value of our reserves.
Unless we replace our oil and gas reserves, our reserves and production will decline.
Our identified drilling locations are scheduled to be drilled over many years, making them susceptible to uncertainties that could prevent them from being drilled or delay their
drilling.
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The development of our PUDs may take longer and may require higher levels of capital expenditures than we currently anticipate.
•
Risks Related to Technology
• We may not be able to keep pace with technological developments in our industry.
•
Our business could be negatively affected by security threats. A cyberattack or similar incident could occur and result in information theft, data corruption, operational disruption,
damage to our reputation or financial loss.
Risks Related to Our Indebtedness and Financial Position
Our business requires significant capital expenditures.
•
Our leverage and debt service obligations may adversely affect our financial condition, results of operations and business prospects.
•
Restrictive covenants in the agreements governing our indebtedness may limit our ability to respond to changes in market conditions or pursue business opportunities.
•
Adverse changes in our credit rating may affect our borrowing capacity and borrowing terms.
•
Our borrowings under our Credit Facility expose us to interest rate risk.
•
The ability to borrow under our Credit Facility may be restricted to an amount below the amount of borrowings outstanding thereunder or to a lesser amount than what we expect
due to future borrowing base reductions or restrictions contained in our other debt agreements.
•
• We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under applicable debt
instruments, which may not be successful.
• We cannot be certain that we will be able to maintain or improve our leverage position.
Risks Related to Acquisitions
• We may be unable to integrate successfully the operations of acquisitions with our operations, and we may not realize all the anticipated benefits of these acquisitions.
• We may fail to fully identify problems with any properties we acquire, and as such, assets we acquire may prove to be worth less than we paid because of uncertainties in
evaluating recoverable reserves and potential liabilities.
Risks Related to Our Hedging Program
•
•
Our hedging program may limit potential gains from increases in commodity prices, result in losses, or be inadequate to protect us against continuing and prolonged declines in
commodity prices.
Our production is not fully hedged, and we are exposed to fluctuations in oil, natural gas and NGL prices and will be affected by continuing and prolonged declines in oil, natural
gas and NGL prices.
Our hedging transactions expose us to counterparty credit risk.
•
Legal and Regulatory Risks
• We are subject to stringent and complex federal, state and local laws and regulations which require compliance that could result in substantial costs, delays or penalties.
•
•
•
Federal legislation and state and local legislative and regulatory initiatives relating to hydraulic fracturing and water disposal wells could result in increased costs and additional
operating restrictions or delays.
Climate change legislation or regulations restricting emissions of GHG or requiring the reporting of GHG emissions or climate-related information could adversely impact our
operating costs and demand for the oil and natural gas we produce.
Current or proposed financial legislation and rulemaking could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest
rate and other risks associated with our business.
Tax Risks
•
•
Other Material Risks
•
•
•
•
•
•
•
Our ability to use our existing net operating loss (“NOL”) carryforwards or other tax attributes could be limited.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial condition and
results of operations.
Tax laws may change over time and such changes could adversely affect our business and financial condition.
Competitive industry conditions may negatively affect our ability to conduct operations.
All of our producing properties are located in the Permian of West Texas, making us vulnerable to risks associated with operating in only one geographic region.
The results of our planned development programs in new or emerging shale development areas and formations may be subject to more uncertainties than programs in more
established areas and formations and may not meet our expectations for reserves or production.
The loss of key personnel, or inability to employ a sufficient number of qualified personnel, could adversely affect our ability to operate.
The inability of one or more of our customers to meet their obligations to us may adversely affect our financial results.
Our bylaws designate the Court of Chancery of the State of Delaware (the “Court of Chancery”) as the sole and exclusive forum for certain types of actions and proceedings that
may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other
employees.
Provisions of our charter documents and Delaware law may inhibit a takeover, which could limit the price investors might be willing to pay in the future for our common stock.
•
• We do not currently pay cash dividends on our common stock.
General Risk Factors
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Declining general economic, business or industry conditions and inflation may have a material adverse effect on our results of operations, liquidity and financial condition.
•
• We may be subject to the actions of activist shareholders.
•
Future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of our common stock or other
securities may dilute a shareholder’s ownership in us.
Risks Related to the Merger
While the Merger Agreement is in effect, we are subject to certain interim covenants. The Merger Agreement generally requires us to operate our business in the ordinary
course, subject to certain exceptions, including as required by applicable law, pending consummation of the Merger, and subjects us to customary interim operating covenants
that restrict us, without APA’s approval (such approval not to be unreasonably conditioned, withheld or delayed), from taking certain specified actions until the Merger is
completed or the Merger Agreement is terminated in accordance with its terms. These restrictions could prevent us from pursuing certain business opportunities that may arise
prior to the consummation of the Merger and may affect our ability to execute our business strategies and attain financial and other goals and may impact our financial
condition, results of operations and cash flows.
The announcement and pendency of the Merger may result in disruptions to our business, and the Merger could divert management's attention, disrupt our
relationships with third parties and employees, and result in negative publicity or legal proceedings, any of which could negatively impact our operating results and
ongoing business. In connection with the pending Merger, our current and prospective employees may experience uncertainty about their future roles with us following the
Merger, which may materially adversely affect our ability to attract and retain key personnel and other employees while the Merger is pending. Key employees may depart prior
to the consummation of the Merger because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us following the Merger.
The proposed Merger may cause disruptions to our business or business relationships with our existing and potential suppliers and other business partners, and this could have
an adverse impact on our results of operations. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may
delay or defer certain business decisions, seek alternative relationships with third parties, or seek to negotiate changes to or alter their present business relationships with us.
Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
The pursuit of the proposed Merger has placed an increased burden on management and internal resources, which may have a negative impact on our ongoing business. It also
diverts management’s time and attention from the day-to-day operation of our business, which could adversely affect our financial results. In addition, we have incurred and
will continue to incur other significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and many of these
fees and costs are payable regardless of whether or not the pending Merger is consummated.
Any of the foregoing, individually or in combination, could materially and adversely affect our business, our financial condition and our results of operations and prospects.
The Merger may not be completed within the expected timeframe, or at all, for a variety of reasons, including the possibility that the Merger Agreement is
terminated, and the failure to complete the Merger could adversely affect our business, results of operations, financial condition and the market price of our common
stock. There can be no assurance that the Merger will be completed in the expected timeframe or at all. The Merger Agreement contains a number of customary closing
conditions that must be satisfied or waived prior to the completion of the Merger, including, among others, (i) the receipt of the required approvals from Callon shareholders
and APA shareholders and (ii) the absence of any governmental order or law prohibiting consummation of the Merger.
Many of the conditions to completion of the merger are not within either Callon’s or APA’s control. If any of these closing conditions are not satisfied or waived prior to
October 3, 2024 (or such date as extended pursuant to the terms set forth in the Merger Agreement), it is possible that the Merger Agreement may be terminated. The Merger
Agreement also provides both Callon and APA with certain termination rights. Furthermore, the requirements for obtaining the required clearances and approvals could delay
the completion of the Merger for a significant period of time or prevent the Merger from occurring. There can be no assurance that all required regulatory approvals will be
obtained or obtained prior to the termination date.
If the Merger is not consummated within the expected time frame or at all, we may be subject to a number of material risks. The price of our common stock may decline to the
extent that current market prices reflect a market assumption that the Merger will be completed. In addition, some costs, expenses and fees related to the Merger must be paid
whether or not the Merger is completed, and we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction
costs in connection with the proposed Merger, as well as the direction of management resources towards the Merger, for which we will have received little or no benefit if the
closing of the Merger does not occur. We may also experience negative reactions from our shareholders and other investors, employees and other parties with which we
maintain business relationships. In addition, if the Merger Agreement is terminated, in specified circumstances, we may be required to pay a termination fee. If the Merger is
not
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consummated, there can be no assurance that any other transaction acceptable to us will be offered or that our business, prospects or results of operations will not be adversely
affected.
Litigation relating to the Merger could result in an injunction preventing the completion of the Merger and/or substantial costs to us. Securities class action lawsuits
and derivative lawsuits are often brought against public companies that have entered into acquisition, merger or other business combination agreements. Even if such a lawsuit
is without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary
damages, which could have a negative impact on our liquidity and financial condition. Such lawsuits could also seek, among other things, injunctive relief or other equitable
relief, including a request to enjoin us and APA from consummating the Merger.
The Merger Agreement limits Callon’s ability to pursue alternatives to the Merger, may discourage certain other companies from making a favorable alternative
transaction proposal, and, in specified circumstances, could require Callon to pay APA a termination fee. The Merger Agreement contains certain provisions that restrict
each of APA’s and Callon’s ability to initiate, solicit, knowingly encourage, or knowingly facilitate any inquiry or the making of any proposal or offer that constitutes, or would
reasonably be expected to result in, a competing proposal with respect to APA or Callon, as applicable, and APA and Callon have each agreed to certain terms and conditions
relating to their ability to engage in, continue, or otherwise participate in any discussions with respect to, provide any third party confidential information with respect to, or
enter into any acquisition agreement with respect to certain unsolicited proposals that constitute or are reasonably likely to lead to a competing proposal. The Merger
Agreement further provides that under specified circumstances, including after receipt of certain alternative acquisition proposals, each of APA and Callon may be required to
pay the other a cash termination fee equal to $170 million (if APA is the payor) or $85 million (if Callon is the payor). These and other provisions in the Merger Agreement
could discourage a potential third party acquirer or other strategic transaction partner that might have an interest in acquiring all or a significant portion of Callon from
considering or pursuing an alternative transaction with Callon or proposing such a transaction, even if it were prepared to pay consideration with a higher per share value than
the total value proposed to be paid or received in the Merger. These provisions might also result in a potential third-party acquirer or other strategic transaction partner
proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee or expense reimbursement that may become
payable in certain circumstances.
Even if the Merger is completed, the combined company may fail to realize the anticipated benefits of the Merger and the integration of the businesses and operations
of APA and Callon may not be as successful as anticipated. The success of the Merger will depend, in part, on the combined company’s ability to realize the anticipated
benefits and cost savings from combining our and APA’s businesses, and there can be no assurance that the combined company will be able to successfully integrate us or
otherwise realize the expected benefits of the Merger. Difficulties in integrating us into the combined company may result in the combined company performing differently than
expected, in operational challenges or in the failure to realize anticipated expense-related efficiencies. Potential difficulties that may be encountered in the integration process
include harmonizing the companies’ operating practices, employee development and compensation programs, internal controls, and other policies, procedures, and processes;
maintaining existing agreements with customers, providers, and vendors or business partners and avoiding delays in entering into new agreements with prospective customers,
providers, and vendors or business partners; addressing possible differences in business backgrounds, corporate cultures, and management philosophies; consolidating the
companies’ operating, administrative, and information technology infrastructure and financial systems; and coordinating distribution and marketing efforts.
Completion of the Merger may trigger change in control or other provisions in certain agreements to which Callon is a party. If APA and Callon are unable to negotiate
waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements, or seeking monetary
damages. Even if APA and Callon are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less
favorable to Callon.
Our shareholders will have a reduced ownership and voting interest after the Merger and will exercise less influence over the policies of the combined company than
they now have on the policies of Callon. Immediately after the Merger is completed, it is expected that our current shareholders will own approximately 19% of APA’s
outstanding common stock and current APA shareholders will own approximately 81% of APA’s outstanding common stock. As a result, our current shareholders will have less
influence on the management and policies of the combined company than they now have on the management and policies of Callon.
Because the market price of APA common stock will fluctuate, Callon shareholders cannot be sure of the value of the shares of APA common stock they will receive in
the Merger. In addition, because the Exchange Ratio is fixed, the number of shares of APA common stock to be received by Callon shareholders in the Merger will not
change between now and the time the Merger is completed to reflect changes in the trading prices of APA common Stock or Callon common stock. As a result of the
Merger, each eligible share of Callon common stock will be converted automatically into the right to receive, without interest, 1.0425 shares of APA common stock, with cash
paid in lieu of the issuance of any fractional shares of APA common stock. The Exchange Ratio is fixed, which means that it will not change between now and the closing date,
regardless of whether the market price of either APA common stock or Callon common stock changes. Therefore, the value of the Merger consideration will depend on the
market price of APA common stock at the Effective Time. The market price of APA common stock has fluctuated since the date of the announcement of the parties’ entry into
the Merger Agreement and will continue to fluctuate.
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The market price of shares of APA common stock may decline in the future as a result of the sale of shares of APA common stock held by former Callon shareholders
or APA’s other shareholders. Following their receipt of shares of APA common stock as consideration in the Merger, our shareholders may seek to sell the shares of APA
common stock delivered to them, and the Merger Agreement contains no restriction on the ability of our shareholders to sell such shares of APA common stock following
completion of the Merger. Other shareholders of APA may also seek to sell shares of APA common stock held by them following, or in anticipation of, completion of the
Merger. These sales (or the perception that these sales may occur), coupled with the increase in the outstanding number of shares of APA common stock to be issued in the
Merger, may affect the market for, and the market price of, APA common stock in an adverse manner.
Risks Related to the Oil & Natural Gas Industry
Oil and natural gas prices are volatile, and substantial or extended declines in prices may adversely affect our results of operations and financial condition. Our
success is highly dependent on prices for oil and natural gas, which have in recent years been, and we expect will continue to be, extremely volatile. During the three years
ended December 31, 2023, NYMEX WTI prices ranged from a high of $123.64 per barrel on March 8, 2022 to a low of $47.47 per barrel on January 4, 2021, and NYMEX
Henry Hub prices ranged from a high of $23.86 per MMBtu on February 17, 2021 to a low of $1.74 per MMBtu on June 2, 2023. Prices were particularly volatile in 2020 and
2021, with five-year highs occurring in 2021 and five-year lows occurring in 2020, as a result of multiple significant factors impacting supply and demand in the global oil and
natural gas markets, including those relating to the COVID-19 global pandemic. The prices of oil and natural gas depend on factors we cannot control, such as macro-economic
conditions, levels of production, domestic and worldwide inventories, demand for oil and natural gas, the capacity of U.S. and international refiners to use U.S. supplies of oil,
natural gas and NGLs, relative price and availability of alternative forms of energy, actions by non-governmental organizations, OPEC and other countries, legislative and
regulatory actions, trade embargoes or sanctions, technology developments impacting energy consumption and energy supply, and weather. These factors make it extremely
difficult to predict future oil, natural gas and NGLs price movements with any certainty. We make price assumptions that are used for planning purposes, and a significant
portion of our cash outlays, including rent, salaries and non-cancelable capital commitments, are largely fixed in nature. Accordingly, if commodity prices are below the
expectations on which these commitments were based, our financial results are likely to be adversely and disproportionately affected because these cash outlays are not variable
in the short term and cannot be quickly reduced to respond to unanticipated decreases in commodity prices.
In general, prices of oil, natural gas, and NGLs affect the following aspects of our business: our revenues, cash flows, earnings and returns; our ability to attract capital to
finance our operations and the cost of the capital; the amount we are allowed to borrow under our Credit Facility; the profit or loss we incur in exploring for and developing our
reserves; and the value of our oil and natural gas properties.
A substantial or extended decline in commodity prices may also reduce the amount of oil and natural gas that we can produce economically and cause a significant portion of
our development projects to become uneconomic. This may result in our having to make significant downward adjustments to our estimated proved reserves. A reduction in
production could also result in a shortfall in expected cash flows and require us to reduce capital spending, which could negatively affect our ability to replace our production
and our future rate of growth, or require us to borrow funds to cover any such shortfall, which we may be unable to obtain at such time on satisfactory terms. Additionally, a
sustained period of weakness in oil, natural gas and NGLs prices, and the resultant effects of such prices on our drilling economics and ability to raise capital, would require us
to reevaluate and postpone or eliminate additional drilling.
Additionally, if we are required to curtail our drilling program, we may be unable to continue to hold leases that are scheduled to expire, which may further reduce our reserves.
As a result, if oil, natural gas and/or NGL prices experience a sustained period of weakness, our future business, financial condition, results of operations, liquidity, and ability
to finance planned capital expenditures may be materially and adversely affected.
If oil and natural gas prices remain depressed for extended periods of time, we may be required to make significant downward adjustments to the net book value of
our oil and natural gas properties. Under the successful efforts method, we review our proved oil and gas properties for impairment whenever events and circumstances
indicate that a decline in the recoverability of their net book value may have occurred. In addition, we evaluate significant unproved oil and gas property costs for impairment
based on remaining lease term, drilling results, reservoir performance, seismic interpretation or changes in future plans to develop acreage. Unproved oil and gas properties that
are not individually significant are aggregated by asset group, and the portion of such costs estimated to be nonproductive prior to lease expiration is amortized over the average
holding period. The estimate of what could be nonproductive is based on our historical experience or other information, including current drilling plans and existing geological
data. Based on specific market factors and circumstances at the time of prospective impairment reviews, and the continuing evaluation of development plans, production data,
economics and other factors, we may be required to write down the net book value of our oil and gas properties, which may result in a decrease in the amount available under
the Credit Facility. See “Note 2 – Summary of Significant Accounting Policies” of the Notes to our Consolidated Financial Statements as well as the Supplemental Information
on Oil and Natural Gas Operations for additional information.
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Our business is subject to climate-related transition risks, including evolving climate change legislation, fuel conservation measures, technological advances and
negative shift in market perception towards the oil and natural gas industry, which could result in increased operating expenses and capital costs, financial risks and
potential reduction in demand for oil and natural gas. Increasing attention from governmental and regulatory bodies, investors, consumers, industry and other stakeholders
on combating climate change, together with changes in consumer and industrial/commercial behavior, societal expectations on companies to address climate change, investor
and societal expectations regarding voluntary climate-related disclosures, preferences and attitudes with respect to the generation and consumption of energy, the use of
hydrocarbons, and the use of products manufactured with, or powered by, hydrocarbons, may result in the enactment of climate change-related regulations, policies and
initiatives (at the government, regulator, corporate and/or investor community levels), including alternative energy requirements, new fuel consumption standards, energy
conservation and emissions reductions measures and responsible energy development; technological advances with respect to the generation, transmission, storage and
consumption of energy (including advances in wind, solar and hydrogen power, as well as battery technology); increased availability of, and increased demand from consumers
and industry for, energy sources other than oil and natural gas (including wind, solar, nuclear, and geothermal sources as well as electric vehicles); and development of, and
increased demand from consumers and industry for, lower-emission products and services (including electric vehicles and renewable residential and commercial power
supplies) as well as more efficient products and services. For further discussions regarding risk related to technological developments, see “—We may not be able to keep pace
with technological developments in our industry.” These developments may in the future adversely affect the demand for products manufactured with, or powered by,
petroleum products, as well as the demand for, and in turn the prices of, oil and natural gas products. Such developments may also adversely impact, among other things, our
revenues, stock price and access to capital markets, and the availability to us of necessary third-party services and facilities that we rely on, which may increase our operational
costs and adversely affect our ability to successfully carry out our business strategy. Climate change-related developments may also impact the market prices of or our access to
raw materials such as energy and water and therefore result in increased costs to our business.
More broadly, the enactment of climate change-related regulations, policies and initiatives across the market at the government, corporate, and/or investor community levels
may in the future result in increases in our compliance costs and other operating costs and have other adverse effects (e.g., greater potential for governmental investigations or
litigation). For further discussion regarding the risks posed to us by climate change-related regulations, policies and initiatives, negative public perception of the oil and gas
industry, and increasing scrutiny of ESG matters, see the discussions below in “—Negative public perception of the oil and gas industry could have a material and adverse
effect on us,” “—Increased scrutiny of ESG matters could have an adverse effect on our business, financial condition and results of operations and damage our reputation,” and
“—Climate change legislation or regulations restricting emissions of GHG or requiring the reporting of GHG emissions or climate-related information could adversely impact
our operating costs and demand for the oil and natural gas we produce.”
Negative public perception of the oil and gas industry could have a material and adverse effect on us. Opposition toward oil and natural gas drilling and development
activity has been growing globally and is particularly pronounced in the United States. Negative public perception regarding us and/or our industry resulting from, among other
things, concerns raised by advocacy groups about climate change may lead to increased reputational and litigation risk and regulatory, legislative and judicial scrutiny, which
may, in turn, lead to new state and federal safety and environmental laws, regulations, guidelines and enforcement interpretations. Companies in the oil and natural gas industry
are often the target of activist efforts from both individuals and non-governmental organizations regarding safety, human rights, climate change, environmental matters,
sustainability, and business practices. Anti-development activists are working to, among other things, reduce access to federal and state government lands and delay or cancel
certain operations such as drilling and development. Activism could materially and adversely impact our ability to operate our business and raise capital. The foregoing factors
may cause operational delays or restrictions, increased operating costs, additional regulatory burdens and increased risk of litigation. In addition, various officials and
candidates at the federal, state and local levels, have made climate-related pledges or proposed banning hydraulic fracturing altogether.
In addition, some parties have initiated public nuisance claims under federal or state common law against certain companies involved in the production of oil and natural gas, or
claims alleging that the companies have been aware of the adverse effects of climate change for some time but failed to adequately disclose such impacts to their investors or
customers. Although our business is not a party to any such litigation, we could be named in actions making similar allegations, which could lead to costs and materially impact
our financial condition in an adverse way.
Negative perceptions regarding our industry and reputational risks may also in the future adversely affect our ability to successfully carry out our business strategy by adversely
affecting our access to capital. Certain segments of the investor community have developed negative sentiment towards investing in our industry. Parties concerned about the
potential effects of climate change have directed their attention at sources of financing for energy companies, which has resulted in certain financial institutions, funds and other
capital providers restricting or eliminating their investment in oil and natural gas activities. There is also a risk that financial institutions may be required to adopt policies that
have the effect of reducing the funding provided to the fossil fuel sector, and some investors, including investment advisors and certain sovereign wealth funds, pension funds,
university endowments and family foundations, have stated policies to disinvest in the oil and gas sector based on their social and environmental considerations. Further,
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certain investment banks and asset managers based both domestically and internationally have announced that they are adopting climate change guidelines for their banking and
investing activities. Certain other stakeholders have also pressured commercial and investment banks to stop financing oil and gas production and related infrastructure projects.
Institutional lenders who provide financing to companies in the energy sector have also become more attentive to sustainable lending practices, and some may elect not to
provide traditional energy producers or companies that support such producers with funding. Such developments, including ESG activism and initiatives aimed at limiting
climate change and reducing air pollution, could result in downward pressure on the stock prices of oil and gas companies, including ours. This may also potentially result in an
increase in our expenses and a reduction of revenues and available capital funding for potential development projects, impacting our future financial results.
Increased scrutiny of ESG matters could have an adverse effect on our business, financial condition and results of operations and damage our reputation. In recent
years, companies across all industries are facing increasing scrutiny from a variety of stakeholders, including investor advocacy groups, proxy advisory firms, certain
institutional investors and lenders, investment funds and other influential investors and rating agencies, related to their ESG and sustainability practices. If we do not adapt to or
comply with investor or other stakeholder expectations and standards on ESG matters (or meet sustainability goals and targets that we have set), as they continue to evolve, or if
we are perceived to have not responded appropriately or quickly enough to growing concern for ESG and sustainability issues, regardless of whether there is a regulatory or
legal requirement to do so, we may suffer from reputational damage and our business, financial condition and/or stock price could be materially and adversely affected.
In addition, the Company’s continuing efforts to research, establish, accomplish and accurately report on the implementation of our ESG strategy, including any specific ESG
objectives, may also create additional operational risks and expenses and expose us to reputational, legal and other risks. While we create and publish voluntary disclosures
regarding ESG matters from time to time, some of the statements in those voluntary disclosures may be based on hypothetical expectations and assumptions that may or may
not be representative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Such expectations and assumptions are
necessarily uncertain and may be prone to error or subject to misinterpretation given the long timelines involved and the lack of an established single approach to identifying,
measuring and reporting on many ESG matters. Further, failure or a perception (whether or not valid) of failure to implement our ESG strategy or achieve sustainability goals
and targets we have set, including emissions reduction goals, could damage our reputation, causing our investors or consumers to lose confidence in our Company, and
negatively impact our business. Our continuing efforts to research, establish, accomplish and accurately report on the implementation of our ESG strategy, including any ESG
goals, may also create additional operational risks and expenses and expose us to reputational, legal and other risks. For example, growing interest on the part of investors and
regulators in ESG factors and increased demand for, and scrutiny of, ESG-related disclosure by stakeholders has also increased the risk that companies could be perceived as, or
accused of, making inaccurate or misleading statements regarding their ESG-related claims, goal, targets, efforts or initiatives, often referred to as "greenwashing." Such
perception or accusation could damage our reputation and result in litigation or regulatory actions. In addition, organizations that provide information to investors on corporate
governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform
their investment and voting decisions. Unfavorable ESG ratings could lead to increased negative investor sentiment toward us and our industry and to the diversion of
investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital.
Further, our operations, projects and growth opportunities require us to have strong relationships with various key stakeholders, including our shareholders, employees,
suppliers, customers, local communities and others. We may face pressure from stakeholders, many of whom are increasingly focused on climate change, to prioritize
sustainable energy practices, reduce our carbon footprint and promote sustainability while at the same time remaining a successfully operating public company. If we do not
successfully manage expectations across these varied stakeholder interests, it could erode stakeholder trust and thereby affect our brand and reputation. Such erosion of
confidence could negatively impact our business through decreased demand and growth opportunities, delays in projects, increased legal action and regulatory oversight,
adverse press coverage and other adverse public statements, difficulty hiring and retaining top talent, difficulty obtaining necessary approvals and permits from governments
and regulatory agencies on a timely basis and on acceptable terms and difficulty securing investors and access to capital.
The unavailability or high cost of drilling rigs, pressure pumping equipment and crews, other equipment, supplies, water, personnel and oil field services could
adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget, which could materially and adversely affect
our operations and profitability. From time to time, during periods of increasing oil and natural gas prices and in periods in which the levels of exploration and production
increase, our industry experiences a shortage of drilling and workover rigs, other equipment, pipes, materials and supplies, water and qualified personnel. As a result of such
shortage, the costs and delivery times of rigs, equipment and supplies often increase substantially, as well as the wages and costs of drilling rig crews and other experienced
personnel and oilfield services, while the quality of these services and equipment may suffer. This impact may be magnified to the extent that the Company's ability to
participate in the commodity price increases is limited by its derivative risk management activities. Cost increases in and shortages of such resources may also result from a
variety of other factors beyond our control, such as general inflationary pressures, transportation constraints,
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and increases in the cost of necessary inputs such as electricity, steel and other raw materials, including as a result of increased tariffs or geopolitical issues.
An excess supply of oil and natural gas in the market may in the future cause us to reduce production and shut-in our wells, any of which could adversely affect our
business, financial condition, results of operations, liquidity, and ability to finance planned capital expenditures. An excess supply of oil and natural gas in the market
may result in transportation and storage capacity constraints. If, in the future, our transportation or storage arrangements become constrained or unavailable, we may incur
significant operational costs if there is an increase in price for services or we may be required to shut-in or curtail production or flare our natural gas. If we were required to
shut-in wells, we might also be obligated to pay certain demand charges for gathering and processing services and firm transportation charges for pipeline capacity we have
reserved. Further, any prolonged shut-in of our wells may result in materially decreased well productivity once we are able to resume operations, and any cessation of drilling
and development of our acreage could result in the expiration, in whole or in part, of our leases. All of these impacts may adversely affect our business, financial condition,
results of operations, liquidity, and ability to finance planned capital expenditures.
Operational Risks
Our operations are dependent on third-party service providers. We contract with third-party service providers to support our operations. These contracted services are
generally provided pursuant to master services agreements entered into between the third-party service providers and our operating subsidiaries. Although we have our own
employees, our ability to conduct operations and generate revenues is dependent on the availability and performance of those third-party service providers and their compliance
with the terms of their respective master service agreements. We cannot guarantee that we will be successful in either retaining the services of our current third-party service
providers or contracting with alternative service providers in the event that our current contractors discontinue providing services to us or fail to meet their obligations under
their respective master services agreements. Any failure to retain the services of our current service providers or locate alternatives will negatively affect our ability to generate
revenues and continue and expand our operations.
Our operations are subject to operating hazards inherent to our industry that may adversely impact our ability to conduct business, and we may not be fully insured
against all such operating risks. The operating hazards in exploring for and producing oil and natural gas include: encountering unexpected subsurface conditions that cause
damage to equipment or personal injury, including loss of life; equipment failures that curtail or stop production or cause severe damage to or destruction of property, natural
resources or other equipment; blowouts or other damages to the productive formations of our reserves that require a well to be re-drilled or other corrective action to be taken;
and storms and other extreme weather conditions that cause damages to our production facilities or wells. Because of these or other events, we could experience environmental
hazards, including release of oil and natural gas from spills, natural gas leaks, accidental leakage of toxic or hazardous materials, such as petroleum liquids, drilling fluids or
fracturing fluids, including chemical additives, underground migration, and ruptures. If we experience any of these problems, we could incur substantial losses in excess of our
insurance coverage.
The occurrence of a significant event or claim, not fully insured or indemnified against, could have a material adverse effect on our financial condition and operations. In
accordance with industry practice, we maintain insurance against some of the operating risks to which our business is exposed. Also, no assurance can be given that we will be
able to maintain insurance in the future at rates we consider reasonable to cover our possible losses from operating hazards and we may elect no or minimal insurance coverage.
We are subject to physical risks arising from climate change, which may have a negative impact on our business and results of operations. Most scientists have
concluded that increasing concentrations of GHGs in the Earth’s atmosphere and climate change may produce significant physical effects on weather conditions, such as
increased frequency and severity of droughts, storms, floods and other climatic events. If any such effects were to occur, they could adversely affect or delay demand for oil or
natural gas products or cause us to incur significant costs in preparing for or responding to the effects of climatic events themselves, which may not be fully insured. Potential
adverse effects could include disruption of our production activities, including, for example, damages to our facilities from winds or floods, increases in our costs of operation,
or reductions in the efficiency of our operations, impacts on our workforce, supply chain, or distribution chain, as well as potentially increased costs for or difficulty procuring
consistent levels of insurance coverages in the aftermath of such effects. The physical effects of climate change may generally result in reduced availability of relevant
insurance coverage on the market. Any of these effects could have an adverse effect on our assets and operations. Our ability to mitigate the adverse physical impacts of climate
change depends in part upon our disaster preparedness and response and business continuity planning. Further, energy needs could increase or decrease as a result of extreme
weather conditions depending on the duration and magnitude of any such climate changes. Increased energy use due to weather changes may require us to invest in additional
equipment to serve increased demand. A decrease in energy use due to weather changes may affect our financial condition through decreased revenues. The effect of
fluctuations on supply and demand may become more pronounced within specific geographic oil and natural gas producing areas, which may cause these conditions to occur
with greater frequency or magnify the effects of these conditions. Due to the concentrated nature of our portfolio of properties, a number of our properties could experience any
of the same conditions at the same time, resulting in a relatively greater impact on our results of operations than they might have
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on other companies that have a more diversified portfolio of properties. Such delays or interruptions could have a material adverse effect on our financial condition and results
of operations.
Our exploration and development drilling efforts and the operation of our wells may not be profitable or achieve our targeted returns. Exploration, development,
drilling and production activities are subject to many risks. We may invest in property, including undeveloped leasehold acreage, which we believe will result in projects that
will add value over time. However, we cannot guarantee that any leasehold acreage acquired will be profitably developed, that new wells drilled will be productive or that we
will recover all or any portion of our investment in such leasehold acreage or wells. Drilling for oil and natural gas may involve unprofitable efforts, including wells that are
productive but do not produce sufficient net reserves to return a profit after deducting operating and other costs. In addition, we may not be successful in controlling our drilling
and production costs to improve our overall return and wells that are profitable may not achieve our targeted rate of return. Wells may have production decline rates that are
greater than anticipated. Future drilling and completion efforts may impact production from existing wells, and parent-child effects may impact future well productivity as a
result of timing, spacing proximity or other factors. Failure to conduct our oil and gas operations in a profitable manner may result in write-downs of our proved reserves
quantities, impairment of our oil and gas properties, and a write-down in the net book value of our unproved properties, and over time may adversely affect our growth,
revenues and cash flows.
Multi-well pad drilling may result in volatility in our operating results. We utilize multi-well pad drilling where practical. Because wells drilled on a pad are not brought
into production until all wells on the pad are drilled and completed and the drilling rig is moved from the location, multi-well pad drilling delays the commencement of
production. In addition, problems affecting a single well could adversely affect production from all of the wells on the pad, which would further cause delays in the scheduled
commencement of production or interruptions in ongoing production. These delays or interruptions may cause volatility in our operating results. Further, any delay, reduction or
curtailment of our development and producing operations due to operational delays caused by multi-well pad drilling could result in the loss of acreage through lease
expirations.
Restrictions on our ability to obtain, recycle and dispose of water may impact our ability to execute our drilling and development plans in a timely or cost-effective
manner. Water is an essential component of both the drilling and hydraulic fracturing processes. Historically, we have been able to secure water from local landowners and
other third-party sources for use in our operations. If drought conditions were to occur or demand for water were to outpace supply, our ability to obtain water could be
impacted and in turn, our ability to perform hydraulic fracturing operations could be restricted or made more costly. Along with the risks of other extreme weather events,
drought risk, in particular, is likely increased by climate change. If we are unable to obtain water to use in our operations from local sources, we may be unable to economically
produce oil and natural gas, which could have an adverse effect on our financial condition, results of operations and cash flows. In addition, significant amounts of water are
produced in our operations. Inadequate access to or availability of water recycling or water disposal facilities could adversely affect our production volumes or significantly
increase the cost of our operations.
Risks Related to Marketing and Transportation
Factors beyond our control, including the availability and capacity of gas processing facilities and pipelines and other transportation operations owned and operated
by third parties, affect the marketability of our production. The ability to market oil and natural gas from our wells depends upon numerous factors beyond our control. A
significant factor in our ability to market our production is the availability and capacity of gas processing facilities and pipeline and other transportation operations, including
trucking services, owned and operated by third parties. These facilities and services may be temporarily unavailable to us due to market conditions, physical or mechanical
disruption, weather, lack of contracted capacity, available manpower, pipeline safety issues, or other reasons. In certain newer development areas, processing and transportation
facilities and services may not be sufficient to accommodate potential production and it may be necessary for new interstate and intrastate pipelines and gathering systems to be
built. In addition, we or parties that we utilize might not be able to connect new wells that we complete to pipelines. Our failure to obtain access to processing and
transportation facilities and services in a timely manner and on acceptable terms could materially harm our business. We may be required to shut in wells for lack of a market or
because of inadequate or unavailable processing or transportation capacity. If that were to occur, we would be unable to realize revenue from those wells until transportation
arrangements were made to deliver our production to market. Furthermore, if we were required to shut in wells, we might also be obligated to pay shut-in royalties to certain
mineral interest owners in order to maintain our leases. If we were required to shut in our production for long periods of time due to lack of transportation capacity, it would
have a material adverse effect on our business, financial condition, results of operations and cash flows.
Other factors that affect our ability to market our production include:
•
•
•
•
the extent of domestic production and imports/exports of oil and natural gas;
federal regulations authorizing exports of LNG, the development of new LNG export facilities under construction in the U.S. Gulf Coast region, and the timing of the
first LNG exports from such facilities;
the construction of new pipelines capable of exporting U.S. natural gas to Mexico and transporting Permian oil production to the Gulf Coast;
the proximity of hydrocarbon production to pipelines and gathering infrastructure;
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•
•
•
•
the demand for oil and natural gas by utilities and other end users;
the availability of alternative fuel sources;
the effects of inclement weather, including the effects of chronic and acute climate events associated with the effects of global climate change; and
state and federal regulation of oil, natural gas and NGL marketing and transportation.
We have entered into firm transportation contracts that require us to pay fixed sums of money regardless of quantities actually shipped. If we are unable to deliver
the minimum quantities of production, such requirements could adversely affect our results of operations, financial position, and liquidity. We have entered into firm
transportation agreements for a portion of our production in certain areas in order to improve our ability, and that of our purchasers, to successfully market our production. We
may also enter into firm transportation arrangements for additional production in the future. These firm transportation agreements may be more costly than interruptible or
short-term transportation agreements. Additionally, these agreements obligate us to pay fees on minimum volumes regardless of actual throughput. If we have insufficient
production to meet the minimum volumes, the requirements to pay for quantities not delivered could have an impact on our results of operations, financial position, and
liquidity.
Risks Related to Our Reserves and Drilling Locations
Our estimated reserves are based on interpretations and assumptions that may be inaccurate. Any material inaccuracies in these reserve estimates or underlying
assumptions will materially affect the quantities and present value of our reserves. This 2023 Annual Report on Form 10-K contains estimates of our proved oil and
natural gas reserves and the estimated future net cash flows from such reserves. The process of estimating oil and natural gas reserves is complex and requires significant
decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir and is therefore inherently imprecise. These
assumptions include those required by the SEC relating to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds.
Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves
most likely will vary from the estimates. Any significant variance could materially affect the estimated quantities and present value of reserves shown in this 2023 Annual
Report on Form 10-K. Additionally, estimates of reserves and future cash flows may be subject to material downward or upward revisions, based on production history,
development drilling and exploration activities and prices of oil and natural gas.
You should not assume that any PV-10 of our estimated proved reserves contained in this 2023 Annual Report on Form 10-K represents the market value of our oil and natural
gas reserves. We base the PV-10 from our estimated proved reserves at December 31, 2023 on the 12-Month Average Realized Prices and costs as of the date of the estimate.
Actual future prices and costs may be materially higher or lower. Further, actual future net revenues will be affected by factors such as the amount and timing of actual
development expenditures, the rate and timing of production, and changes in governmental regulations or taxes. Recovery of PUDs generally requires significant capital
expenditures and successful drilling operations. Our reserve estimates include the assumption that we will make significant capital expenditures to develop these PUDs and the
actual costs, development schedule, and results associated with these properties may not be as estimated. In addition, the discount factor used to calculate PV-10 may not be
appropriate based on our cost of capital from time to time and the risks associated with our business and the oil and gas industry.
Unless we replace our oil and gas reserves, our reserves and production will decline. Our future oil and gas production depends on our success in finding or acquiring
additional reserves. If we fail to replace reserves through drilling or acquisitions, our production, revenues, reserve quantities and cash flows will decline. In general, production
from oil and gas properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. We may not be successful in finding, developing or
acquiring additional reserves, and our efforts may not be economic. Our ability to make the necessary capital investment to maintain or expand our asset base of oil and gas
reserves would be limited to the extent cash flow from operations is reduced and external sources of capital become limited or unavailable.
Our identified drilling locations are scheduled to be drilled over many years, making them susceptible to uncertainties that could prevent them from being drilled or
delay their drilling. Our management team has identified drilling locations as an estimation of our future development activities on our existing acreage. These identified
drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these identified drilling locations depends on a number of uncertainties,
including oil and natural gas prices, the availability and cost of capital, availability and cost of drilling, completion and production services and equipment, lease expirations,
regulatory approvals, and other factors discussed in these risk factors. Because of these uncertain factors, we do not know if the identified drilling locations will ever be drilled
or if we will be able to produce oil or natural gas from these drilling locations. In addition, unless production is established within the spacing units covering the undeveloped
acres on which some of the identified locations are located, the leases for such acreage will expire. Therefore, our actual drilling activities may materially differ from those
presently identified.
The development of our PUDs may take longer and may require higher levels of capital expenditures than we currently anticipate. Developing PUDs requires
significant capital expenditures and successful drilling operations, and a substantial amount of
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our proved reserves are PUDs which may not be ultimately developed or produced. Approximately 36% of our total estimated proved reserves as of December 31, 2023 were
PUDs. The reserve data included in the reserve reports of our independent petroleum engineers assume significant capital expenditures will be made to develop such reserves.
We cannot be certain that the estimated capital expenditures to develop these reserves are accurate, that development will occur as scheduled, or that the results of such
development will be as estimated. We may be forced to limit, delay or cancel drilling operations as a result of a variety of factors, including: unexpected drilling conditions;
pressure or irregularities in formations; lack of proximity to and shortage of capacity of transportation facilities; equipment failures or accidents and shortages or delays in the
availability of drilling rigs, equipment, personnel and services; the availability of capital; and compliance with governmental requirements. Delays in the development of our
reserves, increases in costs to drill and develop such reserves or decreases in commodity prices will reduce the future net revenues of our estimated PUDs and may result in
some projects becoming uneconomical. In addition, delays in the development of reserves could force us to reclassify certain of our proved reserves as unproved reserves.
Risks Related to Technology
We may not be able to keep pace with technological developments in our industry. The oil and natural gas industry is characterized by rapid and significant technological
advancements and introductions of new products and services using new technologies. As others use or develop new technologies, including technological advances in fuel
economy and energy generation devices or other technological advances that could reduce demand for oil and natural gas, we may be placed at a competitive disadvantage or
may be forced by competitive pressures to implement new technologies at substantial costs. We may not be able to respond to these competitive pressures or implement new
technologies on a timely basis or at an acceptable cost. If one or more of the technologies we use now or in the future were to become obsolete, our business, financial condition
or results of operations could be materially and adversely affected.
Our business could be negatively affected by security threats. A cyberattack or similar incident could occur and result in information theft, data corruption,
operational disruption, damage to our reputation or financial loss. The oil and natural gas industry has become increasingly dependent on digital technologies to conduct
certain exploration, development, production, processing, transportation and financial activities. We depend on digital technology to estimate quantities of oil and gas reserves,
manage operations, process and record financial and operating data, analyze seismic and drilling information, and communicate with our employees and third-party partners.
Our technologies, systems, networks, seismic data, reserves information or other proprietary information, and those of our vendors, suppliers and other business partners, may
become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary
and other information, or could otherwise lead to the disruption of our business operations or other operational disruptions in our exploration or production operations.
Cyberattacks are becoming more sophisticated and certain cyber incidents, such as surveillance, may remain undetected for an extended period and could lead to disruptions in
critical systems or the unauthorized release of confidential or otherwise protected information. These events could lead to financial losses from remedial actions, loss of
business, disruption of operations, damage to our reputation or potential liability. Also, computers control nearly all of the oil and gas distribution systems in the United States
and abroad, which are necessary to transport our production to market. A cyberattack directed at oil and gas distribution systems could damage critical distribution and storage
assets or the environment, delay or prevent delivery of production to markets and make it difficult or impossible to accurately account for production and settle transactions.
Cyber incidents have increased, and the U.S. government has issued warnings indicating that energy assets may be specific targets of cybersecurity threats. Our systems and
insurance coverage for protecting against cybersecurity risks may not be sufficient. Further, as cyberattacks continue to evolve, we may be required to expend significant
additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyberattacks.
Risks Related to Our Indebtedness and Financial Position
Our business requires significant capital expenditures. We make and expect to continue to make substantial capital expenditures in our business for the development,
exploitation, production and acquisition of oil and natural gas reserves. We intend to fund our capital expenditures through a combination of cash flows from operations and, if
needed, borrowings from financial institutions, the sale of debt and equity securities, and asset divestitures. The actual amount and timing of our future capital expenditures may
differ materially from our estimates as a result of, among other things, commodity prices, actual drilling results, participation of non-operating working interest owners, the cost
and availability of drilling rigs and other services and equipment, and regulatory, technological and competitive developments.
If the ability to borrow under our Credit Facility or our cash flows from operations decrease, we may have limited ability to obtain the capital necessary to sustain our
operations at current levels. The failure to obtain additional financing on terms acceptable to us, or at all, could result in a curtailment of our development activities and could
adversely affect our business, financial condition and results of operations.
Our leverage and debt service obligations may adversely affect our financial condition, results of operations and business prospects. As of December 31, 2023, we had
aggregate outstanding indebtedness of approximately $1.9 billion. Our amount of indebtedness could affect our operations in many ways, including:
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requiring us to dedicate a substantial portion of our cash flow from operations to service our existing debt, thereby reducing the cash available to fund our operations
and other business activities as well as any potential returns to shareholders;
limiting management’s discretion in operating our business and our flexibility in planning for, or reacting to, changes in our business and the industry in which we
operate;
increasing our vulnerability to downturns and adverse developments in our business and the economy;
limiting our ability to access the capital markets to raise capital on favorable terms, to borrow under our Credit Facility or to obtain additional financing for working
capital, capital expenditures or acquisitions or to refinance existing indebtedness;
• making it more likely that a reduction in our borrowing base following a periodic redetermination could require us to repay a portion of our then-outstanding bank
borrowings;
• making us vulnerable to increases in interest rates as the interest we pay on our indebtedness under our Credit Facility varies with prevailing interest rates;
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placing us at a competitive disadvantage relative to competitors with lower levels of indebtedness or less restrictive terms governing their indebtedness; and
• making it more difficult for us to satisfy our obligations under our senior notes or other debt and increasing the risk that we may default on our debt obligations.
Restrictive covenants in the agreements governing our indebtedness may limit our ability to respond to changes in market conditions or pursue business
opportunities. Our Credit Facility and the indentures governing our senior notes contain restrictive covenants that limit our ability to, among other things: incur additional
indebtedness including secured indebtedness; make investments; merge or consolidate with another entity; pay dividends or make certain other payments; hedge future
production or interest rates; create liens that secure indebtedness; repurchase securities; sell assets; or engage in certain other transactions without the prior consent of the
holders or lenders. As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to react to changes in market
conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures or withstand a continuing or future
downturn in our business.
In addition, our Credit Facility requires us to maintain certain financial ratios and to make certain required payments of principal, premium, if any, and interest. If we fail to
comply with these provisions or other financial and operating covenants in the Credit Facility or the indentures governing our senior notes, we could be in default under the
terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to
be due and payable, together with accrued and unpaid interest, the lenders under our Credit Facility could elect to terminate their commitments thereunder, cease making further
loans and institute foreclosure proceedings against our assets; and we could be forced into bankruptcy or liquidation.
Adverse changes in our credit rating may affect our borrowing capacity and borrowing terms. Our outstanding debt is periodically rated by nationally recognized credit
rating agencies. The credit ratings are based on our operating performance, liquidity and leverage ratios, overall financial position, and other factors viewed by the credit rating
agencies as relevant to our industry and the economic outlook. Our credit rating may affect the amount and timing of availability of capital we can access, as well as the terms
of any financing we may obtain. Because we rely in part on debt financing to fund growth, adverse changes in our credit rating may have a negative effect on our future growth.
Our borrowings under our Credit Facility expose us to interest rate risk. Our borrowings under our Credit Facility make us vulnerable to increases in interest rates as they
bear interest at a rate elected by us that is based on the prime, SOFR or federal funds rate plus margins ranging from 0.75% to 2.75%, depending on the rate used and the
amount of the loan outstanding in relation to the elected commitment.
The ability to borrow under our Credit Facility may be restricted to an amount below the amount of borrowings outstanding thereunder or to a lesser amount than
what we expect due to future borrowing base reductions or restrictions contained in our other debt agreements. The borrowing base and elected commitment amount
under our Credit Facility is currently $2.0 billion and $1.5 billion, respectively, and as of December 31, 2023, we had an aggregate principal balance of $365.0 million
outstanding thereunder. Our borrowing base is subject to redeterminations semi-annually, and a future decrease in borrowing base due to the issuance of new indebtedness, the
outcome of a subsequent borrowing base redetermination or an unwillingness or inability on the part of lending counterparties to meet their funding obligations may cause us to
not be able to access adequate funding under the Credit Facility. The lenders have sole discretion in determining the amount of the borrowing base and may cause our
borrowing base to be redetermined to a materially lower amount, including to below our outstanding borrowings as of such redetermination. In addition, our other debt
agreements contain restrictions on the incurrence of additional debt and liens which could limit our ability to borrow under our Credit Facility. If our borrowing base were to be
reduced, or if covenants in our indentures restrict our ability to access funding under the Credit Facility, we may be unable to implement our drilling and development plan,
make acquisitions or otherwise carry out business plans, which would have a material adverse effect on our financial condition and results of operations and impair our ability
to service our indebtedness. In addition, we cannot borrow amounts above the elected commitments, even if the borrowing base is greater, without new commitments being
obtained from the lenders for such incremental amounts above the elected commitments. In the event the amount outstanding under our Credit Facility exceeds the elected
commitments, we must repay such amounts
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immediately in cash. In the event the amount outstanding under our Credit Facility exceeds the redetermined borrowing base, we are required to either (i) grant liens on
additional oil and gas properties (not previously evaluated in determining such borrowing base) with a value equal to or greater than such excess, (ii) repay such excess
borrowings over six monthly installments, or (iii) elect a combination of options in clauses (i) and (ii). We may not have sufficient funds to make any required repayment. If we
do not have sufficient funds and are otherwise unable to negotiate renewals of our borrowings or arrange new financing, an event of default would occur under our Credit
Facility.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under applicable
debt instruments, which may not be successful. Our ability to make scheduled payments on or to refinance our indebtedness obligations depends on our financial condition
and operating performance, which are subject to certain financial, economic, competitive and other factors beyond our control. We may not be able to maintain a level of cash
flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund debt service obligations, we may be forced to reduce or delay investments and capital expenditures, sell assets,
seek additional capital or restructure or refinance indebtedness. These alternative measures may not be successful and may not permit us to meet scheduled debt service
obligations. Our ability to restructure or refinance indebtedness will depend on the condition of the capital markets and our financial condition at such time. Also, we may not
be able to consummate dispositions at such time on terms acceptable to us or at all, and the proceeds of any such dispositions may not be adequate to meet such debt service
obligations. Furthermore, any refinancing of indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further
restrict business operations. In addition, the terms of existing or future debt instruments may restrict us from adopting some of these alternatives. For example, our Credit
Facility currently restricts our ability to dispose of assets and our use of the proceeds from such disposition.
Any failure to make payments of interest and principal on outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm
our ability to incur additional indebtedness.
We cannot be certain that we will be able to maintain or improve our leverage position. An element of our business strategy involves maintaining a disciplined approach to
financial management. However, we are also seeking to acquire, exploit and develop additional reserves that may require the incurrence of additional indebtedness. Although
we will seek to maintain or improve our leverage position, our ability to maintain or reduce our level of indebtedness depends on a variety of factors, including future
performance and our future debt financing needs. General economic conditions, oil and natural gas prices and financial, business and other factors will also affect our ability to
maintain or improve our leverage position. Many of these factors are beyond our control.
Risks Related to Acquisitions
We may be unable to integrate successfully the operations of acquisitions with our operations, and we may not realize all the anticipated benefits of these acquisitions.
We have completed, and may in the future complete, acquisitions that include undeveloped acreage. We can offer no assurance that we will achieve the desired profitability
from our recent acquisitions or from any acquisitions we may complete in the future. In addition, failure to integrate future acquisitions successfully could adversely affect our
financial condition and results of operations.
Our acquisitions may involve numerous risks, including those related to:
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operating a larger, more complex combined organization and adding operations;
assimilating the assets, data, and operations of the acquired business, especially if the assets acquired are in a new geographic area;
acquired oil and natural gas reserves not being of the anticipated magnitude or as developed as anticipated;
the loss of significant key employees, including from the acquired business;
the inability to obtain satisfactory title to the assets we acquire;
a decrease in our liquidity if we use a portion of our available cash to finance acquisitions;
a significant increase in our interest expense or financial leverage if we incur additional debt to finance acquisitions;
the diversion of management’s attention from other business concerns, which could result in, among other things, performance shortfalls;
the failure to realize expected profitability or growth;
the failure to realize expected synergies and cost savings;
coordinating geographically disparate organizations, systems, data, and facilities;
coordinating or consolidating corporate and administrative functions;
inconsistencies in standards controls, procedures and policies; and
integrating relationships with customers, vendors and business partners.
Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays
in realizing the benefits of an acquisition. The elimination of duplicative costs, as well as the
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realization of other efficiencies related to the integration of our two companies, may not initially offset integration-related costs or achieve a net benefit in the near term or at
all.
If we consummate any future acquisitions, our capitalization and results of operation may change significantly, and you may not have the opportunity to evaluate the economic,
financial and other relevant information that we will consider in evaluating future acquisitions. The inability to effectively manage the integration of acquisitions could reduce
our focus on current operations, which in turn, could negatively impact our future results of operations.
We may fail to fully identify problems with any properties we acquire, and as such, assets we acquire may prove to be worth less than we paid because of
uncertainties in evaluating recoverable reserves and potential liabilities. We look to acquire additional acreage in Texas or other regions. Successful acquisitions require an
assessment of a number of factors, including estimates of recoverable reserves, exploration potential, future oil and natural gas prices, adequacy of title, operating and capital
costs, and potential environmental and other liabilities. Although we conduct a review that we believe is consistent with industry practices, we can give no assurance that we
have identified or will identify all existing or potential problems associated with such properties or that we will be able to mitigate any problems we do identify. Such
assessments are inexact and their accuracy is inherently uncertain. In addition, our review may not permit us to become sufficiently familiar with the properties to fully assess
their deficiencies and capabilities. We do not inspect every well. Even when we inspect a well, we do not always discover structural, subsurface, title and environmental
problems that may exist or arise. We are generally not entitled to contractual indemnification for pre-closing liabilities, including environmental liabilities. Normally, we
acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties. As a result of these factors, we may not be able to acquire
oil and natural gas properties that contain economically recoverable reserves or be able to complete such acquisitions on acceptable terms.
Risks Related to Our Hedging Program
Our hedging program may limit potential gains from increases in commodity prices, result in losses, or be inadequate to protect us against continuing and prolonged
declines in commodity prices. We enter into arrangements to hedge a portion of our production from time to time to reduce our exposure to fluctuations in oil, natural gas, and
NGL prices and to achieve more predictable cash flow. Our hedges at December 31, 2023 are in the form of collars, swaps, put and call options, basis swaps, and other
structures placed with the commodity trading branches of certain banking institutions. These hedging arrangements may limit the benefit we could receive from increases in the
market or spot prices for oil, natural gas, and NGLs. We cannot be certain that the hedging transactions we have entered into, or will enter into, will adequately protect us from
continuing and prolonged declines in oil, natural gas, and NGL prices. To the extent that oil, natural gas, and NGL prices remain at current levels or decline further, we would
not be able to hedge future production at the same pricing level as our current hedges and our results of operations and financial condition may be negatively impacted.
Our production is not fully hedged, and we are exposed to fluctuations in oil, natural gas and NGL prices and will be affected by continuing and prolonged declines in
oil, natural gas and NGL prices. The total volumes which we hedge through use of our derivative instruments varies from period to period and takes into account our view of
current and future market conditions in order to provide greater certainty of cash flows to meet our debt service costs and capital program. We generally hedge for the next 12 to
24 months. We intend to continue to hedge our production, but we may not be able to do so at favorable prices. Accordingly, our revenues and cash flows are subject to
increased volatility and may be subject to significant reduction in prices which would have a material negative impact on our results of operations.
Our hedging transactions expose us to counterparty credit risk. Our hedging transactions expose us to risk of financial loss if a counterparty fails to perform under a
derivative contract, particularly during periods of falling commodity prices. Disruptions in the financial markets or other factors outside our control could lead to sudden
decreases in a counterparty’s liquidity, which could make them unable to perform under the terms of the derivative contract. We are unable to predict sudden changes in a
counterparty’s creditworthiness or ability to perform, and even if we do accurately predict sudden changes, our ability to negate the risk may be limited depending on market
conditions at the time. If the creditworthiness of any of our counterparties deteriorates and results in their nonperformance, we could incur a significant loss.
Legal and Regulatory Risks
We are subject to stringent and complex federal, state and local laws and regulations which require compliance that could result in substantial costs, delays or
penalties. Our oil and natural gas operations are subject to various federal, state and local governmental regulations that may be changed from time to time in response to
economic and political conditions. For a discussion of the material regulations applicable to us, see “Business and Properties — Regulations.” These laws and regulations may:
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require that we acquire permits before commencing drilling;
regulate the spacing of wells and unitization and pooling of properties;
impose limitations on production or operational, emissions control and other conditions on our activities;
restrict the substances that can be released into the environment or used in connection with drilling and production activities or restrict the disposal of waste from our
operations;
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limit or prohibit drilling activities on protected areas, such as wetlands and wilderness;
impose requirements to protect our employees and mitigate safety risks;
impose penalties or other sanctions for accidental or unpermitted spills or releases from our operations; or
require measures to remediate or mitigate pollution and environmental impacts from current and former operations, such as cleaning up spills or decommissioning
abandoned wells and production facilities.
Significant expenditures may be required to comply with governmental laws and regulations applicable to us. In addition, failure to comply with these laws and regulations may
result in the assessment of administrative, civil and criminal penalties, permit revocations, requirements for additional pollution controls or injunctions limiting or prohibiting
operations.
The regulatory burden on the oil and natural gas industry increases the cost of doing business in the industry and consequently affects profitability. Additionally, Congress and
federal, state and local agencies frequently review, revise and supplement environmental laws and regulations, and such changes could result in increased costs for
environmental compliance, such as emissions monitoring and control, permitting, waste handling, storage, transport, remediation or disposal for the oil and natural gas industry
and could have a significant impact on our operating costs. In general, the oil and natural gas industry recently has been the subject of increased legislative and regulatory
attention with respect to public health and environmental matters. Even if regulatory burdens temporarily ease from time to time, the historic trend of more expansive and
stricter environmental legislation and regulations may continue in the long-term.
Further, under these laws and regulations, we could be liable for costs of investigation, removal and remediation, damages to and loss of use of natural resources, loss of profits
or impairment of earning capacity, property damages, costs of increased public services, as well as administrative, civil and criminal fines and penalties, and injunctive relief.
Certain environmental statutes, including RCRA, CERCLA, OPA and analogous state laws and regulations, impose strict, joint and several liability for costs required to
investigate, clean up and restore sites where hazardous substances or other waste products have been disposed of or otherwise released (i.e., liability may be imposed regardless
of whether the current owner or operator was responsible for the release or contamination or whether the operations were in compliance with all applicable laws at the time the
release or contamination occurred). We could also be affected by more stringent laws and regulations adopted in the future, including any related to climate change, engine and
other equipment emissions, GHGs and hydraulic fracturing. Under common law, we could be liable for injuries to people and property. We maintain limited insurance coverage
for sudden and accidental environmental damages. We do not believe that insurance coverage for environmental damages that occur over time is available at a reasonable cost.
Also, we do not believe that insurance coverage for the full potential liability that could be caused by sudden and accidental environmental damages is available at a reasonable
cost. Accordingly, we may be subject to liability in excess of our insurance coverage or we may be required to curtail or cease production from properties in the event of
environmental incidents.
Federal legislation and state and local legislative and regulatory initiatives relating to hydraulic fracturing and water disposal wells could result in increased costs and
additional operating restrictions or delays. Hydraulic fracturing is used to stimulate production of hydrocarbons from tight formations. The process involves the injection of
water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production and is typically regulated by state oil and gas commissions.
However, from time to time, the U.S. Congress has considered adopting legislation intended to provide for federal regulation of hydraulic fracturing. Legislation has been
proposed in recent sessions of Congress to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing from the definition of “underground injection”
and to require federal permitting and regulatory control of hydraulic fracturing but has not passed. Furthermore, several federal agencies have asserted regulatory authority over
certain aspects of the process. For example, the EPA regulates hydraulic fracturing with fluids containing diesel fuel under the UIC program, specifically as “Class II”
Underground Injection Control wells under the Safe Drinking Water Act. The EPA has recently taken steps to strengthen its methane standards. The November 2021 rule
intended to make the existing regulations in Subpart OOOOa more stringent and create a Subpart OOOOb to expand reduction requirements for new, modified, and
reconstructed oil and gas sources, including standards focusing on certain source types that have never been regulated under the CAA (including intermittent vent pneumatic
controllers, associated gas, and liquids unloading facilities). In addition, the November 2021 rule would establish “Emissions Guidelines,” creating a Subpart OOOOc that
would require states to develop plans to reduce methane emissions from existing sources that must be at least as effective as presumptive standards set by EPA. Additionally, in
November 2022, the EPA issued a proposed rule supplementing the November 2021 proposed rule. Among other things, the November 2022 supplemental proposed rule
removes an emissions monitoring exemption for small wellhead-only sites and creates a new third-party monitoring program to flag large emissions events, referred to in the
proposed rule as “super emitters.” In December 2023, the EPA announced a final rule, which, among other things, requires the phase out of routine flaring of natural gas from
newly constructed wells (with some exceptions) and routine leak monitoring at all well sites and compressor stations. Notably, the EPA updated the applicability date for
Subparts OOOOb and OOOOc to December 6, 2022, meaning that sources constructed prior to that date will be considered existing sources with later compliance deadlines
under state plans. The final rule gives states, along with federal tribes that wish to regulate existing sources, two years to develop and submit their plans for reducing methane
emissions from existing sources. The final emissions guidelines under Subpart OOOOc provide three years from the plan submission deadline for existing sources to comply.
We may incur significant operational costs associated with compliance with these and any new regulations.
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In some areas of Texas, including the Permian, there has been concern that certain formations into which disposal wells are injecting produced waters could become over-
pressured after many years of injection, and the RRC is reviewing the data to determine whether any regulatory action is necessary to address this issue. If the RRC were to
decline to issue permits for, or impose new limits on the volumes of, injection wells into the formations that we currently utilize, we may be required to seek alternative
methods of disposing of produced waters, including injecting into deeper formations, which could increase our costs.
Some states have adopted, and other states are considering adopting, regulations that could restrict hydraulic fracturing in certain circumstances, impose additional requirements
on hydraulic fracturing activities or otherwise require the public disclosure of chemicals used in the hydraulic fracturing process. For example, Texas law requires the chemical
components used in the hydraulic fracturing process, as well as the volume of water used, must be disclosed to the RRC and the public. The RRC’s “well integrity rule”
includes testing and reporting requirements, such as (i) the requirement to submit to the RRC cementing reports after well completion or cessation of drilling and (ii) the
imposition of additional testing on wells less than 1,000 feet below usable groundwater. Additionally, the RRC rules require applicants for certain new water disposal wells to
conduct seismic activity searches using the U.S. Geological Survey to determine the potential for earthquakes within a circular area of 100 square miles. Further, the RRC has
authority to modify, suspend or terminate a disposal well permit if scientific data indicates a disposal well is likely to contribute to seismic activity. The RRC has used this
authority to deny permits for, and limit volumes for, disposal wells. In addition to state law, local land use restrictions, such as city ordinances, may restrict or prohibit the
performance of drilling in general or hydraulic fracturing in particular.
The EPA has also issued the “Hydraulic Fracturing for Oil and Gas: Impacts from the Hydraulic Fracturing Water Cycle on Drinking Water Resources in the United States”
report, concluding that hydraulic fracturing can impact drinking water resources in certain circumstances but also noted that certain data gaps and uncertainties limited EPA’s
ability to fully characterize the severity of impacts or calculate the national frequency of impacts on drinking water resources from activities in the hydraulic fracturing water
cycle. This study could result in additional regulatory scrutiny that could restrict our ability to perform hydraulic fracturing and increase our costs of compliance and doing
business.
There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water
supplies, water usage and the potential for impacts to surface water, groundwater and the environment generally, and a number of lawsuits and enforcement actions have been
initiated across the country implicating hydraulic fracturing practices. Several states and municipalities have adopted, or are considering adopting, regulations that could restrict
or prohibit hydraulic fracturing in certain circumstances. If new laws or regulations that significantly restrict hydraulic fracturing or water disposal wells are adopted, such laws
could make it more difficult or costly for us to drill for and produce oil and natural gas as well as make it easier for third parties opposing the hydraulic fracturing process to
initiate legal proceedings. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional
permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and
abandonment requirements, permitting delays and potential increases in costs. These changes could cause us to incur substantial compliance costs, and compliance or the
consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate
the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing.
Climate change legislation or regulations restricting emissions of GHG or requiring the reporting of GHG emissions or climate-related information could adversely
impact our operating costs and demand for the oil and natural gas we produce. In recent years, federal, state and local governments have taken steps to reduce emissions
of GHGs. The EPA has finalized a series of GHG monitoring, reporting and emissions control rules and proposed additional rules, and the U.S. Congress has, from time to time,
considered adopting legislation to reduce or tax emissions. Several states have already taken measures to reduce emissions of GHGs primarily through the development of
GHG emission inventories or regional GHG cap-and-trade programs. For a description of some existing and proposed GHG rules and regulations, see “Business and Properties
—Regulations.”
In 2021, as a party to the Paris Agreement, the U.S. announced a target for the U.S. to achieve a 50% to 52% reduction from 2005 levels in economy-wide GHG emissions by
2030. In addition, in September 2021, President Biden publicly announced the Global Methane Pledge, a pact that aims to reduce global methane emissions at least 30% below
2020 levels by 2030, including “all feasible reductions” in the energy sector. Since its formal launch at the COP26, over 150 countries have joined the pledge. At the 27th
conference of parties (“COP27”), President Biden announced the EPA’s supplemental proposed rule to reduce methane emissions from existing oil and gas sources, and agreed,
in conjunction with the European Union and a number of other partner countries, to develop standards for monitoring and reporting methane emissions to help create a market
for low methane-intensity natural gas. At COP28, member countries entered into an agreement that calls for actions toward achieving, at a global scale, a tripling of renewable
energy capacity and doubling energy efficiency improvements by 2030. The goals of the agreement, among other things, are to accelerate efforts toward the phase-down of
unabated coal power, phase out inefficient fossil fuel subsidies, and take other measures that drive the transition away from fossil fuels in energy systems. Various state and
local governments have also publicly committed to furthering the goals of the Paris Agreement. In addition, a number of states have begun taking actions to control or reduce
emissions of GHGs.
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Restrictions on GHG emissions that may be imposed could adversely affect the oil and gas industry. The adoption of legislation or regulatory programs to reduce or control
GHG emissions or that require the reporting of GHG emissions or other climate-related information could result in increased operational complexity, production delays,
increased potential for regulatory fines and penalties, and require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to
acquire emissions allowances or comply with new regulatory requirements, and to monitor and report on GHG emissions. Any GHG emissions legislation or regulatory
programs applicable to power plants or refineries could also increase the cost of consuming, and thereby reduce demand for, the oil and natural gas we produce. Moreover,
incentives or requirements to conserve energy, use alternative energy sources, reduce GHG emissions in product supply chains, and increase demand for low-carbon fuel or
zero-emissions vehicles, could reduce demand for the oil and natural gas we produce. International commitments, re-entry into the Paris Agreement, and President Biden’s
executive orders may result in the development of additional regulations or changes to existing regulations. At the federal level, although no comprehensive climate change
legislation regulating the emission of GHGs or directly imposing a price on carbon has been implemented to date, such legislation has periodically been introduced in the U.S.
Congress and may be proposed or adopted in the future, and energy legislation and other regulatory initiatives have been proposed that are relevant to GHG emissions issues.
The $1 trillion legislative infrastructure package passed by Congress in November 2021 includes a number of climate-focused spending initiatives targeted at climate resilience,
enhanced response and preparation for extreme weather events and clean energy and transportation investments. The IRA also provides significant funding and incentives for
research and development of low-carbon energy production methods, carbon capture and other programs directed at addressing climate change. For example, the IRA imposes a
fee on GHG emissions from certain oil and gas facilities. The IRA amends the CAA to include a Methane Emissions and Waste Reduction Incentive Program, which requires
the EPA to impose a “waste emissions charge” on certain natural gas and oil sources that are already required to report under the EPA’s Greenhouse Gas Reporting Program. To
implement the program, the IRA requires revisions to GHG reporting regulations for petroleum and natural gas systems (Subpart W) by 2024. In July 2023, the EPA proposed
to expand the scope of the Greenhouse Gas Reporting Program for petroleum and natural gas facilities, as required by the IRA. Among other things, the proposed rule would
expand the emissions events that are subject to reporting requirements to include “other large release events” and apply reporting requirements to certain new sources and
sectors. The rule is expected to be finalized in the spring of 2024 and become effective on January 1, 2025 in advance of the deadline for GHG reporting for 2024 (March
2025). The fee imposed under the Methane Emissions and Waste Reduction Incentive Program for 2024 would be $900 per ton emitted over annual methane emissions
thresholds, and would increase to $1,200 in 2025, and $1,500 in 2026. The emissions fee and funding provisions of the law could increase operating costs within the oil and gas
industry and accelerate the transition away from fossil fuels, which could in turn adversely affect our and our customers’ business and results of operations. Additionally, the
SEC issued a proposed rule in March 2022 that would mandate extensive disclosure of climate-related data, risks and opportunities, including financial impacts, physical and
transition risks, related governance and strategy and GHG emissions, for certain public companies, and a final rule is anticipated in April 2024. We cannot predict the costs of
implementation or any potential adverse impacts resulting from the rulemaking. To the extent this rulemaking is finalized as proposed, we could incur increased costs relating to
the assessment and disclosure of climate-related risks. We may also face increased litigation risks related to disclosures made pursuant to the rule if finalized as proposed. In
addition, enhanced climate disclosure requirements could accelerate the trend of certain stakeholders and lenders restricting or seeking more stringent conditions with respect to
their investments in certain carbon-intensive sectors. Consequently, legislation and regulatory programs to reduce or require reporting relating to GHG emissions or other
climate-related information could have an adverse effect on our business, financial condition and results of operations.
In addition, fuel conservation measures, alternative fuel requirements and increasing consumer demand for alternatives to oil and natural gas could reduce demand for oil and
natural gas, and activism, litigation and initiatives aimed at limiting climate change and reducing air pollution could impact our business activities, operations and ability to
access capital. For further discussion on transition risks related to climate change legislation and regulation, see “—Our business is subject to climate-related transition risks,
including evolving climate change legislation, fuel conservation measures, technological advances and negative shift in market perception towards the oil and natural gas
industry could result in increased operating expenses and capital costs, financial risks and potential reduction in demand for oil and natural gas” and “—Negative public
perception of the oil and gas industry could have a material and adverse effect on us.”
Current or proposed financial legislation and rulemaking could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity
price, interest rate and other risks associated with our business. Title VII of the Dodd-Frank Act establishes federal oversight and regulation of over-the-counter derivatives
and requires the CFTC and the SEC to enact further regulations affecting derivative contracts, including the derivative contracts we use to hedge our exposure to price volatility
through the over-the-counter market.
Although the CFTC and the SEC have issued final regulations in certain areas, final rules in other areas, including the scope of relevant definitions or exemptions, remain
pending. The CFTC issued a final rule on margin requirements for uncleared swap transactions in January 2016, which it amended in November 2018. The final rule as
amended includes an exemption for certain commercial end-users that enter into uncleared swaps in order to hedge bona fide commercial risks affecting their business. In
addition, the CFTC has issued a final rule authorizing an exception from the requirement to use cleared exchanges (rather than hedging over-the-counter) for commercial end-
users who use swaps to hedge their commercial risks. The Dodd-Frank Act also
43
imposes recordkeeping and reporting obligations on counterparties to swap transactions and other regulatory compliance obligations. On January 24, 2020, U.S. banking
regulators published a new approach for calculating the quantum of exposure of derivative contracts under their regulatory capital rules. This approach to measuring exposure is
referred to as the standardized approach for counterparty credit risk or SA-CCR. It requires certain financial institutions to comply with significantly increased capital
requirements for over-the-counter commodity derivatives. In addition, on September 15, 2020, the CFTC issued a final rule regarding the capital a swap dealer or major swap
participant is required to set aside with respect to its swap business. These two sets of regulations and the increased capital requirements they place on certain financial
institutions may reduce the number of products and counterparties in the over-the-counter derivatives market available to us and could result in significant additional costs
being passed through to end-users like us. On January 14, 2021, the CFTC published a final rule on position limits for certain commodities futures and their economically
equivalent swaps, though like several other rules there is a bona fide hedging exemption to the application of such rule. All of the above regulations could increase the costs to
us of entering into financial derivative transactions to hedge or mitigate our exposure to commodity price volatility and other commercial risks affecting our business.
Depending on our ability to satisfy the CFTC’s requirements for the various exemptions available for a commercial end-user using swaps to hedge or mitigate its commercial
risks, the final rules may provide beneficial exemptions and/or may require us to comply with position limits and other limitations with respect to our financial derivative
activities. The Dodd-Frank Act may require our current counterparties to post additional capital as a result of entering into uncleared financial derivatives with us, which could
increase the cost to us of entering into such derivatives. The Dodd-Frank Act may also require our current counterparties to financial derivative transactions to cease their
current business as hedge providers or spin off some of their derivatives activities to separate entities, which may not be as creditworthy as the current counterparties. These
potential changes could reduce the liquidity of the financial derivatives markets which would reduce the ability of commercial end-users like us to hedge or mitigate their
exposure to commodity price volatility. The Dodd-Frank Act and any new regulations could significantly increase the cost of derivative contracts, materially alter the terms of
future swaps relative to the terms of our existing financial derivative contracts, and reduce the availability of derivatives to protect against commercial risks we encounter.
If we reduce our use of derivative contracts as a result of any of the foregoing new requirements, our results of operations may become more volatile and cash flows less
predictable, which could adversely affect our ability to plan for and fund capital expenditures. Our revenues could be adversely affected if a consequence of the legislation and
regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on our consolidated financial position, results of operations, or cash
flows.
Tax Risks
Our ability to use our existing net operating loss (“NOL”) carryforwards or other tax attributes could be limited. A significant portion of our NOL carryforward balance
was generated prior to the effective date of limitations on utilization of NOLs imposed by the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) and are allowable as a deduction
against 100% of taxable income in future years, but will start to expire in the 2035 taxable year. The remainder were generated following such effective date and, thus,
generally allowable as a deduction against 80% of taxable income in future years (with an exception to this rule due to the enactment of the Coronavirus Aid, Relief, and
Economic Security Act, whereby the utilization of NOLs was temporarily expanded for taxable years beginning before 2021). Utilization of any NOL carryforwards depends on
many factors, including our ability to generate future taxable income, which cannot be assured. In addition, Section 382 (“Section 382”) of the Internal Revenue Code of 1986,
as amended (the “Code”), generally imposes, upon the occurrence of an ownership change (discussed below), an annual limitation on the amount of our pre-ownership change
NOLs we can utilize to offset our taxable income in any taxable year (or portion thereof) ending after such ownership change. The limitation is generally equal to the value of
our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate. In general, an ownership change occurs if there is a cumulative increase in
our ownership of more than 50 percentage points by one or more “5% shareholders” (as defined in the Code) at any time during a rolling three-year period. Future ownership
changes and/or future regulatory changes could further limit our ability to utilize our NOLs. To the extent we are not able to offset our future income with our NOLs, this could
adversely affect our operating results and cash flows once we attain profitability.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial
condition and results of operations. We are subject to income taxes in the U. S., and our domestic tax assets and liabilities are subject to the allocation of expenses in differing
jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including the following: changes in the valuation of our
deferred tax assets and liabilities; expected timing and amount of the release of any tax valuation allowances; tax effects of stock-based compensation; costs related to
intercompany restructurings; changes in tax laws, regulations or interpretations thereof; or lower than anticipated future earnings in our taxing jurisdictions. In addition, we may
be subject to audits of our income, sales and other transaction taxes by U.S. federal and state authorities. Outcomes from these audits could have an adverse effect on our
financial condition and results of operations.
Tax laws may change over time and such changes could adversely affect our business and financial condition. From time to time, legislation has been proposed that, if
enacted into law, would make significant changes to U.S. federal and state income tax laws,
44
including (i) the elimination of the immediate deduction for intangible drilling and development costs, (ii) changes to a depletion allowance for oil and natural gas properties,
(iii) the implementation of a carbon tax, (iv) an extension of the amortization period for certain geological and geophysical expenditures, (v) changes to tax rates, and (vi) the
introduction of a minimum tax. While these specific changes were not included in recent legislation such as the IRA, no accurate prediction can be made as to whether any such
legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. The elimination of
U.S. federal tax deductions, as well as any other changes to or the imposition of new federal, state, local or non-U.S. taxes (including the imposition of, or increases in
production, severance or similar taxes) could adversely affect our business and financial condition.
Other Material Risks
Competitive industry conditions may negatively affect our ability to conduct operations. We compete with numerous other companies in virtually all facets of our
business. Our competitors in development, exploration, acquisitions and production include major integrated oil and gas companies and smaller independents as well as
numerous financial buyers. Some of our competitors may be able to pay more for desirable leases and evaluate, bid for and purchase a greater number of properties or prospects
than our financial or personnel resources permit. We also compete for the materials, equipment, personnel and services that are necessary for the exploration, development and
operation of our properties. Our ability to increase reserves in the future will be dependent on our ability to select and acquire suitable prospects for future exploration and
development.
All of our producing properties are located in the Permian of West Texas, making us vulnerable to risks associated with operating in only one geographic region. As a
result of this concentration, as compared to companies that have a more diversified portfolio of properties, we may be disproportionately exposed to the impact of regional
supply and demand factors, severe weather, water shortages and other disruptions to climate patterns, delays or interruptions of production from wells in this area caused by
governmental regulation, specific taxes or other regulatory legislation, processing or transportation capacity constraints, availability of equipment, facilities, personnel or
services, or market limitations or interruption of the processing or transportation of oil, natural gas or NGLs. Such delays, interruptions or limitations could have a material
adverse effect on our financial condition and results of operations. In addition, the effect of fluctuations on supply and demand may be more pronounced within specific
geographic oil and natural gas producing areas, which may cause these conditions to occur with greater frequency or magnify the effects of these conditions.
The results of our planned development programs in new or emerging shale development areas and formations may be subject to more uncertainties than programs
in more established areas and formations and may not meet our expectations for reserves or production. The results of our horizontal drilling efforts in emerging areas
and formations of the Permian are generally more uncertain than drilling results in areas that are more developed and have more established production from horizontal
formations. Because emerging areas and associated target formations have limited or no production history, we are less able to rely on past drilling results in those areas as a
basis to predict our future drilling results. In addition, horizontal wells drilled in shale formations, as distinguished from vertical wells, utilize multilateral wells and stacked
laterals, all of which are subject to well spacing, density and proration requirements of the RRC, which requirements could adversely impact our ability to maximize the
efficiency of our horizontal wells related to reservoir drainage over time. Further, access to adequate gathering systems or pipeline takeaway capacity and the availability of
drilling rigs and other services may be more challenging in new or emerging areas. If our drilling results in these areas are less than anticipated or we are unable to execute our
drilling program in these areas because of capital constraints, access to gathering systems and takeaway capacity or otherwise, or natural gas and oil prices decline, our
investment in these areas may not be as economic as we anticipate, we could incur material write-downs of unproved properties and the value of our undeveloped acreage could
decline in the future.
The loss of key personnel, or inability to employ a sufficient number of qualified personnel, could adversely affect our ability to operate. We depend, and will continue
to depend in the foreseeable future, on the services of our senior officers and other key employees, as well as other third-party consultants with extensive experience and
expertise in evaluating and analyzing drilling prospects and producing oil and natural gas and maximizing production from oil and natural gas properties. Our ability to retain
our senior officers, other key employees, and third-party consultants, many of whom are not subject to employment agreements, is important to our future success and growth.
The unexpected loss of the services of one or more of these individuals could have a detrimental effect on our business. Also, we may experience employee turnover or labor
shortages if our business requirements, compensation, benefits and/or perquisites are inconsistent with the expectations of current or prospective employees, or if workers
pursue employment in fields with less volatility than in the energy industry. If we are unsuccessful in our efforts to attract and retain sufficient qualified personnel on terms
acceptable to us, or do so at rates necessary to maintain our competitive position, our business could be adversely affected.
The inability of one or more of our customers to meet their obligations to us may adversely affect our financial results. Our principal exposure to credit risk is through
receivables resulting from the sale of our oil and natural gas production, advances to joint interest parties and joint interest receivables. We are also subject to credit risk due to
the concentration of our oil and natural gas receivables with several significant customers. The largest purchaser of our oil and natural gas accounted for approximately 13% of
45
our total revenues for the year ended December 31, 2023. The inability or failure of our significant customers to meet their obligations to us or their insolvency or liquidation
may adversely affect our financial results.
Our bylaws designate the Court of Chancery of the State of Delaware (the “Court of Chancery”) as the sole and exclusive forum for certain types of actions and
proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our
directors, officers, or other employees. Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any
derivative action or proceeding brought on our behalf, (ii) any action or proceeding asserting a claim for breach of a fiduciary duty owed by any current or former director,
officer, or other employee of our company to us or our shareholders, (iii) any action or proceeding asserting a claim against us or any current or former director, officer, or other
employee of our company arising pursuant to any provision of the Delaware General Corporate Law (the “DGCL”) or our charter or bylaws (as each may be amended from
time to time), (iv) any action or proceeding asserting a claim against us or any current or former director, officer, or other employee of our company governed by the internal
affairs doctrine, or (v) any action or proceeding as to which the DGCL confers jurisdiction on the Court of Chancery shall be the Court of Chancery or, if and only if the Court
of Chancery lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if such state courts lack subject matter jurisdiction, the federal
district court for the District of Delaware, in all cases to the fullest extent permitted by law and subject to the court’s having personal jurisdiction over the indispensable parties
named as defendants.
Our exclusive forum provision is not intended to apply to claims arising under the Securities Act or the Exchange Act. To the extent the provision could be construed to apply to
such claims, there is uncertainty as to whether a court would enforce the forum selection provision with respect to such claims, and in any event, our shareholders would not be
deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing forum
selection provision. This provision may limit our shareholders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers,
or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one
or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely
affect its business, financial condition, prospects, or results of operations.
Provisions of our charter documents and Delaware law may inhibit a takeover, which could limit the price investors might be willing to pay in the future for our
common stock. Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing an acquisition of the Company or a merger in which we
are not the surviving company and may otherwise prevent or slow changes in our Board of Directors and management. In addition, because we are incorporated in Delaware,
we are governed by the provisions of Section 203 of the DGCL. These provisions could discourage an acquisition of the Company or other change in control transactions and
thereby negatively affect the price that investors might be willing to pay in the future for our common stock.
We do not currently pay cash dividends on our common stock. We do not currently pay dividends on our common stock and any future determination as to the declaration
and payment of cash dividends will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, contractual restrictions,
capital requirements, business prospects and other factors deemed relevant by our Board of Directors at the time of such determination. Consequently, a shareholder’s only
current opportunity to achieve a return on its investment in us will be by selling its shares of our common stock at a price greater than the shareholder paid for it. There is no
guarantee that the price of our common stock that will prevail in the market will exceed the price at which a shareholder purchased its shares of our common stock.
General Risk Factors
Declining general economic, business or industry conditions and inflation may have a material adverse effect on our results of operations, liquidity and financial
condition. Concerns over global economic conditions, energy costs, supply chain disruptions, increased demand, labor shortages associated with a fully employed U.S. labor
force, geopolitical issues, inflation, the availability and cost of credit and the United States financial market and other factors have contributed to increased economic
uncertainty and diminished expectations for the global economy. Although inflation in the United States had been relatively low for many years, there was a significant increase
in inflation beginning in the second half of 2021, which has continued into 2022, 2023 and thus far into 2024 (although it has begun to moderate) due to a substantial increase
in money supply, a stimulative fiscal policy, a significant rebound in consumer demand as COVID-19 restrictions were relaxed, the Russia-Ukraine war and worldwide supply
chain disruptions resulting from the economic contraction caused by COVID-19 and lockdowns followed by a rapid recovery. We continue to undertake actions and implement
plans to strengthen our supply chain to address these pressures and protect the requisite access to commodities and services, and we are working closely with suppliers and
contractors to ensure availability of supplies on site, especially fuel, steel and chemical suppliers which are critical to many of our operations. However, these mitigation efforts
may not succeed or may be insufficient, and we expect for the foreseeable future to experience supply chain constraints and inflationary pressure on our cost structure.
Principally, commodity costs for steel and chemicals required for drilling, higher transportation and fuel costs and wage
46
increases have increased our operating costs for the year ended December 31, 2023 compared to 2022, which was higher as compared to 2021. We also may face shortages of
these commodities and labor, which may prevent us from executing our development plan. These supply chain constraints and inflationary pressures will likely continue to
adversely impact our operating costs and, if we are unable to manage our supply chain, it may impact our ability to procure materials and equipment in a timely and cost-
effective manner, if at all, which could impact our ability to distribute available cash and result in reduced margins and production delays and, as a result, our business, financial
condition, results of operations and cash flows could be materially and adversely affected.
We are taking actions to mitigate supply chain and inflationary pressures.
In addition, continued hostilities related to the Russian invasion of Ukraine, the conflict in Israel and the occurrence or threat of terrorist attacks in the United States or other
countries could adversely affect the global economy. These factors and other factors, combined with volatile commodity prices, and declining business and consumer
confidence may contribute to an economic slowdown and a recession. Recent growing concerns about global economic growth have had a significant adverse impact on global
financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which
could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and ultimately adversely impact our
business, financial condition and results of operations.
We may be subject to the actions of activist shareholders. We have been the subject of an activist shareholder in the past. Responding to shareholder activism can be costly
and time-consuming, disrupt our operations and divert the attention of management and our employees from executing our business plan. Activist campaigns can create
perceived uncertainties as to our future direction, strategy or leadership and may result in the loss of potential business opportunities, harm our ability to attract new investors,
customers and joint venture partners and cause our stock price to experience periods of volatility or stagnation. Moreover, if individuals are elected to our Board of Directors
with a specific agenda, our ability to effectively and timely implement our current initiatives, retain and attract experienced executives and employees and execute on our long-
term strategy may be adversely affected.
Future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of our common stock or
other securities may dilute a shareholder’s ownership in us. In the future, we may continue to issue securities to raise capital. We may also continue to acquire interests in
other companies by using any combination of cash and our common stock or other securities convertible into, or exchangeable for, or that represent the right to receive, our
common stock. Any of these events may dilute your ownership interest in our company, reduce our earnings per share or have an adverse impact on the price of our common
stock. In addition, secondary sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market
price of our common stock. Any such reduction in the market price of our common stock could impair our ability to raise additional capital through the sale of our securities.
ITEM 1B. Unresolved Staff Comments
None.
47
ITEM 1C. Cybersecurity
The Board of Directors recognizes the critical importance of maintaining the trust and confidence of our suppliers, customers, other business partners and employees. The
Board of Directors is actively involved in oversight of the Company’s risk management program, and cybersecurity represents an important component of the Company’s
overall approach to enterprise risk management (“ERM”). The Company’s cybersecurity policies, standards, processes, and practices are fully integrated into the Company’s
ERM program and are based on recognized frameworks established by the National Institute of Standards and Technology. In general, the Company seeks to address
cybersecurity risks through a comprehensive, cross-functional approach that is focused on preserving the confidentiality, security, and availability of the information that the
Company collects and stores by identifying, preventing, and mitigating any cybersecurity threats and effectively responding to cybersecurity incidents should they occur.
As of the date of this 2023 Annual Report on Form 10-K, the Company is not aware of any cybersecurity threats that have materially affected or are reasonably likely to
materially affect the Company, including its business strategy, results of operations, or financial condition. However, as discussed under “Item 1A. Risk Factors,” specifically
the risk titled “Our business could be negatively affected by security threats. A cyberattack or similar incident could occur and result in information theft, data corruption,
operational disruption, damage to our reputation or financial loss,” the sophistication of cyberattacks continues to increase, and the preventative actions the Company takes to
reduce the risk of cyber incidents and protect its systems and information may be insufficient. Accordingly, no matter how well the Company’s controls are designed or
implemented, it will not be able to anticipate all security breaches, and it may not be able to implement effective preventive measures against such security breaches in a timely
manner. In light of these risks, the Company has also developed cybersecurity detection and response protocols as described below to attempt to mitigate the impact in the event
of a breach.
Risk Management and Strategy
As one of the critical elements of the Company’s overall ERM approach, the Company’s cybersecurity program is focused on the following key areas:
• Governance – The Board of Directors has responsibility for oversight of cybersecurity risk management and regularly interacts with the Company’s ERM function,
the Company’s Chief Information Officer (“CIO”), and other members of management.
•
•
•
•
•
Collaborative Approach – The Company has implemented a comprehensive, cross-functional approach to identifying, preventing, and mitigating cybersecurity
threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions
regarding the public disclosure and reporting of such incidents can be made by management in a timely manner. The Company also collaborates with others in the
industry and actively participates in a specific oil and gas threat intelligence group with weekly meetings and up-to-date threat notices.
Technical Safeguards – The Company deploys technical safeguards that are designed to protect its information systems from cybersecurity threats, including
firewalls, intrusion prevention and detection systems, anti-malware software and access controls, which are evaluated and improved through vulnerability assessments
and cybersecurity threat intelligence. The Company performs an annual penetration test for identification of any vulnerabilities; in 2023, this test was performed by a
third-party audit firm.
Incident Response and Recovery Planning – The Company has established and maintains comprehensive incident response and recovery plans that address the
Company’s response to a cybersecurity incident, and such plans are tested and evaluated on a regular basis, with the participation of executive officers and employees
in our IT, legal and operations departments.
Third-Party Risk Management – The Company maintains a comprehensive, risk-based approach to identifying and overseeing cybersecurity risks presented by third
parties, including vendors, service providers and other external users of the Company’s systems, as well as the systems of third parties that could adversely impact our
business. In 2023, the Company completed a comprehensive review of certain third-party providers that have access to the Company’s data, such as banks, and SaaS
vendors, and implemented a third-party risk management service which (i) allows for comprehensive vendor assessments with risk scoring, (ii) informs risk decisions
with increased visibility and cybersecurity ratings, (iii) continuously monitors for vendor breaches and other significant events via various data feeds, and (iv) allows
for collaboration with vendors to assess and remediate risk.
Education and Awareness – The Company provides regular, mandatory training for personnel regarding cybersecurity threats as a means to equip the Company’s
personnel with effective tools to address cybersecurity threats, and to communicate the Company’s evolving information security policies, standards, processes, and
practices. In addition to our annual required training, the Company promotes awareness through regular phishing simulations and educational opportunities, including
an FBI-led training in 2023.
The Company engages in the periodic assessment and testing of the Company’s policies, standards, processes, and practices that are designed to address cybersecurity threats
and incidents. These efforts include a wide range of activities, including audits, assessments, tabletop exercises, threat modeling, vulnerability management, and other exercises
focused on evaluating the effectiveness of our
48
cybersecurity measures and planning. The Company regularly engages third parties to perform assessments on our cybersecurity measures, including information security
maturity and risk assessments, audits and independent reviews of our information security control environment and operating effectiveness. The results of such assessments,
audits and reviews are reported to the Board of Directors, and the Company adjusts its cybersecurity policies, standards, processes, and practices as necessary based on the
information provided by these assessments, audits, and reviews.
Governance
The Board of Directors oversees the Company’s ERM program, including the management of risks arising from cybersecurity threats. On an annual basis, the Board of
Directors discusses the Company’s approach to cybersecurity risk management with the CIO. The Board of Directors also receives regular presentations and reports on
cybersecurity risks, which address a wide range of topics including recent developments, evolving standards, vulnerability assessments, third-party and independent reviews,
the threat environment, technological trends and information security considerations arising with respect to the Company’s peers and third parties.
The CIO, in coordination with the Company’s executive team, works collaboratively across the Company to implement a program designed to protect the Company’s
information systems from cybersecurity threats and to promptly respond to any cybersecurity incidents in accordance with the Company’s incident response and recovery plans.
To facilitate the success of the Company’s cybersecurity risk management program, multidisciplinary teams throughout the Company are deployed to address cybersecurity
threats and to respond to cybersecurity incidents. Through ongoing communications with these teams, the CIO oversees the monitoring, prevention, detection, mitigation, and
remediation of cybersecurity threats and incidents, and reports such threats and incidents to the Board of Directors when appropriate. The CIO is supported by, among others, a
Cybersecurity Architect who is a Certified Information Systems Security Professional (CISSP) and an Application Director who is Certified in Risk and Information Systems
Control.
Angelina C. Day has served as the Company’s Vice President and CIO since July 2022. In this role, she is responsible for all aspects of information technology, including
cybersecurity. Prior to joining the Company, Ms. Day was IT Director at EP Energy Corporation, an independent E&P company, from May 2012 until March 2022, where she
oversaw the information technology and security functions. Prior to EP Energy, Ms. Day held various roles with increasing responsibility in technology and leadership at El
Paso Corporation. Ms. Day has over 20 years of energy, technology and risk management experience. She is also a member of the Houston CIO Community (Evanta)
Governing Body, an organization that fosters collaboration and knowledge sharing across the Houston CIO community. Ms. Day holds a B.B.A. in Computer Information
Systems from the University of Houston Downtown.
Supporting our CIO in assessing and managing the Company’s material risks from cybersecurity threats are the Company’s COO, CFO, and General Counsel, each of whom
have over 20 years of experience managing risks at the Company and at similar companies, including risks arising from cybersecurity threats.
ITEM 3. Legal Proceedings
We are a party in various legal proceedings and claims, which arise in the ordinary course of our business. While the outcome of these events cannot be predicted with certainty,
we believe that the ultimate resolution of any such actions will not have a material effect on our financial position or results of operations.
As previously reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, in January 2022, we received a Notice of Violation from the United States
Environmental Protection Agency (the “EPA”) related to the Clean Air Act. As previously reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023,
to resolve the alleged violations, on June 9, 2023, we agreed to a Consent Agreement and Final Order (“CAFO”) with the EPA, which became effective June 20, 2023. The
CAFO assessed a civil penalty in the amount of approximately $1.3 million and requires us to perform certain actions over the course of the next year, including facility
reviews, additional monitoring, and the submission of a final letter report in June 2024. We have begun implementing the requirements of the CAFO. We believe that the
settlement was in the best interests of the Company and its shareholders to avoid the uncertainty, risk, expense, and distraction of protracted litigation.
ITEM 4. Mine Safety Disclosures
Not applicable.
49
PART II.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock trades on the NYSE under the symbol “CPE.”
Holders
As of February 16, 2024 the Company had approximately 1,002 common stockholders of record.
Issuer Repurchases of Equity Securities
Our common stock repurchase activity for the year ended December 31, 2023 was as follows:
Period
July 1 - July 31, 2023
August 1 - August 31, 2023
September 1 - September 30, 2023
October 1 - October 31, 2023
November 1 - November 30, 2023
December 1 - December 31, 2023
Total
Total Number of
Shares Purchased
Average Price
Paid Per Share
(1)
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
Approximate Dollar Value of
Shares that May Yet Be Purchased
Under the Plans or Programs
(2)
—
81,574
305,145
—
942,536
322,397
1,651,652
$—
$36.22
$39.38
$—
$32.89
$29.47
$33.59
—
81,574
305,145
—
942,536
322,397
1,651,652
$300,000,000
$300,000,000
$297,045,600
$285,027,986
$285,027,986
$254,028,104
$244,528,169
(1) The average price paid per share excludes any fees, commissions and expenses paid to repurchase stock.
(2) On May 3, 2023, we announced that on May 2, 2023, the Board of Directors approved the Share Repurchase Program pursuant to which we are authorized to repurchase up to $300.0 million
of our outstanding common stock through the second quarter of 2025. Repurchases under the Share Repurchase Program may be made, from time to time, in amounts and at prices we deem
appropriate and will be subject to a variety of factors, including the market price of our common stock, general market and economic conditions and applicable legal requirements. The Share
Repurchase Program will expire on June 30, 2025 but may be suspended, modified or discontinued by the Board of Directors at any time without prior notice.
We are restricted from making share repurchases during the period between the execution of the Merger Agreement and the Effective Time (or, if applicable, the termination
date) without APA’s approval pursuant to covenants of Callon included within the Merger Agreement.
Dividends
We have not paid any cash dividends on our common stock to date. However, we continuously monitor many internal and external factors as we consider when, or if, we should
implement shareholder return programs. These factors include our current and projected financial performance; our debt metrics, covenants and absolute amounts borrowed;
commodity price outlooks; cash requirements; corporate and strategic plans; and macroeconomic indicators. In addition, the Merger Agreement contains certain restrictions that
limit our ability to pay dividends. Ultimately, the timing, amount and form of shareholder return programs, if any, is subject to the discretion of our Board of Directors and to
certain limitations imposed under Delaware corporate law and the agreements governing our debt obligations.
50
ITEM 6. Reserved
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis describes the principal factors affecting our results of operations, liquidity, capital resources and contractual cash
obligations. This discussion should be read in conjunction with the accompanying audited consolidated financial statements, information about our business practices,
significant accounting policies, risk factors, and the transactions that underlie our financial results, which are included in various parts of this filing.
A discussion and analysis of the Company’s financial condition and results of operations for the year ended December 31, 2021 can be found in “Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations” of its Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the
SEC on February 23, 2023.
Financial information for all prior periods has been recast to reflect the retrospective application of the successful efforts method of accounting, as discussed under “Note 2 —
Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in this Form 10-K.
General
We are an independent oil and natural gas company focused on the acquisition, exploration and sustainable development of high-quality assets in the Permian Basin in West
Texas. Our operating culture is centered on responsible development of hydrocarbon resources, safety and the environment, which we believe strengthens our operational
performance. Our drilling activity is predominantly focused on the horizontal development of several prospective intervals in the Permian, including multiple layers of the
Wolfcamp and Bone Springs formations and the Spraberry shale. We have assembled a decade-plus inventory of potential horizontal well locations and intend to add to this
inventory through delineation drilling of emerging zones on our existing acreage and through the acquisition of additional locations through working interest acquisitions,
leasing programs, acreage purchases, joint ventures and asset swaps.
Merger Agreement
On January 3, 2024, we entered into the Merger Agreement, which provides that, among other things and subject to the terms and conditions therein, (i) Merger Sub will be
merged with and into Callon, with Callon surviving and continuing as the surviving corporation in the Merger and becoming a subsidiary of APA, and (ii) at the Effective Time,
each outstanding share of common stock of Callon (other than Excluded Shares (as defined in the Merger Agreement)) will be converted into the right to receive, without
interest, 1.0425 shares of common stock of APA, with cash in lieu of fractional shares.
The completion of the Merger is subject to satisfaction or waiver of certain customary mutual closing conditions, and the Merger Agreement contains certain termination rights
for each of APA and Callon. In certain circumstances, a termination fee would be payable by the terminating party.
If the Merger is consummated, our common stock will be delisted from the NYSE and deregistered under the Securities Exchange Act of 1934, and Callon will cease to be a
publicly traded company.
For additional discussion of the Merger, please see “Part I. Items 1 and 2. Business and Properties — Merger Agreement.”
Financial and Operational Highlights
For discussion of our significant financial and operational highlights for the year ended December 31, 2023, please see “Part I. Items 1 and 2. Business and Properties — Major
Developments in 2023”.
51
Results of Operations
Production
Total production
Oil (MBbls)
Permian
Eagle Ford
Total oil
Natural gas (MMcf)
Permian
Eagle Ford
Total natural gas
NGLs (MBbls)
Permian
Eagle Ford
Total NGLs
Total production (MBoe)
Permian
Eagle Ford
Total barrels of oil equivalent
Total daily production (Boe/d)
Percent of total daily production
Oil
Natural gas
NGLs
2023
Years Ended December 31,
$ Change
2022
% Change
19,658
2,233
21,891
43,437
2,672
46,109
7,554
457
8,011
34,452
3,135
37,587
102,977
18,041
5,598
23,639
35,519
6,108
41,627
6,424
1,052
7,476
30,385
7,668
38,053
104,254
58 %
21 %
21 %
62 %
18 %
20 %
1,617
(3,365)
(1,748)
7,918
(3,436)
4,482
1,130
(595)
535
4,067
(4,533)
(466)
(1,277)
9 %
(60 %)
(7 %)
22 %
(56 %)
11 %
18 %
(57 %)
7 %
13 %
(59 %)
(1 %)
(1 %)
(4 %)
3 %
1 %
The decrease in production for the year ended December 31, 2023 compared to the same period of 2022 was primarily due to the Eagle Ford Divestiture, oil volumes that were
negatively impacted by weather-related power and midstream disruptions in the third quarter, and normal production decline, partially offset by the Percussion Acquisition.
52
Pricing
(1)
Benchmark prices
WTI (per Bbl)
Henry Hub (per Mcf)
Average realized sales price (excluding impact of derivative settlements)
Oil (per Bbl)
Permian
Eagle Ford
Total oil
Natural gas (per Mcf)
Permian
Eagle Ford
Total natural gas
NGL (per Bbl)
Permian
Eagle Ford
Total NGL
Total average realized sales price (per Boe)
Permian
Eagle Ford
Total average realized sales price
(1) Reflects calendar average daily spot market prices.
Revenues
Revenues for the year ended December 31, 2022
(1)
Volume increase (decrease)
Price decrease
Net decrease
Revenues for the year ended December 31, 2023
(1)
Percent of total revenues
2023
$77.64
2.67
$77.81
75.01
77.52
1.74
2.64
1.79
21.86
20.26
21.77
51.38
58.63
$51.98
Years Ended December 31,
$ Change
2022
% Change
$94.26
6.54
$95.58
96.15
95.72
5.44
6.47
5.59
35.18
32.80
34.84
70.55
79.84
$72.42
($16.62)
(3.87)
($17.77)
(21.14)
(18.20)
(3.70)
(3.83)
(3.80)
(13.32)
(12.54)
(13.07)
(19.17)
(21.21)
($20.44)
(18 %)
(59 %)
(19 %)
(22 %)
(19 %)
(68 %)
(59 %)
(68 %)
(38 %)
(38 %)
(38 %)
(27 %)
(27 %)
(28 %)
Oil
Natural Gas
NGLs
Total
$2,262,647
(167,313)
(398,308)
(565,621)
$1,697,026
(In thousands)
$232,681
25,053
(175,266)
(150,213)
$82,468
$260,472
18,640
(104,705)
(86,065)
$174,407
$2,755,800
(123,620)
(678,279)
(801,899)
$1,953,901
87 %
4 %
9 %
(1) Excludes sales of oil and gas purchased from third parties and sold to our customers.
The decrease in revenues for the year ended December 31, 2023 compared to the same period of 2022 was primarily due to a 28% decrease in the average realized sales price,
which decreased to $51.98 per Boe from $72.42 per Boe, as shown above.
Operating Expenses
Lease Operating Expenses
Permian
Eagle Ford
Lease operating
2023
2022
Total Change
Years Ended December 31,
Amount
Per Boe
$270,836
32,527
$303,363
$7.86
10.38
$8.07
Amount
$
Per Boe
%
(In thousands, except per Boe and % amounts)
$218,040
72,446
$290,486
$52,796
(39,919)
$12,877
$7.18
9.45
$7.63
24 %
(55 %)
4 %
Boe Change
$
%
$0.68
0.93
$0.44
9 %
10 %
6 %
53
The increase in lease operating expenses, as well as lease operating expenses per Boe, for the year ended December 31, 2023 compared to the same period of 2022 was
primarily due to increases in certain operating expenses such as saltwater disposal and fuel and power.
Production and Ad Valorem Taxes
2023
2022
Total Change
Years Ended December 31,
Amount
Per Boe
Amount
%
(In thousands, except per Boe and % amounts)
Per Boe
$
Permian
Eagle Ford
Production and ad valorem taxes
Percent of total revenues
$101,035
12,477
$113,512
5.8%
$2.93
3.98
$3.02
$122,957
36,963
$159,920
5.8%
$4.05
4.82
$4.20
($21,922)
(24,486)
($46,408)
(18 %)
(66 %)
(29 %)
—%
Boe Change
$
%
($1.12)
(0.84)
($1.18)
(28 %)
(17 %)
(28 %)
The decrease in production and ad valorem taxes for the year ended December 31, 2023 compared to the same period of 2022 was primarily related to a 29% decrease in total
revenues which decreased production taxes, partially offset by an increase in ad valorem taxes due to higher expected property tax valuations as a result of higher commodity
prices during 2022 compared to 2021. The increase in production and ad valorem taxes as a percentage of total revenues for the year ended December 31, 2023 compared to the
same period of 2022 was primarily due to an increase in ad valorem taxes during the year ended December 31, 2023, as discussed above, with a decrease in total revenues
during the year ended December 31, 2023.
Gathering, Transportation and Processing Expenses
2023
2022
Total Change
Years Ended December 31,
Permian
Eagle Ford
Gathering, transportation and processing
Amount
Per Boe
$101,975
6,246
$108,221
$2.96
1.99
$2.88
Amount
$
Per Boe
%
(In thousands, except per Boe and % amounts)
$82,459
14,443
$96,902
$19,516
(8,197)
$11,319
$2.71
1.88
$2.55
24 %
(57 %)
12 %
Boe Change
$
%
$0.25
0.11
$0.33
9 %
6 %
13 %
The increase in gathering, transportation and processing expenses, as well as the increase in gathering, transportation and processing expenses per Boe, for the year ended
December 31, 2023 compared to the same period of 2022 was primarily related to new gathering agreements put into place during the year ended December 31, 2023.
Exploration Expenses
2023
2022
Total Change
Years Ended December 31,
Amount
Per Boe
Amount
%
(In thousands, except per Boe and % amounts)
Per Boe
$
Boe Change
$
%
Exploration
$9,143
$0.24
$9,703
$0.25
($560)
(6 %)
($0.01)
(4 %)
For the year ended December 31, 2023 compared to the same period in 2022, exploration expense, as well as exploration expense per Boe, decreased by an immaterial amount.
Depreciation, Depletion and Amortization (“DD&A”). The following table sets forth the components of our DD&A for the periods indicated:
2023
2022
Total Change
Years Ended December 31,
DD&A of proved oil and gas properties
Depreciation of other property and equipment
Amortization of other assets
Accretion of asset retirement obligations
DD&A
Amount
Per Boe
$527,966
1,461
2,341
3,893
$535,661
$14.05
0.04
0.06
0.10
$14.25
54
Amount
$
Per Boe
%
(In thousands, except per Boe and % amounts)
$485,585
1,685
2,962
3,997
$494,229
$42,381
(224)
(621)
(104)
$41,432
$12.76
0.04
0.08
0.11
$12.99
9 %
(13 %)
(21 %)
(3 %)
8 %
Boe Change
$
%
$1.29
—
(0.02)
(0.01)
$1.26
10 %
— %
(25 %)
(9 %)
10 %
The increase in DD&A and DD&A per Boe for the year ended December 31, 2023 compared to the same period of 2022 was primarily attributable to higher proved oil and gas
property balances as a result of the capital expenditures throughout 2023, partially offset by the cessation of depletion on the assets associated with the Eagle Ford Divestiture
as a result of being classified as assets held for sale during the second quarter of 2023.
See “Note 5 - Acquisitions and Divestitures” of the Notes to our Consolidated Financial Statements for additional details regarding the Eagle Ford Divestiture.
General and Administrative (“G&A”)
2023
2022
Amount
Per Boe
Amount
Per Boe
Total Change
$
%
Boe Change
$
%
Years Ended December 31,
General and administrative
$115,344
$3.07
(In thousands, except per Boe and % amounts)
$97,996
$17,348
$2.58
18 %
$0.49
19 %
The increase in G&A for the year ended December 31, 2023 compared to the same period of 2022 was primarily due to an increase in employee-related costs as well as an
increase in stock compensation expense between the two periods.
Impairment of Oil and Gas Properties. We recognized an impairment of proved oil and gas properties in the second quarter of 2023 of $406.9 million as the fair value less cost
to sell was less than the carrying amount of the net assets associated with the Eagle Ford Divestiture that were classified as assets held for sale. We recognized an impairment of
unproved oil and gas properties in the fourth quarter of 2022 of $2.2 million due to certain leases approaching the end of their lease terms with no future plans to develop the
acreage.
Other Income and Expenses
Interest Expense. The following table sets forth the components of our interest expense for the periods indicated:
Interest expense on Senior Notes
Interest expense on second lien notes
Interest expense on Credit Facility
Amortization of debt issuance costs, premiums and discounts
Other interest expense
Interest expense
2023
Years Ended December 31,
2022
(In thousands)
$124,694
13,825
36,860
12,333
80
$187,792
$126,575
—
41,907
10,790
33
$179,305
Change
$1,881
(13,825)
5,047
(1,543)
(47)
($8,487)
Interest expense for the year ended December 31, 2023 was $179.3 million, a decrease as compared to the same period of 2022 as a result of the redemption of our 9.0% second
lien notes in June 2022 and our 8.25% Senior Notes, partially offset by an increase in interest expense due to the issuance of our 7.5% Senior Notes due 2030 in June 2022 as
well as increases in interest rates on our outstanding borrowings under the Credit Facility.
See “Note 8 - Borrowings” of the Notes to our Consolidated Financial Statements for additional details.
(Gain) Loss on Derivative Contracts. The net (gain) loss on derivative contracts for the periods indicated includes the following:
(Gain) loss on oil derivatives
(Gain) loss on natural gas derivatives
Loss on NGL derivatives
Loss on contingent consideration arrangements
(Gain) loss on derivative contracts
2023
Years Ended December 31,
2022
(In thousands)
$287,379
38,803
4,771
—
$330,953
($22,371)
(4,990)
2,663
5,800
($18,898)
Change
($309,750)
(43,793)
(2,108)
5,800
($349,851)
See “Note 9 – Derivative Instruments and Hedging Activities” and “Note 10 – Fair Value Measurements” of the Notes to our Consolidated Financial Statements for additional
information.
(Gain) Loss on Extinguishment of Debt. For the year ended December 31, 2023, we recognized a gain on extinguishment of debt of $1.2 million as a result of the redemption of
the 8.25% Senior Notes.
55
For the year ended December 31, 2022, we recognized a loss on extinguishment of debt of $45.7 million as a result of the redemptions of the 6.125% senior notes and second
lien notes and the termination of our Prior Credit Facility.
See “Note 8 – Borrowings” of the Notes to our Consolidated Financial Statements for additional information.
Sales and Cost of Purchased Oil and Gas. We purchase oil and gas from third parties in order to fulfill portions of our pipeline commitments. For the years ended December 31,
2023 and 2022, we recorded sales of purchased oil and gas of $389.1 million and $475.2 million, respectively, and cost of purchased oil and gas of $399.2 million and $478.4
million, respectively, related to commodities purchased from third parties and sold to our customers.
Income Tax Expense. We recorded income tax benefit of $189.8 million for the year ended December 31, 2023 compared to income tax expense of $13.8 million for the same
period of 2022. The changes from the statutory income tax rate for the year ended December 31, 2023 is a result of releasing the valuation allowance that was in place against
our net deferred tax assets. See “Note 13 – Income Taxes” of the Notes to our Consolidated Financial Statements for further discussion.
Liquidity and Capital Resources
Pricing Outlook. Oil prices continue to remain volatile as the daily NYMEX benchmark price for oil ranged between approximately $67 and $94 per barrel during 2023.
Overall for 2023, the average price of $78 per barrel remained significantly below the average of $95 per barrel for 2022. Additionally, during 2023, the daily NYMEX
benchmark price for natural gas decreased approximately 59% from the average for 2022 to $2.67 per Mcf. We expect to continue to see volatility in oil prices, as well as
natural gas and NGL prices.
Capital Efficiency Outlook. We recently transitioned to a business unit design in our operations group to improve focus on capital efficiency and capital allocation. We have
identified structural drilling efficiency gains from well design changes and expect to continue to identify incremental structural efficiency gains as we move into 2024. The
identified improvements are expected to reduce our 2024 average total well costs, including facilities, by at least 15%.
Sources and Uses of Cash. Our primary uses of capital are for the exploration and development of our oil and natural gas properties. Because we are the operator of a high
percentage of our properties, we can control the well design and the development pace associated with our capital expenditures. We plan our capital expenditure program to
achieve disciplined reinvestment rates to drive capital efficiency through an enhanced multi-zone, scaled development program.
We believe that existing cash and cash equivalents, cash flows from operations and available borrowings under our credit facility will be sufficient to support working capital,
capital expenditures and other cash requirements for at least the next 12 months and, based on our current expectations, for the foreseeable future thereafter. Our future capital
requirements, both near-term and long-term, will depend on many factors, including, but not limited to, commodity prices, market conditions, our available liquidity and
financing, acquisitions and divestitures of oil and gas properties, the availability of drilling rigs and completion crews, the cost of completion services, success of drilling
programs, land and industry partner issues, weather delays, the acquisition of leases with drilling commitments, and other factors.
Historically, our primary sources of capital have been cash flows from operations, borrowings under our credit facility, proceeds from the issuance of debt securities and public
equity offerings, and asset dispositions. Up to the completion of the Merger, our liquidity requirements will remain funded by our cash flow from operations, borrowings under
our credit facility and certain other capital activities allowed under the Merger Agreement. In particular, we are subject to restrictions under the Merger Agreement on assuming
additional debt, issuing additional equity or debt, repurchasing equity, making certain capital expenditures, and entering into certain acquisition, disposition and leasing
transactions, among other restrictions.
Overview of Cash Flow Activities. For the year ended December 31, 2023, cash and cash equivalents decreased $0.1 million to $3.3 million compared to $3.4 million at
December 31, 2022.
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Net change in cash and cash equivalents
Years Ended December 31,
2023
2022
(In thousands)
$1,092,529
(707,311)
(385,288)
($70)
$1,355,673
(853,183)
(508,977)
($6,487)
Operating Activities. Net cash provided by operating activities was $1.1 billion and $1.4 billion for the years ended December 31, 2023 and 2022, respectively. The decrease in
net cash provided by operating activities was primarily attributable to the following:
•
•
A decrease in revenue primarily driven by a 28% decrease in total average realized sales price; partially offset by
A decrease in the cash paid for commodity derivative settlements.
56
Investing Activities. Net cash used in investing activities was $707.3 million and $853.2 million for the years ended December 31, 2023 and 2022, respectively. The change in
net cash used in investing activities was primarily attributable to proceeds from the Eagle Ford Divestiture and a decrease in cash paid for the settlement of contingent
consideration agreements, partially offset by cash paid for the Percussion Acquisition and an increase in operational capital expenditures.
Financing Activities. We finance a portion of our capital expenditures, acquisitions and working capital requirements with borrowings under our Credit Facility, term debt and
equity offerings. For the year ended December 31, 2023, net cash used in financing activities was $385.3 million compared to $509.0 million during 2022. The change was
primarily attributable to the redemption of the 8.25% Senior Notes and the initiation of our Share Repurchase Program during 2023 compared to the redemptions of the 6.125%
Senior Notes and Second Lien Notes, partially offset by the issuance of the 7.5% Senior Notes in 2022.
Credit Facility. As of December 31, 2023, our Credit Facility had a maximum credit amount of $5.0 billion, a borrowing base of $2.0 billion and an elected commitment
amount of $1.5 billion, with borrowings outstanding of $365.0 million at a weighted-average interest rate of 7.54%, and letters of credit outstanding of $21.4 million.
Redemption of 8.25% Senior Notes. On August 2, 2023, we redeemed all $187.2 million of our outstanding 8.25% Senior Notes using borrowings under our Credit Facility. See
“Note 8 – Borrowings” of the Notes to our Consolidated Financial Statements for additional information on our long-term debt.
Income Taxes. Due to the issuance of common stock pursuant to the acquisition of Carrizo Oil & Gas, Inc. (“Carrizo”), the Company incurred a cumulative ownership change,
and as such, the Company’s NOLs prior to the acquisition are subject to a combined annual limitation under Internal Revenue Code (the “IRC”) Section 382 in the amount of
$32.2 million, which is comprised of $15.7 million of Carrizo’s NOLs and $16.5 million of Callon’s NOLs. At December 31, 2023, the Company had approximately $2.0
billion of NOLs, some of which i) are subject to annual limitation under Section 382, ii) are subject to the IRC’s 80% taxable income limitation rule, or iii) expire between 2034
and 2037, as summarized in the table below.
Subject to Annual Limitation Under
Section 382
Subject to IRC’s 80% Taxable Income
Limitation
Years of Expiration
Yes
No
Yes
Yes
Yes
No
N/A
N/A
2034 to 2037
NOL Balance
(In millions)
$710.0
841.5
399.3
$1,950.8
The Company also has a net interest expense carryforward of $401.0 million under Section 163(j) of the Code, subject to indefinite carryforward.
Material Cash Requirements. As of December 31, 2023, we have financial obligations associated with our outstanding long-term debt, including interest payments and
principal repayments. See “Note 8 – Borrowings” of the Notes to our Consolidated Financial Statements for further discussion of the contractual commitments under our debt
agreements, including the timing of principal repayments. Additionally, we have operational obligations associated with long-term, non-cancelable leases, drilling rig contracts,
frac service contracts, gathering, processing and transportation service agreements and other purchase obligations as well as estimates of future asset retirement obligations. See
“Note 15 – Asset Retirement Obligations” and “Note 18 – Commitments and Contingencies” of the Notes to our Consolidated Financial Statements for additional details.
We estimate that the combination of our sources of capital, as discussed above, will continue to be adequate to fund our short- and long-term contractual obligations.
Critical Accounting Estimates
For discussion regarding our significant accounting policies, see “Note 2 – Summary of Significant Accounting Policies” of the Notes to our Consolidated Financial Statements.
We have outlined below the policies identified as being critical to the understanding of our business and results of operations and that require the application of significant
management judgment.
Recast Financial Information for Change in Accounting Principle
In the first quarter of 2023, we voluntarily changed our method of accounting for our oil and gas exploration and development activities from the full cost method to the
successful efforts method of accounting. Accordingly, the financial information for prior periods has been recast to reflect retrospective application of the successful efforts
method, as prescribed by the FASB ASC 932
57
“Extractive Activities — Oil and Gas.” See “Note 2 — Summary of Significant Accounting Policies” and “Note 3 — Change in Accounting Principle” of the Notes to our
Consolidated Financial Statements for additional discussion.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make judgments affecting estimates and assumptions for reported amounts of assets
and liabilities and revenues and expenses during the reporting period. Estimates of proved oil and gas reserves are used in calculating DD&A of proved oil and natural gas
property costs, the present value of estimated future net revenues, estimates of future taxable income used in assessing the realizability of deferred tax assets, and the estimated
timing of cash outflows underlying asset retirement obligations. There are numerous uncertainties inherent in the estimation of proved oil and gas reserves and in the projection
of future rates of production and the timing of development expenditures. Other significant estimates are involved in determining asset retirement obligations, acquisition date
fair values of assets acquired and liabilities assumed, impairments of unevaluated leasehold costs, fair values of commodity derivative assets and liabilities, and litigation
liabilities. Actual results could differ from those estimates.
Oil and Natural Gas Properties
Oil and natural gas properties are accounted for using the successful efforts method of accounting under which drilling and completion costs, including lease and well
equipment, intangible development costs, and operational support facilities in the field, associated with development wells are capitalized to proved oil and gas properties and
are depleted on an asset group basis (properties aggregated based on geographical and geological characteristics) using the units-of-production method based on estimated
proved developed oil and gas reserves. Acquired proved properties and proved leasehold acquisition costs are depleted on the same asset group basis using the units-of-
production method based on estimated total proved oil and gas reserves. The calculation of depletion expense takes into consideration estimated asset retirement costs, net of
estimated salvage values. Proved oil and gas properties are assessed for impairment on an asset group basis whenever events and circumstances indicate that there could be a
possible decline in the recoverability of the net book value of such property.
The process of estimating proved oil and gas reserves requires that our independent and internal reserve engineers exercise judgment based on available geological, geophysical
and technical information. Additionally, operating costs, production and ad valorem taxes, and future development costs are estimated based on current costs. A significant
change to our estimated volumes of oil and gas reserves as well as changes to the estimates of prices and costs could have an impact on the depletion rate calculation as well as
result in an impairment of oil and gas properties.
Impairment of Oil and Natural Gas Properties
We assess our proved oil and gas properties for impairment on an asset group basis whenever events and circumstances indicate that there could be a possible decline in the
recoverability of the net book value of such property. We estimate the expected future net cash flows of our proved oil and gas properties and compare these undiscounted cash
flows to the net book value of the proved oil and gas properties to determine if the net book value is recoverable. If the net book value exceeds the estimated undiscounted
future net cash flows, we will recognize an impairment to reduce the net book value of the proved oil and gas properties to fair value. The factors used to determine fair value
include, but are not limited to, estimates of reserves, future commodity prices, future production estimates, estimated future development costs and operating costs, and
discount rates, which are based on a weighted average cost of capital. Fair value estimates are based on projected financial information which we believe to be reasonably likely
to occur, as of the date that the impairment is measured. See “Note 5 — Acquisitions and Divestitures” of the Notes to our Consolidated Financial Statements for details of the
impairment of $406.9 million recorded in the second quarter of 2023 associated with the assets held for sale classification resulting from the agreement to sell all of our
interests of Callon (Eagle Ford) LLC to Ridgemar Energy Operating, LLC. We recognized an impairment of unproved oil and gas properties in the fourth quarter of 2022 of
$2.2 million due to certain leases approaching the end of their lease terms with no future plans to develop the acreage.
We evaluate significant unproved oil and gas property costs for impairment based on remaining lease term, drilling results, reservoir performance, seismic interpretation or
changes in future plans to develop acreage. Unproved oil and gas properties that are not individually significant are aggregated by asset group, and the portion of such costs
estimated to be nonproductive prior to lease expiration is amortized over the average holding period. The estimate of what could be nonproductive is based on our historical
experience or other information, including current drilling plans and existing geological data.
Derivative Instruments
We use commodity derivative instruments to mitigate the effects of commodity price volatility for a portion of our forecasted sales of production and achieve a more predictable
level of cash flow. We do not use these instruments for speculative or trading purposes. Settlements of derivative contracts are generally based on the difference between the
contract price and prices specified in the derivative instrument and a NYMEX price or other futures index price. The estimated fair value of our derivative contracts is based
upon current forward market prices on NYMEX and in the case of collars and floors, the time value of options. For additional
58
information regarding our derivatives instruments and their fair values, see “Note 9 – Derivative Instruments and Hedging Activities” and “Note 10 – Fair Value
Measurements” of the Notes to our Consolidated Financial Statements.
Our financial condition and results of operations can be significantly impacted by changes in the market value of our derivative instruments as a result of the volatility of oil
and gas prices. See “Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk — Commodity Price Risk” for the impact on the fair values of our derivative
instruments assuming a 10% increase and decrease in the underlying forward oil and gas price curves as of December 31, 2023.
Income Taxes
The amount of income taxes recorded requires interpretations of complex rules and regulations of federal and state tax jurisdictions. We recognize current tax expense based on
estimated taxable income for the current period and the applicable statutory tax rates. We routinely assess potential uncertain tax positions and, if required, estimate and
establish accruals for such amounts. We have recognized deferred tax assets and liabilities for temporary differences, operating losses and other tax carryforwards.
Management monitors company-specific, oil and natural gas industry and worldwide economic factors and assesses the likelihood that our net deferred tax assets will be
utilized prior to their expiration. As previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, beginning in the second
quarter of 2020 and through the fourth quarter of 2022, we maintained a valuation allowance against our net deferred tax assets. Considering all available evidence (both
positive and negative), we concluded that it is more likely than not that the deferred tax assets would be realized and released the valuation allowance in the first quarter of
2023. This release resulted in deferred income tax benefit of $187.3 million for the year ended December 31, 2023. See “Note 13 – Income Taxes” of the Notes to our
Consolidated Financial Statements for additional discussion.
Recently Adopted and Recently Issued Accounting Pronouncements
See “Note 2 – Summary of Significant Accounting Policies” of the Notes to our Consolidated Financial Statements for information discussion of recent accounting
pronouncements issued by the Financial Accounting Standards Board.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to a variety of market risks including commodity price risk, interest rate risk and counterparty and customer credit risk. We mitigate these risks through a
program of risk management including the use of commodity derivative instruments.
Commodity Price Risk
Our revenues are derived from the sale of our oil, natural gas, and NGL production. The prices for oil, natural gas, and NGLs remain volatile and sometimes experience large
fluctuations as a result of relatively small changes in supply, government actions, economic conditions, and weather conditions.
From time to time, we enter into derivative financial instruments to manage oil, natural gas and NGL price risk, related both to NYMEX benchmark prices and regional basis
differentials. The total volumes we hedge through use of our derivative instruments varies from period to period and takes into account our view of current and future market
conditions in order to provide greater certainty of cash flows to meet our debt service costs and capital program. We generally hedge for the next 12 to 24 months, subject to the
covenants under our Credit Facility. Our hedge policies and objectives may change significantly with movements in commodities prices or futures prices.
We may utilize fixed price swaps, which reduce our exposure to decreases in commodity prices, but limit the benefit we might otherwise have received from any increases in
commodity prices. Swap contracts may also be enhanced by the simultaneous or subsequent sale or purchase of call or put options to effectively increase the effective swap
price as a result of the receipt of premiums from the option sales.
We also may utilize price collars to reduce the risk of changes in oil and natural gas prices. Under these arrangements, no payments are due by either party as long as the
applicable market price is above the floor price (purchased put option) and below the ceiling price (sold call option) set in the collar. If the price falls below the floor, the
counterparty to the collar pays the difference to us, and if the price rises above the ceiling, the counterparty receives the difference from us. Additionally, we may sell put
options at a price lower than the floor price in conjunction with a collar (three-way collar) and use the proceeds to increase either or both the floor or ceiling prices. In a three-
way collar, to the extent that realized prices are below the floor price of the sold put option (or above the ceiling price of the sold call option), our net realized benefit from the
three-way collar will be reduced on a dollar-for-dollar basis.
Additionally, we may enter into basis swap contracts which fix the basis differentials between the index price at which the Company sells its production and the relevant
NYMEX benchmark price used in swap or collar contracts.
We may purchase put options, which reduce our exposure to decreases in oil and natural gas prices while allowing realization of the full benefit from any increases in oil and
natural gas prices. If the price falls below the floor, the counterparty pays the difference to us.
59
We enter into these various agreements from time to time to reduce the effects of volatile oil, natural gas and NGL prices and do not enter into derivative transactions for
speculative or trading purposes. Presently, none of our derivative positions are designated as hedges for accounting purposes.
The following table sets forth the fair values of our commodity derivative instruments as of December 31, 2023 as well as the impact on the fair values assuming a 10%
increase and decrease in the underlying forward oil and gas price curves as of December 31, 2023:
Fair value asset (liability) as of December 31, 2023
(1)
Impact of a 10% increase in forward commodity prices
Impact of a 10% decrease in forward commodity prices
Oil
$4,237
($14,830)
$21,040
Year Ended December 31, 2023
Natural Gas
NGLs
Total
(In thousands)
($414)
($1,022)
$263
($426)
($777)
($75)
$3,397
($16,629)
$21,228
(1) Spot prices for oil and natural gas were $71.71 and $2.51, respectively, as of December 31, 2023.
Interest Rate Risk
We are subject to market risk exposure related to changes in interest rates on our indebtedness under our Credit Facility. As of December 31, 2023, we had $365.0 million
outstanding under the Credit Facility with a weighted average interest rate of 7.54%. An increase or decrease of 1.00% in the interest rate would have a corresponding increase
or decrease in our annual interest expense of approximately $3.7 million, based on the balance outstanding as of December 31, 2023. See “Note 8 – Borrowings” of the Notes
to our Consolidated Financial Statements for more information on our Credit Facility.
Counterparty and Customer Credit Risk
Our principal exposures to credit risk are through receivables from the sale of our oil, natural gas and NGL production, joint interest receivables and receivables resulting from
derivative financial contracts.
For the year ended December 31, 2023, four purchasers each accounted for more than 10% of our oil, natural gas, and NGL revenues. The inability of our significant customers
to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results. In order to mitigate potential exposure to credit risk, we may require
our customers to provide financial security. We are generally paid by our purchasers within 30 to 90 days after the month of production and currently do not believe that we
have a risk of not collecting.
Joint interest receivables arise from billings to entities that own partial interests in the wells we operate. These entities participate in our wells primarily based on their
ownership in leases on which we have or intend to drill. We have little ability to control whether these entities will participate in our wells. We generally have the right to
withhold future revenue distributions to recover past due receivables from joint interest owners. As of December 31, 2023, our joint interest receivables were approximately
$34.6 million and we had no material past due balances.
See “Note 9 – Derivative Instruments and Hedging Activities” of the Notes to our Consolidated Financial Statements for discussion of counterparty credit risk associated with
our commodity derivative arrangements.
60
ITEM 8. Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firm (PCAOB ID Number 248)
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements
61
Page
62
66
67
68
69
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Callon Petroleum Company
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Callon Petroleum Company (a Delaware corporation) and subsidiaries (the “Company”) as of December 31,
2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria
established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements
of the Company as of and for the year ended December 31, 2023, and our report dated February 26, 2024 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
/s/ GRANT THORNTON LLP
Houston, Texas
February 26, 2024
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Callon Petroleum Company
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Callon Petroleum Company (a Delaware corporation) and subsidiaries (the “Company”) as of December 31,
2023 and 2022, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and
the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over
financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”), and our report dated February 26, 2024 expressed an unqualified opinion.
Change in accounting principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the method in which it accounts for oil and natural gas exploration and development
activities from the full cost method to the successful efforts method in 2023. This matter is also discussed below as a critical audit matter.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are
not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
The development of estimated proved reserves used in the calculation of depletion, depreciation and amortization expense (DD&A) under the successful efforts method of
accounting and the valuation of crude oil and natural gas properties in the 2023 Percussion Acquisition (herein referred to as “the crude oil and natural gas reserves”)
As described further in Note 2 to the financial statements, the Company accounts for its oil and gas properties using the successful efforts method of accounting which requires
management to make estimates of proved reserve volumes and future net revenues to record DD&A expense. Additionally, as described in Note 4 to the financial statements,
the Company acquired significant oil and natural gas properties during the year through the Percussion Acquisition. To estimate the volume of proved reserves and future net
revenue, management makes significant estimates and assumptions including forecasting the production decline rate of producing properties and forecasting the timing and
volume of production associated with the Company’s development plan for proved undeveloped properties. In addition, the estimation of proved reserves is also impacted by
management’s judgments and estimates regarding the financial performance of wells associated with proved reserves to determine if wells are expected with reasonable
certainty to be economical under the appropriate pricing assumptions required in the estimation of DD&A expense. For acquired reserves, management also utilizes an
estimated fair value pricing model in determining the corresponding value of proved reserves.
63
We identified the estimation of proved reserves of oil and natural gas properties, including proved reserves in the Percussion Acquisition, due to its impact on DD&A expense
and acquisition accounting, as a critical audit matter.
The principal consideration for our determination that the estimation of proved reserves is a critical audit matter is that changes in certain inputs and assumptions necessary to
estimate the volumes and future net revenues of the Company’s proved reserves require a high degree of subjectivity and could have a significant impact on the measurement of
DD&A expense and acquisition accounting. In turn, auditing those inputs and assumptions required subjective and complex auditor judgment.
Our audit procedures related to the estimation of proved reserves included the following, among others.
• We tested the design and operating effectiveness of controls relating to management’s estimation of proved reserves for the purpose of estimating DD&A expense and
management’s estimation of fair value of the acquired oil and natural gas properties in the Percussion Acquisition.
• We evaluated the independence, objectivity, and professional qualifications of the Company’s reserve engineers, made inquiries of those specialists regarding the
•
process followed and judgments made to estimate the Company’s proved reserve volumes, and read the reserve report prepared by the Company’s specialists.
To the extent key inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions are derived from the Company’s
accounting records, including, but not limited to historical pricing differentials, operating costs, estimated development costs, and ownership interests, we tested
management’s process for determining the assumptions, including examining the underlying support on a sample basis. Specifically, our audit procedures involved
testing management’s assumptions by performing the following:
◦ We compared the estimated pricing differentials used in the reserve report to prices realized by the Company related to revenue transactions recorded in the
current year and examined contractual support for the pricing differentials
◦ We tested models used to estimate the future operating costs in the reserve report and compared amounts to historical operating costs
◦ We evaluated the method used to determine estimated future development costs used in the reserve report and compared management’s estimate to amounts
expended for recently drilled and completed wells to ascertain its reasonableness
◦ We tested the working and net revenue interests used in the reserve report by inspecting land and division order records
◦ We evaluated the Company’s evidence supporting the amount of proved undeveloped properties reflected in the reserve report by examining historical
conversion rates and support for the Company’s ability and intent to develop the proved undeveloped properties,
◦ We evaluated the reasonableness of the Company’s classification of reserves as proved or unproved, and
◦ We applied analytical procedures to production forecasts in the reserve report by comparing to historical actual results and to the prior year reserve report.
◦
As it relates to the recording of the acquisition date values of crude oil and natural gas properties in the Percussion Acquisition, we utilized a valuation
specialist to evaluate the appropriateness of forecasted pricing used in the reserve report by comparing the pricing forecast to published product pricing on the
acquisition closing date;
As it relates to the recording of the acquisition date values of crude oil and natural gas properties in the Percussion Acquisition, we utilized a valuation
specialist to evaluate whether the Company’s valuation methodology was reasonable and for certain inputs and assumptions, evaluated the process used to
develop the estimate and developed an independent expectation of the estimate to evaluate its reasonableness;
As it relates to the recording of the acquisition date values of crude oil and natural gas properties in the Percussion Acquisition, we evaluated the
appropriateness of the future operating cost and capital expenditure assumptions used in the reserve report by comparing forecasted amounts to historical
operating costs and capital expenditures of similarly located properties;
As it relates to the recording of the acquisition date values of crude oil and natural gas properties in the Percussion Acquisition, we compared, on a sample
basis, the working and net revenue interests used in the reserve report to the purchase and sale agreement; and
As it relates to the recording of the acquisition date values of crude oil and natural gas properties in the Percussion Acquisition, we evaluated, on a sample
basis, the appropriateness of management’s estimated future production volumes of proved developed producing properties to subsequent actual production
results and management’s estimated future production volumes of proved undeveloped properties by comparing the estimated ultimate recovery per foot to
producing wells in the field.
◦
◦
◦
◦
Change in Accounting Principle from the Full Cost Method to the Successful Efforts Method
As described above and in Note 3 to the financial statements, during the first quarter of 2023, the Company voluntarily changed its method of accounting for oil and natural gas
exploration and development activities from the full cost method to the successful efforts method. Accordingly, financial information for prior periods has been recast to reflect
retrospective application of the successful efforts method of accounting. As a result of its change in accounting principle, management recorded significant impairments to its
proved oil and natural gas properties, and made significant adjustments to DD&A expense, in historical periods to arrive at the recast financial information. As described in
Note 2, under the successful efforts method of accounting, drilling and completion costs, including lease and well equipment, intangible development costs, and operation
support facilities in the field, associated with the development wells, are capitalized to proved oil and gas properties and are depleted on an asset group basis (properties
aggregated
64
based on geological features or stratigraphic conditions, such as a reservoir or field) using the units-of-production method based on estimated proved developed oil and gas
reserves. As further disclosed by management, estimates of oil and natural gas reserves and their fair values used in determining impairment under the successful efforts method
of accounting are impacted by, future commodity prices, future production estimates, estimated future development and operating costs, and discount rates, which are based on
a weighted average cost of capital. The estimation of reserves requires significant assumptions by management and is also impacted by management’s judgments and estimates
regarding the financial performance of wells with proved reserves to determine if wells are expected with reasonable certainty to be economical under the appropriate pricing
assumptions required in the measurement of DD&A expense and impairment. We identified the change in accounting principle from the full cost method to the successful
efforts method of accounting, due to its impacts on DD&A expense and impairment, as a critical audit matter.
The principal considerations for our determination that performing procedures relating to the change in accounting principle from the full cost method to the successful efforts
method is a critical audit matter are there was significant judgment by management, including the use of specialists, when developing the estimates of proved oil and natural
gas reserves for purposes of reflecting the retrospective application of the successful efforts method, including the calculation of DD&A expense and the calculation of
impairment charges recorded to prior periods. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the
significant assumptions used in developing those estimates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge in evaluating the
audit evidence obtained from these procedures.
Our audit procedures related to the change in accounting principle from full cost method to successful efforts method included the following, among others.
• We tested the design and operating effectiveness of controls related to management’s application of the successful efforts method of accounting to historical periods,
inclusive of those related to the determination of reserves in measuring DD&A expense and impairment.
• We evaluated the Company’s asset groupings under the successful efforts method of accounting based on geological conditions and stratigraphic features.
• We tested the allocation of properties to each asset group within the Company’s historical accounting records and reserve databases, and the assignment of such costs
to leasehold and acquisition, and all other tangible and intangible drilling categories which impact the determination of DD&A expense and impairment.
• We evaluated the independence, objectivity, and professional qualifications of the Company’s reserve engineers, made inquiries of those specialists regarding the
process followed and judgments made to estimate the Company’s proved reserve volumes.
•
• We compared the historical reserve databases used for calculating DD&A expense under the full cost method of accounting to those used in calculating DD&A
expense under the successful efforts method of accounting for consistency, as adjusted for the grouping of assets under the successful efforts method of accounting.
To the extent key inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions in measuring impairment under the
successful efforts method of accounting are derived from the Company’s accounting records, including, but not limited to historical pricing differentials, operating
costs, estimated development costs, and ownership interests, we tested management’s process for determining the assumptions, including examining the underlying
support on a sample basis, or to those utilized in the preparation of reserve reports in previously audited periods. Specifically, our audit procedures involved testing
management’s assumptions by performing the following:
◦ We tested forward commodity pricing used in establishing reserve estimates with the assistance of our valuation specialist;
◦ We tested the working and revenue interests used in the reserve report by comparing to historical accounting records;
◦ We compared the estimated pricing differential used in the reserve reports to historical accounting records, as adjusted to reflect expected future conditions as
applicable;
◦ We evaluated the risk adjustments applied to proved undeveloped reserve volumes by comparing against industry accepted factors;
◦ We compared future development and operating costs against the Company’s historical estimates and accounting records;
◦ We compared future production estimates against historical future production estimates;
◦ We evaluated the reasonableness of the weighted average cost of capital; and
◦ We applied analytical procedures to production forecasts in the fair value reserve report by comparing to forecasts established in the historical SEC case
reserve report used for DD&A expense determinations.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2016.
Houston, Texas
February 26, 2024
65
Callon Petroleum Company
Consolidated Balance Sheets
(In thousands, except par and share amounts)
December 31,
2023
2022*
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Fair value of derivatives
Other current assets
Total current assets
Oil and natural gas properties, successful efforts accounting method:
Proved properties, net
Unproved properties
Total oil and natural gas properties, net
Other property and equipment, net
Deferred income taxes
Other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
Fair value of derivatives
Other current liabilities
Total current liabilities
Long-term debt
Asset retirement obligations
Fair value of derivatives
Other long-term liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 130,000,000 shares authorized; 66,474,525 and
61,621,518 shares outstanding, respectively
Capital in excess of par value
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$3,325
206,791
11,857
30,154
252,127
5,086,973
1,063,033
6,150,006
26,784
180,963
101,596
$6,711,476
$526,446
24,147
96,369
646,962
1,918,655
42,653
29,880
81,965
2,720,115
665
4,186,524
(195,828)
3,991,361
$6,711,476
$3,395
237,128
21,332
35,783
297,638
4,851,529
1,225,768
6,077,297
26,152
—
87,382
$6,488,469
$536,233
16,197
150,384
702,814
2,241,295
53,892
13,415
51,272
3,062,688
616
4,022,194
(597,029)
3,425,781
$6,488,469
*
Financial information for the prior period has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant Accounting
Policies” for additional information.
The accompanying notes are an integral part of these consolidated financial statements.
66
Operating Revenues:
Oil
Natural gas
Natural gas liquids
Sales of purchased oil and gas
Total operating revenues
Operating Expenses:
Lease operating
Production and ad valorem taxes
Gathering, transportation and processing
Exploration
Cost of purchased oil and gas
Depreciation, depletion and amortization
Impairment of oil and gas properties
Gain on sale of oil and gas properties
General and administrative
Merger, integration and transaction
Total operating expenses
Income From Operations
Other (Income) Expenses:
Interest expense
(Gain) loss on derivative contracts
(Gain) loss on extinguishment of debt
Other (income) expense
Total other (income) expense
Income Before Income Taxes
Income tax benefit (expense)
Net Income
Net Income Per Common Share:
Basic
Diluted
Weighted Average Common Shares Outstanding:
Basic
Diluted
Callon Petroleum Company
Consolidated Statements of Operations
(In thousands, except per share amounts)
For the Year Ended December 31,
2022*
2023
2021*
$1,697,026
82,468
174,407
389,083
2,342,984
303,363
113,512
108,221
9,143
399,242
535,661
406,898
(23,476)
115,344
11,198
1,979,106
363,878
179,305
(18,898)
(1,238)
(6,684)
152,485
211,393
189,808
$401,201
$6.20
$6.19
64,692
64,852
$2,262,647
232,681
260,472
475,164
3,230,964
290,486
159,920
96,902
9,703
478,445
494,229
2,201
—
97,996
769
1,630,651
1,600,313
187,792
330,953
45,658
2,645
567,048
1,033,265
(13,822)
$1,019,443
$16.54
$16.47
61,620
61,904
$1,516,225
141,493
193,861
193,451
2,045,030
203,141
100,160
80,970
6,470
201,088
388,612
52,295
—
91,605
14,289
1,138,630
906,400
201,659
522,300
41,040
7,660
772,659
133,741
(180)
$133,561
$2.75
$2.65
48,612
50,311
*
Financial information for the prior periods has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant
Accounting Policies” for additional information.
The accompanying notes are an integral part of these consolidated financial statements.
67
Callon Petroleum Company
Consolidated Statements of Stockholders’ Equity
(In thousands)
Common
Stock
Shares
$
Capital in
Excess
of Par
39,759
—
39,759
—
156
6,913
9,030
5,513
61,371
—
266
(15)
61,622
—
272
6,233
(1,652)
66,475
$398
—
$398
—
2
69
90
55
$614
—
3
(1)
$616
—
3
62
(16)
$665
$3,222,959
—
$3,222,959
—
10,949
134,748
420,610
223,092
$4,012,358
—
8,735
1,101
$4,022,194
—
11,033
208,785
(55,488)
$4,186,524
Accumulated
Deficit
($2,512,355)
762,322
($1,750,033)
133,561
—
—
—
—
($1,616,472)
1,019,443
—
—
($597,029)
401,201
—
—
—
($195,828)
Total
Stockholders’
Equity
$711,002
762,322
$1,473,324
133,561
10,951
134,817
420,700
223,147
$2,396,500
1,019,443
8,738
1,100
$3,425,781
401,201
11,036
208,847
(55,504)
$3,991,361
Previously reported at December 31, 2020
Effect of change in accounting principle
Balance at December 31, 2020 as recast*
Net income
Restricted stock units
Warrant exercises
Common stock issued for Primexx Acquisition
Common stock issued for Second Lien Notes Exchange
Balance at December 31, 2021*
Net income
Restricted stock units
Common stock issued for Primexx Acquisition
Balance at December 31, 2022*
Net income
Restricted stock units
Common stock issued for Percussion Acquisition
Repurchase and retirement of common stock
Balance at December 31, 2023
*
Financial information for the prior periods has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant
Accounting Policies” for additional information.
The accompanying notes are an integral part of these consolidated financial statements.
68
Callon Petroleum Company
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization
Impairment of oil and gas properties
Amortization of non-cash debt related items, net
Deferred income tax (benefit) expense
(Gain) loss on derivative contracts
Cash received (paid) for commodity derivative settlements, net
Gain on sale of oil and gas properties
(Gain) loss on extinguishment of debt
Non-cash expense related to share-based awards
Other, net
Changes in current assets and liabilities:
Accounts receivable
Other current assets
Accounts payable and accrued liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisition of oil and gas properties
Proceeds from sales of assets
Cash paid for settlement of contingent consideration arrangement
Other, net
Net cash used in investing activities
Cash flows from financing activities:
Borrowings on credit facility
Payments on credit facility
Issuance of 7.5% Senior Notes due 2030
Redemption of 8.25% Senior Notes due 2025
Redemption of 6.125% Senior Notes due 2024
Redemption of 9.0% Second Lien Senior Secured Notes due 2025
Payment of deferred financing costs
Cash paid to repurchase common stock
Other, net
Net cash used in financing activities
Net change in cash and cash equivalents
Balance, beginning of period
Balance, end of period
2023
Years Ended December 31,
2022*
2021*
$401,201
$1,019,443
$133,561
535,661
406,898
10,790
(187,270)
(18,898)
2,922
(23,476)
(1,238)
11,413
5,387
48,285
(16,462)
(82,684)
1,092,529
(968,982)
(287,939)
553,222
—
(3,612)
(707,311)
3,513,000
(3,651,000)
—
(187,238)
—
—
(922)
(55,505)
(3,623)
(385,288)
(70)
3,395
$3,325
494,229
2,201
12,332
6,308
330,953
(493,714)
—
45,658
8,042
7,136
(3,480)
(15,392)
(58,043)
1,355,673
(848,688)
(26,706)
27,093
(19,171)
14,289
(853,183)
3,286,000
(3,568,000)
600,000
—
(467,287)
(339,507)
(21,898)
—
1,715
(508,977)
(6,487)
9,882
$3,395
388,612
52,295
20,033
—
522,300
(395,097)
—
41,040
25,857
11,037
(86,402)
(10,399)
146,910
849,747
(454,361)
(493,462)
188,101
—
7,718
(752,004)
2,140,500
(2,340,500)
650,000
—
(542,755)
—
(12,672)
—
(2,670)
(108,097)
(10,354)
20,236
$9,882
*
Financial information for the prior periods has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant
Accounting Policies” for additional information.
The accompanying notes are an integral part of these consolidated financial statements.
69
INDEX TO THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
2. Summary of Significant Accounting Policies
3. Change in Accounting Principle
4. Revenue Recognition
5. Acquisitions and Divestitures
6. Property and Equipment, Net
7. Earnings Per Share
8. Borrowings
9. Derivative Instruments and Hedging Activities
10. Fair Value Measurements
Note 1 – Description of Business
11. Compensation Plans
12. Stockholders’ Equity
13.
Income Taxes
14. Leases
15. Asset Retirement Obligations
16. Accounts Receivable, Net
17. Accounts Payable and Accrued Liabilities
18. Commitments and Contingencies
19. Subsequent Events
20. Supplemental Information on Oil and Natural Gas Operations (Unaudited)
Callon Petroleum Company is an independent oil and natural gas company focused on the acquisition, exploration and sustainable development of high-quality assets in the
Permian Basin in West Texas. As used herein, the “Company,” “Callon,” “we,” “us,” and “our” refer to Callon Petroleum Company and its predecessors and subsidiaries unless
the context requires otherwise.
Merger Agreement
On January 3, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with APA Corporation (“APA”) and Astro Comet Merger Sub
Corp., a wholly owned subsidiary of APA (“Merger Sub”). The Merger Agreement provides that, among other things and subject to the terms and conditions of the Merger
Agreement, (i) Merger Sub will be merged with and into Callon (the “Merger”), with Callon surviving and continuing as the surviving corporation in the Merger, and (ii) at the
effective time of the Merger (the “Effective Time”), each outstanding share of common stock of Callon (other than Excluded Shares (as defined in the Merger Agreement)) will
be converted into the right to receive, without interest, 1.0425 shares of common stock of APA, with cash in lieu of fractional shares.
The Company’s board of directors (the “Board of Directors”) has unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby are in the
best interests of, and advisable to, Callon and Callon shareholders, (ii) approved and declared advisable the Merger Agreement and the transactions contemplated thereby, (iii)
resolved to recommend that Callon stockholders approve the Merger Agreement and the transactions contemplated thereby, and (iv) approved the execution, delivery and
performance by Callon of the Merger Agreement and the consummation of the transactions contemplated thereby.
The completion of the Merger is subject to satisfaction or waiver of certain customary mutual closing conditions, including (i) the receipt of the required approvals from Callon
shareholders and APA shareholders, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
“HSR Act”), (iii) the absence of any governmental order or law prohibiting consummation of the Merger, (iv) the effectiveness of the registration statement on Form S-4 to be
filed by APA, pursuant to which the shares of APA common stock to be issued in connection with the Merger will be registered with the SEC, and (v) the APA common stock to
be issued pursuant to the Merger Agreement being authorized for listing on the Nasdaq Stock Market. The obligation of each party to consummate the Merger is also
conditioned upon the other party’s representations and warranties being true and correct (subject to certain materiality exceptions), the other party having performed in all
material respects its obligations under the Merger Agreement and the non-occurrence of any material adverse effect with respect to the other party since the date of the Merger
Agreement.
The Merger Agreement contains certain termination rights for each of APA and Callon, and in certain circumstances, a termination fee would be payable by the terminating
party.
If the Merger is consummated, the Company’s common stock will be delisted from the New York Stock Exchange (the “NYSE”) and deregistered under the Securities
Exchange Act of 1934, and Callon will cease to be a publicly traded company.
For additional information related to the Merger, refer to the filings made with the SEC in connection with such transaction. The Company has prepared this 2023 Annual
Report on Form 10-K as if it is going to remain an independent company. If the Merger is consummated, many of the forward-looking statements contained in this 2023 Annual
Report on Form 10-K will no longer be applicable.
70
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company after elimination of intercompany transactions and balances and are presented in accordance with
U.S. GAAP. The Company proportionately consolidates its undivided interests in oil and gas properties as well as investments in unincorporated entities, such as partnerships
and limited liability companies where the Company, as a partner or member, has undivided interests in the oil and gas properties. In the opinion of management, the
accompanying audited consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial
position, results of its operations and cash flows for the periods indicated. Certain prior year amounts have been reclassified to conform to current year presentation. Such
reclassifications did not have a material impact on prior period financial statements. The Company evaluates events subsequent to the balance sheet date through the date the
financial statements are issued.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments affecting estimates and assumptions for reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the
reporting period. Estimates of proved oil and gas reserves are used in calculating depreciation, depletion and amortization (“DD&A”) of proved oil and gas property costs,
evaluation of oil and gas properties for impairment, estimates of future taxable income used in assessing the realizability of deferred tax assets, and the estimated timing of cash
outflows underlying asset retirement obligations. There are numerous uncertainties inherent in the estimation of proved oil and gas reserves and in the projection of future rates
of production and the timing of development expenditures. Other significant estimates are involved in determining asset retirement obligations, acquisition date fair values of
assets acquired and liabilities assumed, impairments of unevaluated leasehold costs, fair values of commodity derivative assets and liabilities, and litigation liabilities. Actual
results could differ from those estimates.
Recast Financial Information for Change in Accounting Principle
In the first quarter of 2023, the Company voluntarily changed its method of accounting for its oil and gas exploration and development activities from the full cost method to
the successful efforts method of accounting. Accordingly, the financial information for prior periods has been recast to reflect retrospective application of the successful efforts
method, as prescribed by the FASB Accounting Standards Codification (“ASC”) 932 “Extractive Activities — Oil and Gas.” Although the full cost method of accounting
continues to be an accepted alternative, the successful efforts method of accounting is the generally preferred method of the SEC and, because it is more widely used in the
industry, the Company expects the change to improve the comparability of its financial statements to its peers. The Company also believes the successful efforts method
provides a more representational depiction of assets and operating results and provides for its investments in oil and natural gas properties to be assessed for impairment in
accordance with ASC Topic 360 “Property Plant and Equipment,” rather than valuations based on prices and costs prescribed under the full cost method as of the balance sheet
date. As required by ASC 250 “Accounting Changes and Error Corrections,” the Company has presented the accumulated effect of the change in accounting principle as a
change in the beginning balance of retained earnings (accumulated deficit) of the earliest period presented in the consolidated financial statements. For detailed information
regarding the effects of the change to the successful efforts method, see “Note 3 — Change in Accounting Principle.”
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains cash and cash equivalents
in bank deposit accounts and money market funds that may not be fully federally insured. The Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on such accounts.
Accounts Receivable, Net
Accounts receivable, net consists primarily of receivables from oil, natural gas, and NGL purchasers and joint interest owners in properties the Company operates. The
Company generally has the right to withhold future revenue distributions to recover past due receivables from joint interest owners. Generally, the Company’s oil, natural gas,
and NGL receivables are collected within 30 to 90 days. The Company’s allowance for credit losses and bad debt expense was immaterial for all periods presented.
Concentration of Credit Risk and Major Customers
The concentration of accounts receivable from entities in the oil and gas industry may impact the Company’s overall credit risk such that these entities may be similarly affected
by changes in economic and other industry conditions. The Company does not believe the loss of any one of its purchasers would materially affect its ability to sell the oil and
gas it produces as other purchasers are available
71
in its primary areas of activity. The Company had the following major customers that represented 10% or more of its oil, natural gas and NGL revenues for at least one of the
periods presented:
Vitol Inc.
Plains Marketing, L.P.
Rio Energy International, Inc.
BP Products North America, Inc.
Valero Marketing and Supply Company
Shell Trading Company
Trafigura Trading, LLC
Occidental Energy Marketing, Inc.
(1)
2023
13%
12
12
12
*
*
*
*
(1)
Years Ended December 31,
2022
*
*
12%
*
15
*
*
*
(1)
2021
*
*
*
*
13%
20
15
13
(1) The customers that represented over 10% of the Company’s sales of purchased oil and gas were Vitol Inc. and Plains Marketing, L.P., for the years ended December 31, 2023 and 2022, and
Vitol Inc. for the year ended December 31, 2021.
* - Less than 10% for the respective years.
See “Note 9 – Derivative Instruments and Hedging Activities” for discussion of credit risk related with the Company’s commodity derivative counterparties.
Oil and Natural Gas Properties
Proved Oil and Natural Gas Properties. The Company follows the successful efforts method of accounting for its oil and gas properties. Under this method, drilling and
completion costs, including lease and well equipment, intangible development costs, and operational support facilities in the field, associated with development wells are
capitalized to proved oil and gas properties and are depleted on an asset group basis (properties aggregated based on geographical and geological characteristics) using the
units-of-production method based on estimated proved developed oil and gas reserves. Acquired proved properties and proved leasehold acquisition costs are depleted on the
same asset group basis using the units-of-production method based on estimated total proved oil and gas reserves. The calculation of depletion expense takes into consideration
estimated asset retirement costs, net of estimated salvage values.
Proved oil and gas properties are assessed for impairment on an asset group basis whenever events and circumstances indicate that there could be a possible decline in the
recoverability of the net book value of such property. The Company estimates the expected future net cash flows of its proved oil and gas properties and compares these
undiscounted cash flows to the net book value of the proved oil and gas properties to determine if the net book value is recoverable. If the net book value exceeds the estimated
undiscounted future net cash flows, the Company will recognize an impairment to reduce the net book value of the proved oil and gas properties to fair value. The factors used
to determine fair value include, but are not limited to, estimates of reserves, future commodity prices, future production estimates, estimated future development costs and
operating costs, and discount rates, which are based on a weighted average cost of capital. See “Note 5 — Acquisitions and Divestitures” for details of the impairment recorded
in the second quarter of 2023 associated with the sale of all the Company’s interests of Callon (Eagle Ford) LLC to Ridgemar Energy Operating, LLC. There were no
impairments of proved oil and gas properties for the years ended December 31, 2022 and 2021.
The partial sale of a proved property within an existing asset group is accounted for as a normal retirement and no net gain or loss on divestiture is recognized as long as the
treatment does not significantly alter the units-of-production depletion rate. The sale of a partial interest in an individual proved property is accounted for as a recovery of cost.
A net gain or loss on divestiture is recognized in the consolidated statements of operations for all other sales of proved properties.
Unproved Oil and Natural Gas Properties. Unproved oil and gas properties consist of costs incurred in obtaining a mineral interest or a right in a property such as a lease, in
addition to broker fees, recording fees and other similar costs. Leasehold costs are classified as unproved until proved reserves are discovered on or otherwise attributed to the
property, at which time the related unproved oil and gas property costs are reclassified to proved oil and gas properties and depleted on an asset group basis using the units-of-
production method based on estimated total proved oil and gas reserves.
The Company evaluates significant unproved oil and gas property costs for impairment based on remaining lease term, drilling results, reservoir performance, seismic
interpretation or changes in future plans to develop acreage. Unproved oil and gas properties that are not individually significant are aggregated by asset group, and the portion
of such costs estimated to be nonproductive prior to lease expiration is amortized over the average holding period. The estimate of what could be nonproductive is based on the
Company’s historical experience or other information, including current drilling plans and existing geological data. Impairment and amortization of unproved oil and gas
properties are recognized as “Impairment of oil and gas properties” in the consolidated statements of operations.
72
Exploratory. Exploratory costs, including personnel and other internal costs, geological and geophysical expenses and delay rentals for oil and gas leases, are expensed as
incurred. Exploratory well costs are initially capitalized pending the determination of whether proved reserves have been discovered. If proved reserves are discovered,
exploratory well costs are capitalized as proved oil and gas properties. If proved reserves are not found, exploratory well costs are expensed as dry holes. The application of the
successful efforts method of accounting requires management’s judgment to determine the proper designation of wells as either development or exploratory, which will
ultimately determine the proper accounting treatment of costs of dry holes.
Capitalized Interest. The Company capitalizes interest on expenditures made in connection with exploration and development projects that meet certain thresholds and are not
subject to current amortization. For projects that meet these thresholds, interest is capitalized only for the period that activities are in process to bring the projects to their
intended use. Capitalized interest cannot exceed interest expense for the period capitalized. During the years ended December 31, 2023, 2022 and 2021, the Company did not
have any projects that met the thresholds, therefore, had no capitalized interest.
Depreciation of other property and equipment is recognized using the straight-line method based on estimated useful lives ranging from two to twenty years.
Deferred Financing Costs
Deferred financing costs associated with the Unsecured Senior Notes and previously with the Second Lien Notes, both defined below, are classified as a reduction of the related
carrying value on the consolidated balance sheets and are amortized to interest expense using the effective interest method over the terms of the related debt. Deferred financing
costs associated with the Credit Facility, as defined below, are classified in “Other assets, net” in the consolidated balance sheets and are amortized to interest expense using the
straight-line method over the term of the facility.
Asset Retirement Obligations
The Company records an estimate of the fair value of liabilities for obligations associated with plugging and abandoning oil and gas wells, removing production equipment and
facilities and restoring the surface of the land in accordance with the terms of oil and gas leases and applicable local, state and federal laws. Estimates involved in determining
asset retirement obligations include the future plugging and abandonment costs of wells and related facilities, the ultimate productive life of the properties, a credit-adjusted
risk-free discount rate and an inflation factor in order to determine the present value of the asset retirement obligation. The present value of the asset retirement obligations is
accreted each period and the increase to the obligation is reported in “Depreciation, depletion and amortization” in the consolidated statements of operations. 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 proved oil and gas
properties in the consolidated balance sheets. See “Note 15 – Asset Retirement Obligations” for additional information.
Derivative Instruments
The Company uses commodity derivative instruments to mitigate the effects of commodity price volatility for a portion of its forecasted sales of production and achieve a more
predictable level of cash flow. The Company does not enter into commodity derivative instruments for speculative or trading purposes. All commodity derivative instruments
are recorded in the consolidated balance sheets as either an asset or liability measured at fair value. The Company nets its commodity derivative instrument fair value amounts
executed with the same counterparty to a single asset or liability pursuant to International Swap Dealers Association Master Agreements (“ISDA Agreements”), which provide
for net settlement over the term of the contract and in the event of default or termination of the contract.
Settlements of the Company’s commodity derivative instruments are based on the difference between the contract price or prices specified in the derivative instrument and a
benchmark price, such as the NYMEX price. To determine the fair value of the Company’s derivative instruments, the Company utilizes present value methods that include
assumptions about commodity prices based on those observed in underlying markets. See “Note 10 – Fair Value Measurements” for additional information regarding fair value.
The Company has elected not to meet the criteria to qualify its commodity derivative instruments for hedge accounting treatment. As such, all gains and losses as a result of
changes in the fair value of commodity derivative instruments are recognized as “(Gain) loss on derivative contracts” in the consolidated statements of operations in the period
in which the changes occur. See “Note 9 – Derivative Instruments and Hedging Activities” and “Note 10 – Fair Value Measurements” for further discussion.
Revenue Recognition
The Company recognizes revenues from the sales of oil, natural gas, and NGLs to its customers and presents them disaggregated on the Company’s consolidated statements of
operations. Revenue is recognized at the point in time when control of the product transfers to the customer.
73
For the Company’s product sales that have a contract term greater than one year, it has utilized the practical expedient in Accounting Standards Codification 606-10-50-14,
which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a
wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes
are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for sales may not be received for 30 to 90 days after the
date production is delivered, and as a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the
sale of the product. The Company records the differences between estimates and the actual amounts received for product sales in the month that payment is received from the
purchaser. The Company has existing internal controls for its revenue estimation process and related accruals, and any identified differences between its revenue estimates and
actual revenue received historically have not been significant. See “Note 4 – Revenue Recognition” for further discussion.
Income Taxes
Income taxes are recognized based on earnings reported for tax return purposes in addition to a provision for deferred income taxes. Deferred income taxes are recognized at
the end of each reporting period for the future tax consequences of cumulative temporary differences between the tax basis of assets and liabilities and their reported amounts in
the Company’s consolidated financial statements based on existing tax laws and enacted statutory tax rates applicable to the periods in which the temporary differences are
expected to affect taxable income. U.S. GAAP requires the recognition of a deferred tax asset for net operating loss carryforwards and tax credit carryforwards. The Company
assesses the realizability of its deferred tax assets on a quarterly basis by considering all available evidence (both positive and negative) to determine whether it is more likely
than not that all or a portion of the deferred tax assets will not be realized and a valuation allowance is required. See “Note 13 – Income Taxes” for further discussion.
Share-Based Compensation
The Company grants restricted stock unit awards that may be settled in common stock (“RSU Equity Awards”) or cash (“Cash-Settled RSU Awards”), some of which are
subject to achievement of certain performance conditions. Share-based compensation expense is recognized as “General and administrative expense” in the consolidated
statements of operations. The Company accounts for forfeitures of equity-based incentive awards as they occur. See “Note 11 – Compensation Plans” for further details of the
awards discussed below.
RSU Equity Awards and Cash-Settled RSU Awards. Share-based compensation expense for RSU Equity Awards is based on the grant-date fair value and recognized over the
vesting period (generally three years for employees and one year for non-employee directors) using the straight-line method. For RSU Equity Awards with vesting terms subject
to a performance condition, share-based compensation expense is based on the fair value measured at the grant date as calculated using a Monte Carlo pricing model with the
estimated value recognized over the vesting period (generally three years). Cash-Settled RSU awards that the Company expects, or is required, to settle in cash are accounted
for as liabilities with share-based compensation expense based on the fair value measured at each reporting period, with the estimated fair value recognized over the vesting
period.
Cash SARs. Stock appreciation rights to be settled in cash (“Cash SARs” and together with Cash-Settled RSU Awards, the “Cash-Settled Awards”) are remeasured at fair value
at the end of each reporting period with the change in fair value recorded as share-based compensation expense. The liability for Cash SARs is classified as “Other current
liabilities” in the consolidated balance sheets as all outstanding awards are vested. The Cash SARs outstanding will expire in 2025 and 2026.
Share Repurchase Program
The Company repurchases shares of its common stock from time to time under a program authorized by the Board of Directors. The Company retires shares acquired through
share repurchases and returns those shares to the status of authorized but unissued. The repurchased and retired shares are recorded as a reduction to “Common stock” and
“Capital in excess of par value” in the consolidated balance sheets. See “Note 12 — Stockholders’ Equity” for further discussion.
74
Supplemental Cash Flow Information
The following table sets forth supplemental cash flow information for the periods indicated:
Interest paid
Income taxes paid
Cash paid for amounts included in the measurement of lease liabilities:
(1)
Operating cash flows from operating leases
Investing cash flows from operating leases
Non-cash investing and financing activities:
Change in accrued capital expenditures
Change in asset retirement costs
ROU assets obtained in exchange for lease liabilities:
Operating leases
Financing leases
2023
Years Ended December 31,
2022*
(In thousands)
2021*
$175,076
4,477
$7,735
42,765
($4,251)
10,636
$46,098
—
$192,220
—
$7,096
32,060
$11,696
6,500
$56,291
—
$168,235
—
$26,681
18,598
$63,903
2,905
$24,301
—
*
Financial information for the prior period has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant Accounting
Policies” for additional information.
(1) The Company did not pay or receive a refund for any federal income tax for the years ended December 31, 2022, and 2021. For the years ended December 31, 2023, 2022 and 2021, the
Company had net payments of approximately $4.7 million, $0.2 million, and $3.2 million, respectively, in state income taxes.
Earnings per Share
The Company’s basic net income (loss) per common share is based on the weighted average number of shares of common stock outstanding for the period. Diluted net income
(loss) per common share is calculated using the treasury stock method and is based on the weighted average number of common shares and all potentially dilutive common
shares outstanding during the year which include RSU Equity Awards and common stock warrants. When a net loss per common share exists, all potentially dilutive common
shares outstanding are anti-dilutive and are therefore excluded from the calculation of diluted weighted average shares outstanding. See “Note 7 – Earnings Per Share” for
further discussion.
Industry Segment and Geographic Information
The Company operates in one industry segment, which is the exploration, development, and production of crude oil, natural gas, and NGLs. All of the Company’s operations
are located in the United States and currently all revenues are attributable to customers located in the United States.
Recently Adopted Accounting Standards
As of December 31, 2023, and through the filing of this report, no new accounting standards have been issued and not yet adopted that are applicable to the Company and that
would have a material effect on the Company’s consolidated financial statements and related disclosures.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU
2020-04”) followed by ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), issued in January 2021 to provide clarifying guidance regarding the
scope of Topic 848. ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects
of) reference rate reform on financial reporting. Generally, the guidance is to be applied as of any date from the beginning of an interim period that includes or is subsequent to
March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available
to be issued. ASU 2020-04 and ASU 2021-01 are effective for all entities through December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which extends the
effective date through December 31, 2024. As of December 31, 2023, the Company has not elected to use the optional guidance and continues to evaluate the options provided
by ASU 2020-04 and ASU 2021-01. Please refer to “Note 8 – Borrowings” for discussion of the Credit Agreement (as defined below) which references SOFR.
75
Note 3 – Change in Accounting Principle
In the first quarter of 2023, the Company voluntarily changed its method of accounting for oil and natural gas exploration and development activities from the full cost method
to the successful efforts method. Accordingly, financial information for prior periods has been recast to reflect retrospective application of the successful efforts method. In
general, under successful efforts, exploration costs such as exploratory dry holes, exploratory geophysical and geological costs, delay rentals, unproved leasehold impairments
and exploration overhead are expensed as incurred as opposed to being capitalized under the full cost method of accounting. The successful efforts method also provides for the
assessment of potential proved oil and gas property impairments by comparing the net book value of proved oil and gas properties to associated estimated undiscounted future
net cash flows. If the net book value exceeds the estimated undiscounted future net cash flows, an impairment is recorded to reduce the net book value to fair value. Under the
full cost method of accounting, an impairment would be required if the net book value of oil and natural gas properties exceeds a full cost ceiling using an unweighted
arithmetic average of commodity prices in effect on the first day of each of the previous 12 months. In addition, gains or losses, if applicable, are recognized more frequently on
the divestitures of oil and gas properties under the successful efforts method, as opposed to an adjustment to the net book value of the oil and gas properties under the full cost
method.
The “Impairment of oil and gas properties” and “Gain on sale of oil and gas properties” line items presented in the tables below are in connection with the sale of all of the
Company’s interests of Callon (Eagle Ford) LLC to Ridgemar Energy Operating, LLC. See “Note 5 — Acquisitions and Divestitures” for additional details.
The following tables present the effects of the change to the successful efforts method in the consolidated balance sheets:
Oil and natural gas properties:
Proved properties
Accumulated depreciation, depletion, amortization and impairments
Unproved properties
Total oil and gas properties, net
Deferred income taxes
Total assets
Stockholders’ equity:
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
Oil and natural gas properties:
Proved properties
Accumulated depreciation, depletion, amortization and impairments
Unproved properties
Total oil and gas properties, net
Total assets
(1)
Deferred income taxes
Stockholders’ equity:
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
(1) Included in “Other long-term liabilities” in the consolidated balance sheets.
76
Under
Full Cost
As of December 31, 2023
Changes
(In thousands)
Under Successful
Efforts
$11,661,279
(6,881,323)
1,559,952
6,339,908
136,144
$6,856,559
(50,745)
4,136,444
$6,856,559
($2,004,174)
2,311,191
(496,919)
(189,902)
44,819
($145,083)
(145,083)
(145,083)
($145,083)
$9,657,105
(4,570,132)
1,063,033
6,150,006
180,963
$6,711,476
(195,828)
3,991,361
$6,711,476
Under
Full Cost
As of December 31, 2022
Changes
(In thousands)
Under Successful
Efforts
$10,367,478
(6,343,875)
1,711,306
5,734,909
$6,146,081
4,279
(937,388)
3,085,422
$6,146,081
($1,099,343)
1,927,269
(485,538)
342,388
$342,388
2,029
340,359
340,359
$342,388
$9,268,135
(4,416,606)
1,225,768
6,077,297
$6,488,469
6,308
(597,029)
3,425,781
$6,488,469
The following tables present the effects of the change to the successful efforts method in the consolidated statements of operations:
Year Ended December 31, 2023
Under
Full Cost
Changes
(In thousands, except per share amounts)
Under Successful
Efforts
Operating Expenses:
Exploration
Depreciation, depletion and amortization
Impairment of oil and gas properties
Gain on sale of oil and gas properties
General and administrative
Income From Operations
Other Expenses:
Interest expense
Income Before Income Taxes
Income tax benefit
Net Income
Net Income Per Common Share:
Basic
Diluted
Operating Expenses:
Exploration
Depreciation, depletion and amortization
Impairment of oil and gas properties
General and administrative
Income From Operations
Other Expenses:
Interest expense
Income Before Income Taxes
Income tax expense
Net Income
Net Income Per Common Share:
Basic
Diluted
$9,143
(9,483)
406,898
(23,476)
37,880
(420,962)
111,328
(532,290)
46,848
($485,442)
$—
545,144
—
—
77,464
784,840
67,977
743,683
142,960
$886,643
$13.71
$13.67
Year Ended December 31, 2022
$9,143
535,661
406,898
(23,476)
115,344
363,878
179,305
211,393
189,808
$401,201
$6.20
$6.19
Under
Full Cost
Changes
(In thousands, except per share amounts)
Under Successful
Efforts
$—
466,517
—
57,393
1,680,532
$9,703
27,712
2,201
40,603
(80,219)
$9,703
494,229
2,201
97,996
1,600,313
79,667
108,125
187,792
1,221,609
(11,793)
$1,209,816
$19.63
$19.54
(188,344)
(2,029)
($190,373)
1,033,265
(13,822)
$1,019,443
$16.54
$16.47
77
Year Ended December 31, 2021
Under
Full Cost
Changes
(In thousands, except per share amounts)
Under Successful
Efforts
Operating Expenses:
Exploration
Depreciation, depletion and amortization
Impairment of oil and gas properties
General and administrative
Income From Operations
Other Expenses:
Interest expense
Income Before Income Taxes
Income tax expense
Net Income
Net Income Per Common Share:
Basic
Diluted
$6,470
32,056
52,295
41,122
(131,943)
99,647
(231,590)
—
($231,590)
$—
356,556
—
50,483
1,038,343
102,012
365,331
(180)
$365,151
$7.51
$7.26
$6,470
388,612
52,295
91,605
906,400
201,659
133,741
(180)
$133,561
$2.75
$2.65
The following tables present the effects of the change to the successful efforts method in the consolidated statements of cash flows:
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization
Impairment of oil and gas properties
Amortization of non-cash debt related items, net
Deferred income tax benefit
Gain on sale of oil and gas properties
Non-cash expense related to share-based awards
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisition of oil and gas properties
Net cash used in investing activities
Net change in cash and cash equivalents
Balance, beginning of period
Balance, end of period
78
Year Ended December 31, 2023
Under
Full Cost
Changes
(In thousands)
Under Successful
Efforts
$886,643
($485,442)
$401,201
545,144
—
4,064
(140,422)
—
4,019
1,236,760
(1,104,070)
(297,082)
(851,542)
(70)
3,395
$3,325
(9,483)
406,898
6,726
(46,848)
(23,476)
7,394
(144,231)
135,088
9,143
144,231
—
—
$—
535,661
406,898
10,790
(187,270)
(23,476)
11,413
1,092,529
(968,982)
(287,939)
(707,311)
(70)
3,395
$3,325
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization
Impairment of oil and gas properties
Amortization of non-cash debt related items, net
Deferred income tax expense
Non-cash expense related to share-based awards
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisition of oil and gas properties
Net cash used in investing activities
Net change in cash and cash equivalents
Balance, beginning of period
Balance, end of period
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization
Impairment of oil and gas properties
Amortization of non-cash debt related items, net
Deferred income tax expense
Non-cash expense related to share-based awards
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisition of oil and gas properties
Net cash used in investing activities
Net change in cash and cash equivalents
Balance, beginning of period
Balance, end of period
Year Ended December 31, 2022
Under
Full Cost
Changes
(In thousands)
Under Successful
Efforts
$1,209,816
($190,373)
$1,019,443
466,517
—
5,280
4,279
2,507
1,501,517
(992,985)
(28,253)
(999,027)
(6,487)
9,882
$3,395
27,712
2,201
7,052
2,029
5,535
(145,844)
144,297
1,547
145,844
—
—
$—
494,229
2,201
12,332
6,308
8,042
1,355,673
(848,688)
(26,706)
(853,183)
(6,487)
9,882
$3,395
Year Ended December 31, 2021
Under
Full Cost
Changes
(In thousands)
Under Successful
Efforts
$365,151
($231,590)
$133,561
356,556
—
10,124
—
12,923
974,143
(578,487)
(493,732)
(876,400)
(10,354)
20,236
$9,882
32,056
52,295
9,909
—
12,934
(124,396)
124,126
270
124,396
—
—
$—
388,612
52,295
20,033
—
25,857
849,747
(454,361)
(493,462)
(752,004)
(10,354)
20,236
$9,882
The following tables present the effects of the change to the successful efforts method in the consolidated statements of stockholders’ equity:
Accumulated deficit
Total stockholders’ equity
79
As of December 31, 2023
Under
Full Cost
($50,745)
$4,136,444
Changes
(In thousands)
($145,083)
($145,083)
Under Successful
Efforts
($195,828)
$3,991,361
Accumulated deficit
Total stockholders’ equity
Accumulated deficit
Total stockholders’ equity
Note 4 – Revenue Recognition
Revenue from contracts with customers
Oil Sales
Under
Full Cost
($937,388)
$3,085,422
Under
Full Cost
As of December 31, 2022
Changes
(In thousands)
$340,359
$340,359
Under Successful
Efforts
($597,029)
$3,425,781
As of December 31, 2021
Changes
(In thousands)
Under Successful
Efforts
($2,147,204)
$1,865,768
$530,732
$530,732
($1,616,472)
$2,396,500
Under the Company’s oil sales contracts, it sells oil production at the point of delivery and collects an agreed upon index price, net of pricing differentials. The Company
recognizes revenue when control transfers to the purchaser at the point of delivery at the net price received. The Company has certain oil sales that occur at market locations
downstream of the production area. Given the structure of these arrangements and where control transfers, the Company separately recognizes fees and other deductions
incurred prior to control transfer as “Gathering, transportation and processing” in its consolidated statements of operations.
Natural Gas and NGL Sales
Under the Company’s natural gas sales processing contracts, it delivers natural gas to a midstream processing entity which gathers and processes the natural gas and either
remits proceeds to the Company for the resulting sale of NGLs and residue gas or, in take in-kind arrangements, provides the Company the resulting NGLs and/or residue gas
for sale to downstream customers. The Company evaluates whether the processing entity is the principal or the agent in the transaction for each of our natural gas processing
agreements and have concluded that the Company maintains control through processing or has the right to take residue gas and/or NGLs in-kind at the tailgate of the midstream
entity’s processing plant and subsequently market the product. The Company recognizes revenue when control transfers to the purchaser at the delivery point based on the
contractual index price received.
The Company recognizes revenue for natural gas and NGLs on a gross basis with gathering, transportation and processing fees recognized separately as “Gathering,
transportation and processing” in its consolidated statements of operations as the Company maintains control throughout processing.
Oil and Gas Purchase and Sale Arrangements
The Company proactively evaluates development plans and looks to enter into pipeline transportation contracts to mitigate market exposures and help ensure certainty of flow
for its oil and gas production, in some cases multiple years in advance of development. Additionally, as the Company looks to optimize its operations and reduce exposures, in
certain instances, the Company purchases oil and gas from third parties which is utilized to fulfill portions of its pipeline commitments. Sales of purchased oil and gas represent
revenues the Company receives from sales of commodities purchased from a third-party. The Company recognizes these revenues and the purchase of the third-party
commodities, as well as any costs associated with the purchase, on a gross basis, as the Company acts as a principal in these transactions by assuming control of the purchased
commodity before it is transferred to the customer. As of December 31, 2023 and 2022, receivables from the sales of purchased oil and gas were $33.9 million and
$30.5 million, respectively, and are presented in “Accounts receivable, net” in the consolidated balance sheets. As of December 31, 2023 and 2022, amounts owed for purchases
of oil and gas were $34.8 million and $31.1 million, respectively, and are presented in “Other current liabilities” in the consolidated balance sheets.
Accounts Receivable from Revenues from Contracts with Customers
Net accounts receivable include amounts billed and currently due from revenues from contracts with customers of our oil and natural gas production, which had a balance at
December 31, 2023 and 2022 of $132.3 million and $174.1 million, respectively, and are presented in “Accounts receivable, net” in the consolidated balance sheets.
80
Note 5 – Acquisitions and Divestitures
2023 Acquisitions and Divestitures
Eagle Ford Divestiture
On May 3, 2023, the Company entered into an agreement with Ridgemar Energy Operating, LLC (“Ridgemar”) for the sale of all its oil and gas properties in the Eagle Ford
(the “Eagle Ford Divestiture”) for consideration of $655.0 million in cash, subject to customary purchase price adjustments, as well as contingent consideration where the
Company could receive up to $45.0 million if the WTI price of oil exceeds certain thresholds in 2024 (“Contingent Eagle Ford Consideration”). See “Note 9 — Derivative
Instruments and Hedging Activities” for further discussion of the Contingent Eagle Ford Consideration. Upon signing, Ridgemar paid approximately $49.1 million as a deposit
into a third-party escrow account. The transaction was structured as the acquisition by Ridgemar of 100% of the limited liability company interests of the Company’s wholly
owned subsidiary, Callon (Eagle Ford) LLC.
During the second quarter of 2023, the Company classified the assets and liabilities associated with the Eagle Ford Divestiture as held for sale, and recorded an impairment of
$406.9 million against properties associated with the Eagle Ford Divestiture as the fair value less cost to sell was less than the carrying amount of the net assets. On July 3,
2023, the Company closed the Eagle Ford Divestiture. The Eagle Ford Divestiture has an adjusted purchase price of approximately $549.6 million in cash, inclusive of the
deposit paid at signing. As a result, the Company recorded a gain on sale of assets of $23.5 million in the third quarter of 2023.
Percussion Acquisition
On May 3, 2023, the Company entered into an agreement (the “Percussion Agreement”) with Percussion Petroleum Management II, LLC (“Percussion”) for the purchase of its
oil and gas properties in the Delaware Basin (the “Percussion Acquisition”) for consideration of $475.0 million, which consisted of $255.0 million in cash, inclusive of the
repayment of Percussion’s indebtedness of approximately $220.0 million, and $210.0 million of shares of the Company’s common stock, subject to customary purchase price
adjustments. Upon signing, the Company paid $36.0 million as a deposit into a third-party escrow account. The transaction was structured as the acquisition by Callon
Petroleum Operating Company of 100% of the limited liability company interests of Percussion’s wholly owned subsidiary, Percussion Petroleum Operating II, LLC
(“Percussion Operating”).
On July 3, 2023, the Company closed the Percussion Acquisition. The Percussion Acquisition has an adjusted purchase price of approximately $248.5 million in cash, inclusive
of the deposit paid at signing and the repayment of Percussion Operating’s indebtedness of approximately $220.0 million, and approximately 6.2 million shares of the
Company’s common stock for total consideration of $457.3 million. The Company funded the cash portion of the total consideration with proceeds from the Eagle Ford
Divestiture. Additionally, the Company assumed Percussion Operating’s (as defined below) existing hedges and transportation contract liabilities, and could have to pay up to
$62.5 million if the WTI price of oil exceeds certain thresholds in 2023, 2024, and 2025 (“Percussion Earn-Out Obligation”). See “Note 9 - Derivative Instruments and Hedging
Activities” for further discussion of the Percussion Earn-Out Obligation.
The Percussion Acquisition was accounted for as a business combination; therefore, the purchase price was allocated to the assets acquired and the liabilities assumed based on
their estimated acquisition date fair values with information available at that time. A combination of a discounted cash flow model and market data was used by a third-party
specialist in determining the fair value of the oil and gas properties. Significant inputs into the calculation included future commodity prices, estimated volumes of oil and gas
reserves, expectations for timing and amount of future development and operating costs, future plugging and abandonment costs and a risk adjusted discount rate. Certain data
necessary to complete the purchase price allocation is not yet available. The Company expects to complete the purchase price allocation during the 12-month period following
the acquisition date.
81
The following table sets forth the Company’s preliminary allocation of the total estimated consideration of $457.3 million to the assets acquired and liabilities assumed as of the
acquisition date.
Assets:
Accounts receivable, net
Proved properties, net
Unproved properties
Total assets acquired
Liabilities:
Accounts payable and accrued liabilities
Fair value of derivatives - current
Other current liabilities
Asset retirement obligations
Fair value of derivatives - long-term
Other long-term liabilities
Total liabilities assumed
Total consideration
Preliminary Purchase
Price Allocation
(In thousands)
$30,135
490,330
52,475
$572,940
$42,585
20,660
11,471
2,323
27,979
10,619
$115,637
$457,303
Approximately $131.0 million of revenues and $32.5 million of direct operating expenses attributed to the assets acquired in the Percussion Acquisition are included in the
Company’s consolidated statements of operations for the period from the closing date on July 3, 2023 through December 31, 2023.
Pro Forma Operating Results (Unaudited). The following unaudited pro forma combined condensed financial data for the years ended December 31, 2023 and 2022 was
derived from the historical financial statements of the Company and gives effect to the Percussion Acquisition, as if it had occurred on January 1, 2022. The below information
reflects pro forma adjustments for the issuance of the Company’s common stock, as well as pro forma adjustments based on available information and certain assumptions that
the Company believes provide a reasonable basis for reflecting the significant pro forma effects directly attributable to the Percussion Acquisition.
The pro forma consolidated statements of operations data has been included for comparative purposes only and is not necessarily indicative of the results that might have
occurred had the Percussion Acquisition taken place on January 1, 2022 and is not intended to be a projection of future results.
Revenues
Income from operations
Net income
Basic earnings per common share
Diluted earnings per common share
Year ended December 31,
2023
2022*
(In thousands, except per share amounts)
$2,480,799
434,369
529,869
$8.19
$8.17
$3,603,315
1,840,018
1,123,754
$16.56
$16.49
*
Financial information for the prior period has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant Accounting
Policies” for additional information.
2022 Acquisitions and Divestitures
The Company did not have any material acquisitions or divestitures for the year ended December 31, 2022.
2021 Acquisitions and Divestitures
Primexx Acquisition
On October 1, 2021, the Company closed on the acquisition of certain producing oil and gas properties, undeveloped acreage and associated infrastructure assets in the
Delaware Basin from Primexx Resource Development, LLC (“Primexx”) and BPP Acquisition,
82
LLC (“BPP”) for an adjusted purchase price of approximately $444.8 million in cash, inclusive of the deposit paid at signing, 8.84 million shares of the Company’s common
stock and approximately $25.2 million paid upon final closing for total consideration of $877.0 million (the “Primexx Acquisition”). The Company funded the cash portion of
the total consideration with borrowings under its credit facility. Of the 8.84 million shares of the Company’s common stock issued upon closing, 2.6 million shares were held in
escrow pursuant to the purchase and sale agreements with Primexx and BPP (collectively, the “Primexx PSAs”). Pursuant to the Primexx PSAs, 1.3 million of the shares held in
escrow were released to the sellers six months after the closing date, which was on April 1, 2022. In early October 2022, the remaining 1.2 million shares were released to the
sellers, net of shares that were released to the Company for the satisfaction of indemnification claims made under the Primexx PSAs and subsequently retired.
Also, pursuant to the Primexx PSAs, certain interest owners exercised their option to sell their interest in the properties included in the Primexx Acquisition to the Company for
consideration structured similarly to the Primexx Acquisition, for an incremental purchase price totaling approximately $31.8 million, net of customary purchase price
adjustments, of which $22.4 million closed during the fourth quarter of 2021 and the remaining $9.4 million closed during the first quarter of 2022.
The Primexx Acquisition was accounted for as a business combination; therefore, the purchase price was allocated to the assets acquired and the liabilities assumed based on
their estimated acquisition date fair values with information available at that time. A combination of a discounted cash flow model and market data was used by a third-party
specialist in determining the fair value of the oil and gas properties. Significant inputs into the calculation included future commodity prices, estimated volumes of oil and gas
reserves, expectations for timing and amount of future development and operating costs, future plugging and abandonment costs and a risk adjusted discount rate.
The following table sets forth the Company’s final allocation of the purchase price of $908.9 million to the assets acquired and liabilities assumed as of the acquisition date.
Assets:
Other current assets
Proved properties, net
Unproved properties
Total assets acquired
Liabilities:
Suspense payable
Other current liabilities
Asset retirement obligation
Other long-term liabilities
Total liabilities assumed
Total consideration
Final Purchase
Price Allocation
(In thousands)
$8,174
695,838
278,370
$982,382
$16,447
45,745
1,898
9,425
$73,515
$908,867
Approximately $570.7 million of revenues and $141.2 million of direct operating expenses attributed to the Primexx Acquisition were included in the Company’s consolidated
statements of operations for the year ended December 31, 2022. For the period from the closing date of the Primexx Acquisition on October 1, 2021 through December 31,
2021, approximately $114.3 million of revenues and $32.1 million of direct operating expenses were included in the Company’s consolidated statements of operations for the
year ended December 31, 2021.
Pro Forma Operating Results (Unaudited). The following unaudited pro forma combined condensed financial data for the years ended December 31, 2021 and 2020 was
derived from the historical financial statements of the Company giving effect to the Primexx Acquisition, as if it had occurred on January 1, 2020. The below information
reflects pro forma adjustments for the issuance of the Company’s common stock and the borrowings under the Credit Facility as total consideration, as well as pro forma
adjustments based on available information and certain assumptions that the Company believes provide a reasonable basis for reflecting the significant pro forma effects
directly attributable to the Primexx Acquisition.
83
The pro forma consolidated statements of operations data has been included for comparative purposes only, is not necessarily indicative of the results that might have occurred
had the Primexx Acquisition taken place on January 1, 2020 and is not intended to be a projection of future results.
Revenues
Income (loss) from operations
Net income (loss)
Basic earnings per common share
Diluted earnings per common share
Non-Core Asset Divestitures
Year Ended December 31, 2021
(In thousands, except per share amounts)
$2,294,893
1,151,493
482,690
$8.37
$8.13
During the second quarter of 2021, the Company completed its divestitures of certain non-core assets in the Delaware Basin for net proceeds of $29.6 million. The divestitures
were primarily comprised of natural gas producing properties in the Western Delaware Basin as well as a small undeveloped acreage position.
On November 19, 2021, the Company closed on its divestiture of certain non-core assets in the Eagle Ford Shale, comprised of producing properties as well as an undeveloped
acreage position, for net proceeds of $91.9 million.
In the fourth quarter of 2021, the Company closed on the divestiture of certain non-core assets in the Midland Basin, comprised of producing properties as well as an
undeveloped acreage position for net proceeds of $30.5 million.
On October 28, 2021, the Company closed on the divestiture of certain non-core water infrastructure for net proceeds of $27.9 million, as well as up to $18.0 million of
incremental contingent consideration based on completed lateral length for wells in a specified area.
The aggregate net proceeds for each of the 2021 divestitures discussed above were recognized as a reduction of proved oil and gas properties with no gain or loss recognized as
the divestitures did not significantly alter the relationship between capitalized costs and estimated proved reserves.
Note 6 – Property and Equipment, Net
As of December 31, 2023 and 2022, total property and equipment, net consisted of the following:
Oil and natural gas properties, successful efforts accounting method
Proved properties
Accumulated depreciation, depletion, amortization and impairments
Proved properties, net
Unproved properties
Total oil and natural gas properties, net
Other property and equipment
Accumulated depreciation
Other property and equipment, net
As of December 31,
2023
2022*
(In thousands)
$9,657,105
(4,570,132)
5,086,973
1,063,033
$6,150,006
$41,011
(14,227)
$26,784
$9,268,135
(4,416,606)
4,851,529
1,225,768
$6,077,297
$40,530
(14,378)
$26,152
*
Financial information for the prior period has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant Accounting
Policies” for additional information.
84
Capitalized Exploratory Well Cost
The following table reflects the changes in capitalized exploratory costs pending the determination of proved reserves and included in unproved properties for the periods
presented:
Beginning of period
Additions pending the determination of proved reserves
Reclassifications to proved properties
End of period
2023
Years Ended December 31,
2022*
(In thousands)
2021*
$—
29,687
(29,401)
$286
$19,640
47,711
(67,351)
$—
$13,768
49,294
(43,422)
$19,640
*
Financial information for the prior period has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant Accounting
Policies” for additional information.
For the years ended December 31, 2023, 2022 and 2021, the Company did not have any exploratory well costs capitalized for a period greater than one year after drilling.
Impairment of Oil and Gas Properties
The Company recognized an impairment of proved oil and gas properties for the year ended December 31, 2023 of $406.9 million as the fair value less cost to sell was less than
the carrying amount of the net assets associated with the Eagle Ford Divestiture. See “Note 5 - Acquisitions and Divestitures” for further discussion of the Eagle Ford
Divestiture. The Company recognized an impairment of unproved oil and gas properties in the fourth quarter of 2022 of $2.2 million due to certain leases approaching the end
of their lease terms with no future plans to develop the acreage.
Note 7 – Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding for the periods presented. The calculation of
diluted earnings per share includes the potential dilutive impact of non-vested restricted stock units and unexercised warrants outstanding during the periods presented, as
calculated using the treasury stock method, unless their effect is anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share:
Net Income
Basic weighted average common shares outstanding
Dilutive impact of restricted stock units
Dilutive impact of warrants
Diluted weighted average common shares outstanding
Net Income Per Common Share
Basic
Diluted
Restricted stock units
(1)
Warrants
(1)
2023
Years Ended December 31,
2022*
(In thousands, except per share amounts)
$401,201
$1,019,443
2021*
$133,561
64,692
160
—
64,852
$6.20
$6.19
64
481
61,620
284
—
61,904
$16.54
$16.47
30
455
48,612
296
1,403
50,311
$2.75
$2.65
7
481
*
Financial information for the prior period has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant Accounting
Policies” for additional information.
(1) Shares excluded from the diluted earnings per share calculation because their effect would be anti-dilutive.
85
Note 8 – Borrowings
The Company’s borrowings consisted of the following:
8.25% Senior Notes due 2025
6.375% Senior Notes due 2026
Senior Secured Revolving Credit Facility due 2027
8.0% Senior Notes due 2028
7.5% Senior Notes due 2030
Total principal outstanding
Unamortized premium on 8.25% Senior Notes
Unamortized deferred financing costs for Senior Unsecured Notes
Long-term debt
(1)
As of December 31,
2023
2022
(In thousands)
$—
320,783
365,000
650,000
600,000
1,935,783
—
(17,128)
$1,918,655
$187,238
320,783
503,000
650,000
600,000
2,261,021
1,715
(21,441)
$2,241,295
(1) Excludes unamortized deferred financing costs related to the Company’s senior secured revolving credit facility of $12.8 million and $18.8 million as of December 31, 2023 and 2022,
respectively, which are classified in “Other assets, net” in the consolidated balance sheets.
Senior Secured Revolving Credit Facility
On December 20, 2019, upon consummation of the acquisition of Carrizo Oil & Gas, Inc. (the “Carrizo Acquisition”), the Company entered into the credit agreement with a
syndicate of lenders (the “Prior Credit Facility”). The Prior Credit Facility provided for interest-only payments until December 20, 2024, when the Prior Credit Facility would
mature and any outstanding borrowings would become due. The maximum credit amount under the Prior Credit Facility was $5.0 billion.
On October 19, 2022, the Company entered into the Amended & Restated Credit Agreement (the “Credit Agreement” and the senior secured revolving credit facility
thereunder, the “Credit Facility”) on substantially similar terms as those in the credit agreement governing the Prior Credit Facility. The Credit Agreement, among other things,
extended the term to provide for interest-only payments until October 19, 2027 when the Credit Agreement matures and any outstanding borrowings are due, established a
borrowing base of $2.0 billion, with an elected commitment amount of $1.5 billion, replaced all provisions and related definitions regarding LIBOR with SOFR, and decreased
the maximum leverage ratio from 4.00 to 1.00 to 3.50 to 1.00. As of December 31, 2023, the borrowing base under the Credit Facility was $2.0 billion, with an elected
commitment amount of $1.5 billion, and borrowings outstanding of $365.0 million at a weighted-average interest rate of 7.54%, and letters of credit outstanding of $21.4
million.
Borrowings outstanding under the Credit Agreement bear interest at the Company’s option at either (i) a base rate for a base rate loan plus a margin between 0.75% to 1.75%,
where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.50%, and the SOFR plus 0.1% (“Adjusted SOFR”) for a one month period plus
1.00%, or (ii) an Adjusted SOFR plus a margin between 1.75% to 2.75%. The Company also incurs commitment fees at rates ranging between 0.375% to 0.500% on the unused
portion of lender commitments, which are included in “Interest expense” in the consolidated statements of operations.
The borrowing base under the Credit Agreement is subject to regular redeterminations in the spring and fall of each year, as well as special redeterminations described in the
Credit Agreement, which in each case may reduce the amount of the borrowing base. The Credit Facility is secured by first preferred mortgages covering the Company’s major
producing properties. On October 31, 2023, as part of the Company’s fall 2023 redetermination, the borrowing base of $2.0 billion and elected commitment amount of $1.5
billion was reaffirmed.
Senior Unsecured Notes
Redemption of 8.25% Senior Notes. On August 2, 2023, the Company used borrowings under the Credit Facility to redeem all $187.2 million of its outstanding 8.25% Senior
Notes due 2025 (the “8.25% Senior Notes”). The Company recognized a gain on extinguishment of debt of approximately $1.2 million in its consolidated statements of
operations, which primarily related to the remaining unamortized premium.
7.5% Senior Notes. On June 24, 2022, the Company issued and sold $600.0 million in aggregate principal amount of 7.5% senior unsecured notes due 2030 (the “7.5% Senior
Notes”) in a private placement for proceeds of approximately $588.0 million, net of initial purchasers’ discounts and commissions. The 7.5% Senior Notes mature on June 15,
2030, and interest is payable semi-annually each June 15 and December 15, commencing on December 15, 2022.
At any time prior to June 15, 2025, the Company may, from time to time, redeem up to 35% of the aggregate principal amount of the 7.5% Senior Notes in an amount of cash
not greater than the net cash proceeds from certain equity offerings at the redemption price of 107.5% of the principal amount, plus accrued and unpaid interest, if any, to, but
excluding, the date of redemption, if at least 65% of
86
the aggregate principal amount of the 7.5% Senior Notes remains outstanding after such redemption and the redemption occurs within 180 days of the closing date of such
equity offering. Prior to June 15, 2025, the Company may, at its option, on any one or more occasions, redeem all or a portion of the 7.5% Senior Notes at 100.0% of the
principal amount plus an applicable make-whole premium and accrued and unpaid interest. On or after June 15, 2025, the Company may redeem all or a portion of the 7.5%
Senior Notes at redemption prices decreasing annually from 103.75% to 100.0% of the principal amount redeemed plus accrued and unpaid interest. Upon the occurrence of
certain kinds of change of control that are accompanied by a ratings decline, each holder of the 7.5% Senior Notes may require the Company to repurchase all or a portion of
such holder’s 7.5% Senior Notes for cash at a price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest.
8.0% Senior Notes. On July 6, 2021, the Company issued $650.0 million aggregate principal amount of 8.0% Senior Notes due 2028 (the “8.0% Senior Notes”) in a private
placement for proceeds of approximately $638.1 million, net of underwriting discounts and commissions and offering costs. The 8.0% Senior Notes mature on August 1, 2028
and have interest payable semi-annually each February 1 and August 1.
At any time prior to August 1, 2024, the Company may, from time to time, redeem up to 35% of the aggregate principal amount of the 8.0% Senior Notes in an amount of cash
not greater than the net cash proceeds from certain equity offerings at the redemption price of 108.0% of the principal amount, plus accrued and unpaid interest, if any, to, but
excluding, the date of redemption, if at least 65% of the aggregate principal amount of the 8.0% Senior Notes remains outstanding after such redemption and the redemption
occurs within 180 days of the closing date of such equity offering. Prior to August 1, 2024, the Company may, at its option, on any one or more occasions, redeem all or a
portion of the 8.0% Senior Notes at 100.0% of the principal amount plus an applicable make-whole premium and accrued and unpaid interest. On or after August 1, 2024, the
Company may redeem all or a portion of the 8.0% Senior Notes at redemption prices decreasing annually from 104.0% to 100.0% of the principal amount redeemed plus
accrued and unpaid interest. Upon the occurrence of certain kinds of change of control, the Company must make an offer to repurchase all or a portion of each holder’s 8.0%
Senior Notes for cash at a price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest.
6.375% Senior Notes. The Company’s 6.375% Senior Notes due 2026 (the “6.375% Senior Notes”) mature on July 1, 2026 and have interest payable semi-annually each
January 1 and July 1. Since July 1, 2022, the Company may redeem all or a portion of the 6.375% Senior Notes at redemption prices decreasing annually from 102.125% to
100% of the principal amount redeemed plus accrued and unpaid interest. Following a change of control, each holder of the 6.375% Senior Notes may require the Company to
repurchase all or a portion of the 6.375% Senior Notes at a price of 101% of principal of the amount repurchased, plus accrued and unpaid interest, if any, to the date of
repurchase.
Each of the Senior Unsecured Notes described above are guaranteed on a senior unsecured basis by the Company’s wholly owned subsidiary, Callon Petroleum Operating
Company, and may be guaranteed by certain future subsidiaries. The subsidiary guarantor is 100% owned, all of the guarantees are full and unconditional and joint and several,
the parent company has no independent assets or operations and any subsidiaries of the parent company other than the subsidiary guarantor are minor.
Covenants
The Credit Agreement and the indentures governing the 6.375% Senior Notes, the 8.0% Senior Notes, and the 7.5% Senior Notes (collectively, the “Senior Unsecured Notes”)
limit the Company and certain of its subsidiaries with respect to the amount of additional indebtedness, liens, dividends and other payments to shareholders, repurchases or
redemptions of the Company’s common stock, redemptions of senior notes, investments, acquisitions, mergers, asset dispositions, transactions with affiliates, hedging
transactions and other matters, along with maintenance of certain financial ratios.
Under the Credit Agreement, the Company must maintain the following financial covenants determined as of the last day of the quarter: (1) a Leverage Ratio (as defined in the
Credit Agreement) of no more than 3.50 to 1.00 and (2) a Current Ratio (as defined in the Credit Agreement) of not less than 1.00 to 1.00. The Company was in compliance
with these covenants at December 31, 2023.
The Credit Agreement and indentures are subject to customary events of default. If an event of default occurs and is continuing, the holders or lenders may elect to accelerate
amounts due (except in the case of a bankruptcy event of default, in which case such amounts will automatically become due and payable).
Note 9 – Derivative Instruments and Hedging Activities
Objectives and Strategies for Using Derivative Instruments
The Company is exposed to fluctuations in oil, natural gas and NGL prices received for its production. Consequently, the Company believes it is prudent to manage the
variability in cash flows on a portion of its oil, natural gas and NGL production. The Company utilizes a mix of collars, swaps, put and call options, and basis differential swaps
to manage fluctuations in cash flows resulting from changes in commodity prices. The Company does not use these instruments for speculative or trading purposes.
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Counterparty Risk and Offsetting
The Company typically has numerous commodity derivative instruments outstanding with a counterparty that were executed at various dates, for various contract types,
commodities and time periods. This often results in both commodity derivative asset and liability positions with that counterparty. The Company nets its commodity derivative
instrument fair values executed with the same counterparty to a single asset or liability pursuant to ISDA Agreements, which provide for net settlement over the term of the
contract and in the event of default or termination of the contract. In general, if a party to a derivative transaction incurs an event of default, as defined in the applicable
agreement, the other party will have the right to demand the posting of collateral, demand a cash payment transfer or terminate the arrangement.
The Company strives to minimize its credit exposure to any individual counterparty and, as such, the Company had outstanding commodity derivative instruments with nine
counterparties as of December 31, 2023. All of the counterparties to the Company’s commodity derivative instruments are also lenders under the Company’s Credit Facility.
Therefore, each of the Company’s counterparties allow the Company to satisfy any need for margin obligations associated with commodity derivative instruments where the
Company is in a net liability position with the collateral securing the Credit Agreement, thus eliminating the need for independent collateral posting.
Because each of the Company’s counterparties has an investment grade credit rating, the Company believes it does not have significant credit risk and accordingly does not
currently require its counterparties to post collateral to support the net asset positions of its commodity derivative instruments. Although the Company does not currently
anticipate nonperformance from its counterparties, it continually monitors the credit ratings of each counterparty.
While the Company monitors counterparty creditworthiness on an ongoing basis, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such
changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, the
Company may not realize the benefit of some of its derivative instruments under lower commodity prices while continuing to be obligated under higher commodity price
contracts subject to any right of offset under the agreements. Counterparty credit risk is considered when determining the fair value of a derivative instrument. See “Note 10 –
Fair Value Measurements” for further discussion.
Contingent Consideration Arrangements
Percussion Earn-Out Obligation. As a result of the Percussion Acquisition, the Company assumed an earn-out obligation from Percussion Operating, where the Company could
be required to pay up to $62.5 million in the aggregate if the average daily settlement price of WTI crude oil exceeds $60.00 per barrel for each of the 2023, 2024, and 2025
calendar years. The specified threshold for 2023 was met and the Company paid $12.5 million in January 2024, which will be classified as cash flows from investing activities
in the consolidated statements of cash flows in 2024.
Contingent Eagle Ford Consideration. As a result of the Eagle Ford Divestiture, the Company received a contingent consideration arrangement from Ridgemar. The Company
could receive up to $45.0 million if the average daily settlement price of WTI crude oil for 2024 is at least $80.00 per barrel. If the average daily settlement price of WTI crude
oil for 2024 is less than $80.00 per barrel but at least $75.00 per barrel, then the Company would receive $20.0 million.
The Company determined that the Percussion Earn-Out Obligation and Contingent Eagle Ford Consideration receipt were not clearly and closely related to the Percussion
Acquisition and Eagle Ford Divestiture membership interest purchase agreements, and therefore bifurcated these embedded features and recorded these derivatives at their
acquisition date fair value and divestiture date fair value of $34.9 million and $10.9 million, respectively, in the consolidated financial statements. As of December 31, 2023, the
estimated fair values of the Percussion Earn-Out Obligation and Contingent Eagle Ford Consideration were $42.4 million and $12.6 million, respectively, and are presented in
“Fair value of derivatives” in the consolidated balance sheets.
Ranger Divestiture and Carrizo Acquisition Contingent Consideration. In the second quarter of 2019, the Company completed its divestiture of certain non-core assets in the
southern Midland Basin. Additionally, on December 20, 2019, the Company completed the Carrizo Acquisition. Both of these transactions included potential additional
contingent consideration if certain specified pricing thresholds were met through the end of 2021. Those pricing thresholds were met for 2021, resulting in a cash receipt and
cash payment, respectively, during the first quarter of 2022. Cash received or paid for settlements of contingent consideration arrangements are classified as cash flows from
financing activities or cash flows from investing activities, respectively, up to the divestiture or acquisition date fair value, respectively, with any excess classified as cash flows
from operating activities. As a result, the Company received $20.8 million, of which $8.5 million is presented in cash flows from financing activities with the remaining
$12.3 million presented in cash flows from operating activities, and paid $25.0 million, of which $19.2 million is presented in cash flows from
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investing activities with the remaining $5.8 million presented in cash flows from operating activities. Both of these contingent consideration arrangements were completed as of
the end of 2021.
Financial Statement Presentation and Settlements
The Company records its derivative instruments at fair value in the consolidated balance sheets and records changes in fair value, as well as settlements during the period, as
“(Gain) loss on derivative contracts” in the consolidated statements of operations. The Company presents the fair value of derivative contracts on a net basis in the consolidated
balance sheets as they are subject to master netting arrangements. The following presents the impact of this presentation to the Company’s recognized assets and liabilities for
the periods indicated:
Derivative Assets
Commodity derivative instruments
Fair value of derivatives - current
Commodity derivative instruments
Contingent consideration arrangements
Other assets, net
Derivative Liabilities
Commodity derivative instruments
Contingent consideration arrangements
Fair value of derivatives - current
(1)
Commodity derivative instruments
Contingent consideration arrangements
Fair value of derivatives - non-current
Presented without
Effects of Netting
As of December 31, 2023
Effects of Netting
(In thousands)
As Presented with
Effects of Netting
$25,813
$25,813
$—
12,580
$12,580
($25,603)
(12,500)
($38,103)
$—
(29,880)
($29,880)
($13,956)
($13,956)
$—
—
$—
$13,956
—
$13,956
$—
—
$—
$11,857
$11,857
$—
12,580
$12,580
($11,647)
(12,500)
($24,147)
$—
(29,880)
($29,880)
(1) Includes approximately $4.1 million of deferred premiums, which will be paid as the applicable contracts settled.
Presented without
Effects of Netting
As of December 31, 2022
Effects of Netting
(In thousands)
As Presented with
Effects of Netting
Derivative Assets
Fair value of derivatives - current
Other assets, net
Derivative Liabilities
Fair value of derivatives - current
Fair value of derivatives - non-current
The components of “(Gain) loss on derivative contracts” are as follows for the respective periods:
(Gain) loss on oil derivatives
(Gain) loss on natural gas derivatives
Loss on NGL derivatives
(Gain) loss on contingent consideration arrangements
Loss on September 2020 Warrants liability
(1)
(Gain) loss on derivative contracts
$51,984
$1,343
($46,849)
($14,304)
2023
($30,652)
($889)
$30,652
$889
$21,332
$454
($16,197)
($13,415)
Years Ended December 31,
2022
(In thousands)
2021
($22,371)
(4,990)
2,663
5,800
—
($18,898)
$287,379
38,803
4,771
—
—
$330,953
$429,156
33,621
6,768
(2,635)
55,390
$522,300
(1) A detailed discussion of the Company’s September 2020 Warrants can be found in “Part II, Item 8. Financial Statements and Supplementary Data, Note 7 – Borrowings” of its Annual Report
on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 24, 2022.
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The components of “Cash received (paid) for commodity derivative settlements, net” and “Cash received (paid) for settlements of contingent consideration arrangements, net”
are as follows for the respective periods:
Cash flows from operating activities
Cash paid on oil derivatives
Cash received (paid) on natural gas derivatives
Cash paid on NGL derivatives
Cash received (paid) for commodity derivative settlements, net
Cash received for settlements of contingent consideration arrangements, net (1)
Cash flows from investing activities
Cash paid for settlement of contingent consideration arrangement
Cash flows from financing activities
Cash received for settlement of contingent consideration arrangement
2023
Years Ended December 31,
2022
(In thousands)
2021
($14,626)
18,109
(561)
$2,922
$—
$—
$—
($429,017)
(60,914)
(3,783)
($493,714)
$6,492
($19,171)
$8,512
($350,340)
(34,576)
(10,181)
($395,097)
$—
$—
$—
Derivative Positions
Listed in the tables below are the outstanding oil, natural gas, and NGL derivative contracts as of December 31, 2023:
Oil Contracts (WTI)
Deferred Premium Put Contracts
(1)(2)
Total volume (Bbls)
Weighted average price per Bbl
Three-Way Collar Contracts
Total volume (Bbls)
Weighted average price per Bbl
Ceiling (short call)
Floor (long put)
Floor (short put)
(1) Deferred premium put contracts are a combination of a short fixed price swap and a long call option which then performs as a long put position.
(2) Premiums associated with the Company’s deferred premium puts were approximately $4.1 million, which will be paid as the applicable contracts settle.
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For the Full Year
2024
1,076,300
$81.66
3,963,025
$78.86
$58.16
$48.16
Natural Gas Contracts (Henry Hub)
Collar Contracts
Total volume (MMBtu)
Weighted average price per MMBtu
Ceiling (short call)
Floor (long put)
Natural Gas Contracts (Waha Basis Differential)
Swap Contracts
Total volume (MMBtu)
Weighted average price per MMBtu
Natural Gas Contracts (HSC Basis Differential)
Swap Contracts
Total volume (MMBtu)
Weighted average price per MMBtu
NGL Contracts (Mont Belvieu Normal Butane)
Swap Contracts
Total volume (Bbls)
Weighted average price per Bbl
NGL Contracts (Mont Belvieu Isobutane)
Swap Contracts
Total volume (Bbls)
Weighted average price per Bbl
Note 10 – Fair Value Measurements
For the Full Year
2024
8,598,557
$3.89
$3.00
7,320,000
($1.06)
14,640,000
($0.42)
For the Full Year
2024
72,105
$33.18
23,462
$33.18
Accounting guidelines for measuring fair value establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets
and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as
follows:
Level 1 – Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Other inputs that are observable directly or indirectly, such as quoted prices in markets that are not active, or inputs which are observable, either directly or
indirectly, for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs for which there is little or no market data and for which the Company makes its own assumptions about how market participants would
price the assets and liabilities.
Fair Value of Financial Instruments
Cash, Cash Equivalents, and Restricted Investments. The carrying amounts for these instruments approximate fair value due to the short-term nature or maturity of the
instruments.
Debt. The carrying amount of borrowings outstanding under the Credit Facility approximates fair value as the borrowings bear interest at variable rates and are reflective of
market rates. The following table presents the principal amounts of the Senior Notes with the fair values measured using quoted secondary market trading prices which are
designated as Level 2 within the valuation hierarchy.
December 31, 2023
December 31, 2022
Principal Amount
Fair Value
Principal Amount
Fair Value
8.25% Senior Notes
6.375% Senior Notes
8.0% Senior Notes
7.5% Senior Notes
Total
(In thousands)
$—
320,119
665,164
606,414
$1,591,697
$187,238
320,783
650,000
600,000
$1,758,021
$186,719
301,732
616,935
550,812
$1,656,198
$—
320,783
650,000
600,000
$1,570,783
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
Certain assets and liabilities are reported at fair value on a recurring basis in the consolidated balance sheets. The following methods and assumptions were used to estimate fair
value:
Commodity Derivative Instruments. The fair value of commodity derivative instruments is derived using a third-party income approach valuation model that utilizes market-
corroborated inputs that are observable over the term of the commodity derivative contract. The Company’s fair value calculations also incorporate an estimate of the
counterparties’ default risk for commodity derivative assets and an estimate of the Company’s default risk for commodity derivative liabilities. As the inputs in the model are
substantially observable over the term of the commodity derivative contract and as there is a wide availability of quoted market prices for similar commodity derivative
contracts, the Company designates its commodity derivative instruments as Level 2 within the fair value hierarchy. See “Note 9 – Derivative Instruments and Hedging
Activities” for further discussion.
Contingent Consideration Arrangements - Embedded Derivative Financial Instruments. The embedded options within the contingent consideration arrangements are
considered financial instruments under ASC 815. The Company engages a third-party valuation specialist using an option pricing model approach to measure the fair value of
the embedded options on a recurring basis. The valuation includes significant inputs such as forward oil price curves, time to expiration, and implied volatility. The model
provides for the probability that the specified pricing thresholds would be met for each settlement period, estimates undiscounted payouts, and risk adjusts for the discount rates
inclusive of adjustments for each of the counterparty’s credit quality. As these inputs are substantially observable for the full term of the contingent consideration arrangements,
the inputs are considered Level 2 inputs within the fair value hierarchy. See “Note 9 - Derivative Instruments and Hedging Activities” for further discussion.
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 and 2022:
Derivative Assets
Commodity derivative assets
Contingent consideration arrangements
Total net assets
Derivative Liabilities
Commodity derivative liabilities
Contingent consideration arrangements
(1)
Total net assets (liabilities)
Commodity derivative assets
Commodity derivative liabilities
Level 1
December 31, 2023
Level 2
(In thousands)
Level 3
$—
—
$—
$—
—
$—
$—
$—
Level 1
$11,857
12,580
$24,437
($11,647)
(42,380)
($54,027)
December 31, 2022
Level 2
(In thousands)
$21,786
($29,612)
Level 3
$—
—
$—
$—
—
$—
$—
$—
(1) Includes approximately $4.1 million of deferred premiums, which will be paid as the applicable contracts settled.
There were no transfers between any of the fair value levels during any period presented.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Acquisitions. The fair value of assets acquired and liabilities assumed are measured as of the acquisition date by a third-party valuation specialist using a combination of income
and market approaches, which are not observable in the market and are therefore designated as Level 3 inputs. Significant inputs include expected discounted future cash flows
from estimated reserve quantities, estimates for timing and costs to produce and develop reserves, oil and natural gas forward prices, and a risk adjusted discount rate. See
“Note 5 – Acquisitions and Divestitures” for additional discussion.
Asset Retirement Obligations. The Company measures the fair value of asset retirement obligations as of the date a well begins drilling or when production equipment and
facilities are installed using a discounted cash flow model based on inputs that are not observable in the market and that, therefore, are designated as Level 3 within the
valuation hierarchy. Significant inputs to the fair value measurement of asset retirement obligations include estimates of the costs of plugging and abandoning oil and gas wells,
removing production equipment and facilities, restoring the surface of the land as well as estimates of the economic lives of the oil and gas wells and future inflation rates. See
“Note 15 – Asset Retirement Obligations” for additional discussion.
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Note 11 – Compensation Plans
2020 Omnibus Incentive Plan
Shares-based awards are granted under the 2020 Omnibus Incentive Plan (the “2020 Plan”), which replaced the 2018 Omnibus Incentive Plan (the “2018 Plan”). From the
effective date of the 2020 Plan, no further awards may be granted under the 2018 Plan; however, awards previously granted under the 2018 Plan will remain outstanding in
accordance with their terms. At December 31, 2023, there were 1,326,047 shares available for future share-based awards under the 2020 Plan.
RSU Equity Awards
The following table summarizes RSU Equity Award activity for the year ended December 31, 2023:
Unvested at the beginning of the year
Granted
Vested
Forfeited
Unvested at the end of the year
RSU Equity Awards (In
thousands)
Weighted Average Grant-
Date Fair Value per Share
800
654
(374)
(225)
855
$44.79
$34.33
$39.89
$42.75
$39.46
Grant activity for the years ended December 31, 2023, 2022 and 2021 primarily consisted of RSU Equity Awards granted to executives and employees as part of the annual
grant of long-term equity incentive awards with a weighted average grant date fair value of $34.33, $57.85 and $38.59, respectively.
For performance-based RSU Equity Awards vested on December 31, 2022 and December 31, 2021, the number of performance-based RSU Equity Awards that could vest was
based on a calculation that compares the Company’s TSR to the same calculated return of a group of peer companies selected by the Company and can range between 0% and
300% and 0% and 200% of the target units, respectively. No performance-based RSU Equity Awards vested during 2023.
The following table summarizes the shares that vested and did not vest as a result of the Company’s performance as compared to its peers.
Performance-based Equity Awards
Vesting Multiplier
Target
Vested at end of performance period
Did not vest at end of performance period
Years Ended December 31,
2022
2021
18 %
86,455
15,559
70,896
50 %
28,356
14,177
14,179
The aggregate fair value of RSU Equity Awards that vested during the years ended December 31, 2023, 2022 and 2021 was $12.5 million, $22.4 million and $8.7 million,
respectively. As of December 31, 2023, unrecognized compensation costs related to unvested RSU Equity Awards were $22.1 million and will be recognized over a weighted
average period of 1.7 years.
Cash-Settled Awards
As of December 31, 2023 and 2022, the Company had a total liability of $2.2 million and $6.5 million, respectively, for the outstanding Cash-Settled Awards.
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Share-Based Compensation Expense, Net
Share-based compensation expense associated with the RSU Equity Awards, Cash-Settled Awards is included in “General and administrative” in the consolidated statements of
operations. The following table presents share-based compensation expense (benefit), net for each respective period:
RSU Equity Awards expense
Cash-Settled Awards (benefit) expense
Total share-based compensation expense, net
2023
Years Ended December 31,
2022*
(In thousands)
2021*
$14,658
(3,245)
$11,413
$15,535
(7,493)
$8,042
$13,230
12,627
$25,857
*
Financial information for the prior period has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant Accounting
Policies” for additional information.
401(k) Plan
The Company has a defined contribution plan (“401(k) Plan”) that is subject to the Employee Retirement Income Security Act of 1974. The 401(k) Plan allows eligible
employees to contribute 1% to 100% of their qualified annual earnings, as defined by the 401(k) Plan, up to the contribution limits established under the Internal Revenue Code
(the “IRC”). The Company matches 100% of each employee’s contributions, up to 6% of the employee’s eligible compensation, and may make additional contributions as may
be determined by the Company’s Board of Directors. The Company’s contributions to the 401(k) Plan were $3.6 million, $3.0 million, and $2.2 million for the years ended
December 31, 2023, 2022, and 2021, respectively.
Note 12 – Stockholders’ Equity
Share Repurchase Program
On May 2, 2023, the Board of Directors approved a share repurchase program (the “Share Repurchase Program”), pursuant to which the Company is authorized to repurchase
up to $300.0 million of its outstanding common stock through the second quarter of 2025. Repurchases under the Share Repurchase Program may be made, from time to time,
in amounts and at prices the Company deems appropriate and will be subject to a variety of factors, including the market price of the Company’s common stock, general market
and economic conditions and applicable legal requirements. The Share Repurchase Program may be suspended, modified or discontinued by the Board of Directors at any time
without prior notice. Pursuant to the Merger Agreement, we are restricted from making further repurchases under such program without APA’s approval.
During the year ended December 31, 2023, the Company repurchased and retired 1.7 million shares of common stock at a weighted average purchase price of $33.59 per
common share for a total cost of approximately $55.5 million. As of December 31, 2023, the remaining authorized repurchase amount under the Share Repurchase Program
was $244.5 million.
Percussion Acquisition
During the year ended December 31, 2023, the Company issued approximately 6.2 million shares of common stock in connection with the Percussion Acquisition. See “Note 5
– Acquisitions and Divestitures” for additional details.
Second Lien Note Exchange
On November 3, 2021, at a special meeting of shareholders, the Company obtained the requisite shareholder approval for the issuance of approximately 5.5 million shares of
the Company’s common stock in exchange for an aggregate of $197.0 million principal amount of Second Lien Notes. The exchange was completed on November 5, 2021 and
the exchanged Second Lien Notes were immediately cancelled.
Primexx Acquisition
During the fourth quarter of 2021, the Company issued approximately 9.0 million shares of common stock in connection with the Primexx Acquisition, inclusive of the shares
of common stock issued to those certain interest owners who exercised their option to sell their interest in the properties included in the Primexx Acquisition. See “Note 5 –
Acquisitions and Divestitures” for additional details.
Warrant Exercises
During the year ended December 31, 2021, holders of the September 2020 Warrants and November 2020 Warrants provided notice and exercised all outstanding warrants. As a
result of the exercises in 2021, the Company issued a total of 6.9 million shares of its common stock in exchange for 9.0 million outstanding warrants determined on a net
shares settlement basis. A detailed discussion of the Company’s September 2020 Warrants and November 2020 Warrants can be found in “Part II, Item 8. Financial Statements
and
94
Supplementary Data, Note 7 – Borrowings” of its Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 24, 2022. As
of December 31, 2023, December 31, 2022 and December 31, 2021, no September 2020 or November 2020 Warrants were outstanding.
Note 13 – Income Taxes
The components of the Company’s income tax expense are as follows:
Current
Federal
State
Total current income tax expense (benefit)
Deferred
Federal
State
Total deferred income tax expense (benefit)
Total income tax expense (benefit)
2023
Years Ended December 31,
2022*
(In thousands)
2021*
($2,271)
(266)
(2,537)
(188,911)
1,640
(187,271)
($189,808)
$2,977
4,537
7,514
—
6,308
6,308
$13,822
$—
180
180
—
—
—
$180
*
Financial information for the prior period has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant Accounting
Policies” for additional information.
A reconciliation of the income tax expense calculated at the federal statutory rate of 21% to income tax expense is as follows:
Income before income taxes
Income tax expense computed at the statutory federal income tax rate
State income tax expense (benefit), net of federal benefit
Non-deductible expenses related to capital structure transactions
Equity based compensation
Other
Change in valuation allowance
Income tax expense (benefit)
2023
Years Ended December 31,
2022*
(In thousands)
$1,033,265
216,986
11,393
(2,896)
(1,496)
(1,223)
(208,942)
$13,822
$211,393
44,393
1,430
—
385
2,364
(238,380)
($189,808)
2021*
$133,741
28,086
2,905
(11,875)
564
10,247
(29,747)
$180
*
Financial information for the prior period has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant Accounting
Policies” for additional information.
The income tax benefit of $189.8 million for the year ended December 31, 2023 differs from income tax expense as calculated using the federal statutory rate primarily as a
result of releasing the valuation allowance that was recorded against the Company’s net deferred tax assets. See “— Deferred Tax Asset Valuation Allowance” below for
additional details.
95
As of December 31, 2023 and 2022, the net deferred income tax assets and liabilities are comprised of the following:
Deferred tax assets
Federal net operating loss carryforward and credits
Net interest expense limitation
Derivative instruments
Operating lease right-of-use assets
Asset retirement obligations
Unvested RSU equity awards
Other
Total deferred tax assets
Deferred income tax valuation allowance
Net deferred tax assets
Deferred tax liability
Oil and natural gas properties
Operating lease liabilities
Total deferred tax liability
Net deferred tax asset (liability)
As of December 31,
2023
2022*
(In thousands)
$412,401
84,202
6,507
15,724
10,165
6,214
4,260
$539,473
—
$539,473
($346,050)
(12,460)
($358,510)
$180,963
$359,784
74,628
12,758
13,180
13,049
5,391
11,675
$490,465
(238,380)
$252,085
($248,508)
(9,885)
($258,393)
($6,308)
*
Financial information for the prior period has been recast to reflect retrospective application of the successful efforts method of accounting. See “Note 2 - Summary of Significant Accounting
Policies” for additional information.
Deferred Tax Asset Valuation Allowance
Management monitors company-specific, oil and natural gas industry and worldwide economic factors and assesses the likelihood that the Company’s net deferred tax assets
will be utilized prior to their expiration. Beginning in the second quarter of 2020 and through the fourth quarter of 2022, the Company maintained a valuation allowance against
its net deferred tax assets. Considering all available evidence (both positive and negative), the Company concluded that it was more likely than not that the deferred tax assets
would be realized and released the valuation allowance in the first quarter of 2023. This release resulted in deferred income tax benefit of $187.3 million for the year ended
December 31, 2023.
Federal Net Operating Losses (“NOLs”) & Interest Limitation Carryforwards
Due to the issuance of common stock pursuant to the acquisition of Carrizo, the Company incurred a cumulative ownership change, and as such, the Company’s NOLs prior to
the acquisition are subject to a combined annual limitation under the IRC Section 382 in the amount of $32.2 million, which is comprised of $15.7 million of Carrizo’s NOLs
and $16.5 million of Callon’s NOLs. At December 31, 2023, the Company had approximately $2.0 billion of NOLs of which $399.3 million expire between 2034 and 2037 and
$1.5 billion have an indefinite carryforward life. The Company also has a net interest expense carryforward of $401.0 million under Section 163(j) of the Code, subject to
indefinite carryforward.
Uncertain Tax Positions
During 2023, the Company recorded a $4.1 million reserve for unrecognized tax benefits related to estimated current year research and development tax credits. If recognized,
the net tax benefit of $4.1 million would not have a material effect on the Company's effective tax rate. The Company recognized an immaterial amount of interest associated
with the uncertain tax position in income tax expense.
In the Company’s major tax jurisdictions, the earliest year open to examination is 2019.
Note 14 – Leases
The Company currently has leases associated with contracts for office space, drilling rigs, and the use of well equipment, vehicles, information technology infrastructure, and
other office equipment. The tables below, which present the components of lease costs and
96
supplemental balance sheet information, are presented on a gross basis. Other joint owners in the properties operated by the Company generally pay for their working interest
share of costs associated with drilling rigs and well equipment.
The table below presents the components of the Company’s lease costs for the year ended December 31, 2023.
Components of Lease Costs
Finance lease costs
Amortization of right-of-use assets
Interest on lease liabilities
(2)
(1)
(3)
Operating lease cost
Short-term lease cost
(5)
Variable lease costs
(4)
Total lease costs
2023
Years Ended December 31,
2022
(In thousands)
2021
$262
251
11
49,502
24,860
3,327
$77,951
$228
203
25
38,803
19,426
2,098
$60,555
$277
237
40
37,734
347
284
$38,642
(1)
(2)
(3)
Included as a component of “Depreciation, depletion and amortization” in the consolidated statements of operations.
Included as a component of “Interest expense” in the consolidated statements of operations.
For the years ended December 31, 2023, 2022 and 2021, approximately $42.1 million, $33.3 million and $23.0 million, respectively, are costs associated with drilling rigs. These costs were
capitalized to “Proved properties, net” in the consolidated balance sheets and the other remaining operating lease costs were components of “General and administrative” and “Lease
operating” in the consolidated statements of operations.
Short-term lease cost primarily consists of drilling rigs with contract terms of less than one year.
(4)
(5) Variable lease costs include additional payments that were not included in the initial measurement of the lease liability and related ROU asset for lease agreements with terms greater than 12
months. Variable lease costs primarily consist of incremental usage associated with drilling rigs.
The table below presents supplemental balance sheet information for the Company’s operating leases including the line item in the consolidated balance sheets where each is
presented. The Company’s financing leases are immaterial.
Leases
Operating leases:
Other assets, net - Operating lease ROU assets
Other current liabilities - Current operating lease liabilities
Other long-term liabilities - Long-term operating lease liabilities
Total operating lease liabilities
As of December 31,
2023
2022
(In thousands)
$59,268
$22,070
52,723
$74,793
The table below presents the weighted average remaining lease terms and weighted average discounts rates for the Company’s leases as of December 31, 2023.
December 31, 2023
Weighted Average Remaining Lease Terms (In years)
Operating leases
Financing leases
Weighted Average Discount Rate
Operating leases
Financing leases
97
$47,018
$40,809
21,882
$62,691
7.9
0.2
8.9 %
6.6 %
The table below presents the maturity of the Company’s lease liabilities as of December 31, 2023.
Operating Leases
Financing Leases
(In thousands)
2024
2025
2026
2027
2028
Thereafter
Total lease payments
Less imputed interest
Total lease liabilities
Note 15 – Asset Retirement Obligations
The table below summarizes the activity for the Company’s asset retirement obligations:
Asset retirement obligations, beginning of period
Accretion expense
Liabilities incurred
Increase due to acquisition of oil and gas properties
Liabilities settled
Dispositions
Revisions to estimates
Asset retirement obligations, end of period
Less: Current asset retirement obligations
Non-current asset retirement obligations
$27,207
8,066
9,439
9,526
9,645
42,528
106,411
(31,618)
$74,793
Years Ended December 31,
2023
2022
(In thousands)
$60,435
3,465
2,379
2,323
(4,228)
(25,551)
8,256
47,079
(4,426)
$42,653
$38
—
—
—
—
—
38
—
$38
$56,707
3,997
669
—
(2,008)
(4,760)
5,830
60,435
(6,543)
$53,892
Certain of the Company’s operating agreements require that assets be restricted for future abandonment obligations. Amounts recorded on the consolidated balance sheets at
December 31, 2023 and 2022 as long-term restricted investments were $3.5 million, and are presented in “Other assets, net.” These assets, which primarily include short-term
U.S. Government securities, are held in abandonment trusts dedicated to pay future abandonment costs for several of the Company’s oil and natural gas properties.
Note 16 – Accounts Receivable, Net
Oil and natural gas receivables
Joint interest receivables
Other receivables
Total
Allowance for credit losses
Total accounts receivable, net
Note 17 – Accounts Payable and Accrued Liabilities
Accounts payable
Revenues and royalties payable
Accrued capital expenditures
Accrued interest
Total accounts payable and accrued liabilities
98
As of December 31,
2023
2022
(In thousands)
$132,332
34,555
41,072
207,959
(1,168)
$206,791
As of December 31,
2023
2022
(In thousands)
$204,339
226,804
59,599
35,704
$526,446
$174,107
16,778
48,277
239,162
(2,034)
$237,128
$191,133
244,408
58,395
42,297
$536,233
Note 18 – Commitments and Contingencies
The Company is involved in various claims and lawsuits incidental to its business. In the opinion of management, the ultimate liability hereunder, if any, will not have a
material adverse effect on the financial position or results of operations of the Company.
The Company’s activities are subject to federal, state and local laws and regulations governing environmental quality and pollution control. Although no assurances can be
made, the Company believes that, absent the occurrence of an extraordinary event, compliance with existing federal, state and local laws, rules and regulations governing the
release of materials into the environment or otherwise relating to the protection of the environment are not expected to have a material effect upon the capital expenditures,
earnings or the competitive position of the Company with respect to its existing assets and operations. The Company cannot predict what effect additional regulation or
legislation, enforcement policies hereunder, and claims for damages to property, employees, other persons and the environment resulting from the Company’s operations could
have on its activities.
The table below presents total minimum commitments associated with long-term, non-cancelable leases, drilling rig contracts, frac service contracts, gathering, processing and
transportation service agreements which require minimum volumes of oil, natural gas, or produced water to be delivered and other purchase obligations, as of December 31,
2023.
Office space
Drilling rig and frac service commitments
Pipeline transportation commitments
Produced water disposal commitments
Purchase obligations
Other operating leases
(4)
(2)
(3)
Total
(1)
2024
2025
2026
2027
2028
$5,203
41,875
34,155
8,532
9,004
3,098
$101,867
$6,280
—
35,196
4,509
8,980
1,786
$56,751
$9,409
—
35,196
569
8,980
30
$54,184
(In thousands)
$9,526
—
25,553
113
8,980
—
$44,172
$9,645
—
23,202
—
9,004
—
$41,851
2029 and
Thereafter
$41,883
—
85,143
—
4,030
646
$131,702
Total
$81,946
41,875
238,445
13,723
48,978
5,560
$430,527
(1) Drilling rig and frac service commitments represent gross contractual obligations and accordingly, other joint owners in the properties operated by the Company will generally be billed for
(2)
(3)
(4)
their working interest share of such costs.
Pipeline transportation commitments represent contractual obligations the Company has entered into for certain gathering, processing and transportation service agreements which require
minimum volumes of oil or natural gas to be delivered. The amounts in the table above reflect the aggregate undiscounted deficiency fees assuming no delivery of any oil or natural gas.
Produced water disposal commitments represent contractual obligations the Company has entered into for certain service agreements which require minimum volumes of produced water to
be delivered. The amounts in the table above reflect the aggregate undiscounted deficiency fees assuming no delivery of any produced water.
Purchase obligations represent multi-year energy purchase agreements the Company has entered into to lock in rates for electricity utilized in its operations. Under these contracts, the
Company is obligated to purchase a minimum supply of electricity at a fixed price. If the Company does not utilize the minimum amounts of electricity on a monthly basis, the supplier
would sell the underutilized quantity at the then market price. The amounts in the table above reflect the aggregate undiscounted financial commitments pursuant to these purchase
agreements.
Other Commitments
The following table includes the Company’s current oil sales contracts and firm transportation agreements as of December 31, 2023:
Type of Commitment
(1)
Start Date
End Date
Oil sales contract
Oil sales contract
Oil sales contract
Oil sales contract
Firm transportation agreement
Firm transportation agreement
Firm transportation agreement
(2)(3)
(2)
(2)
January 2024
January 2024
February 2022
January 2020
August 2020
April 2020
April 2020
March 2024
December 2024
January 2027
December 2024
July 2030
March 2027
March 2027
Committed
Volumes (Bbls/d)
10,000
15,000
5,000
10,000
11,140
15,000
10,000
(1) For each of the commitments shown in the table above, the committed barrels may include volumes produced by us and other third-party working, royalty, and overriding royalty interest
owners whose volumes we market on their behalf. We expect to fulfill these delivery commitments with our existing production or through the purchases of third-party commodities.
(2) Each of the firm transportation agreements shown in the table above grant us access to delivery points in several locations along the Gulf Coast. The costs associated with these
agreements are recorded to “Gathering, transportation and processing” in the Company’s consolidated statements of operations.
99
(3) The committed volumes shown in the table above for this particular firm transportation agreement are average volumes. For the terms of August 2023-July 2027 and August 2027-July
2030, the committed volumes are 10,000 Bbls/d and 12,500 Bbls/d, respectively.
The following table includes the Company’s current natural gas firm transportation agreements as of December 31, 2023:
Type of Commitment
(1)(2)
Firm transportation agreement
Firm transportation agreement
Firm transportation agreement
Start Date
October 2023
October 2023
July 2024
End Date
September 2033
September 2033
June 2034
Committed
Volumes (MMBtu/d)
50,000
15,000
10,000
(1) For each of the commitments shown in the table above, the committed MMBtus may include volumes produced by us and other third-party working, royalty, and overriding royalty
interest owners whose volumes we market on their behalf. We expect to fulfill these delivery commitments with our existing production or through the purchases of third-party
commodities.
(2) Each of the firm transportation agreements shown in the table above grant us access to delivery points in several locations along the Gulf Coast. The costs associated with these
agreements are recorded to “Gathering, transportation and processing” in the Company’s consolidated statements of operations.
Note 19 – Subsequent Events (Unaudited)
On January 3, 2024, the Company entered into the Merger Agreement with APA and Merger Sub. See “Note 1 - Description of Business” for further discussion.
Note 20 – Supplemental Information on Oil and Natural Gas Operations (Unaudited)
Estimated Reserves
For each year in the table below, the estimated proved reserves were prepared by DeGolyer and MacNaughton (“D&M”), Callon’s independent third-party reserve engineers.
The reserves were prepared in accordance with guidelines established by the SEC. Accordingly, the following reserve estimates are based upon existing economic and operating
conditions.
There are numerous uncertainties inherent in establishing quantities of proved reserves. The following reserve data represents estimates only and should not be deemed
exact. In addition, the standardized measure of discounted future net cash flows should not be construed as the current market value of the Company’s oil and natural gas
properties or the cost that would be incurred to obtain equivalent reserves.
Extrapolation of performance history and material balance estimates were utilized by D&M to project future recoverable reserves for the producing properties where sufficient
history existed to suggest performance trends and where these methods were applicable to the subject reservoirs. The projections for the remaining producing properties were
necessarily based on volumetric calculations and/or analogy to nearby producing completions. Reserves assigned to non-producing zones and undeveloped locations were
projected on the basis of volumetric calculations and analogy to nearby production and, to a small extent, horizontal PDP and PUD categories.
100
The following tables disclose changes in the estimated quantities of proved reserves, all of which are located onshore within the continental United States:
Proved reserves
Oil (MBbls)
Beginning of period
Extensions and discoveries
Revisions to previous estimates
Purchase of reserves in place
Sales of reserves in place
Removed for five-year rule
Production
End of period
Natural Gas (MMcf)
Beginning of period
Extensions and discoveries
Revisions to previous estimates
Purchase of reserves in place
Sale of reserves in place
Removed for five-year rule
Production
End of period
NGLs (MBbls)
Beginning of period
Extensions and discoveries
Revisions to previous estimates
Purchase of reserves in place
Sale of reserves in place
Removed for five-year rule
Production
End of period
Total (MBoe)
Beginning of period
Extensions and discoveries
Revisions to previous estimates
Purchase of reserves in place
Sale of reserves in place
Removed for five-year rule
Production
End of period
Years Ended December 31,
2022
2021
2023
275,609
40,684
(28,278)
38,731
(47,336)
(18,259)
(21,891)
239,260
592,843
75,616
24,206
42,802
(53,317)
(74,548)
(46,109)
561,493
105,109
14,718
317
9,487
(9,537)
(11,415)
(8,011)
100,668
479,525
68,005
(23,927)
55,352
(65,759)
(42,099)
(37,587)
433,510
290,296
41,064
(31,163)
—
(949)
—
(23,639)
275,609
577,327
75,801
(11,155)
—
(7,503)
—
(41,627)
592,843
98,104
14,264
1,376
—
(1,159)
—
(7,476)
105,109
484,621
67,961
(31,645)
—
(3,359)
—
(38,053)
479,525
289,487
22,520
(10,514)
35,045
(24,019)
—
(22,223)
290,296
541,598
37,896
(3,389)
73,445
(34,837)
—
(37,386)
577,327
96,126
7,345
(3,103)
10,366
(6,191)
—
(6,439)
98,104
475,879
36,180
(14,181)
57,652
(36,015)
—
(34,894)
484,621
101
Proved developed reserves
Oil (MBbls)
Beginning of period
End of period
Natural gas (MMcf)
Beginning of period
End of period
NGLs (MBbls)
Beginning of period
End of period
Total proved developed reserves (MBoe)
Beginning of period
End of period
Proved undeveloped reserves
Oil (MBbls)
Beginning of period
End of period
Natural gas (MMcf)
Beginning of period
End of period
NGLs (MBbls)
Beginning of period
End of period
Total proved undeveloped reserves (MBoe)
Beginning of period
End of period
Total proved reserves
Oil (MBbls)
Beginning of period
End of period
Natural gas (MMcf)
Beginning of period
End of period
NGLs (MBbls)
Beginning of period
End of period
Total proved reserves (MBoe)
Beginning of period
End of period
Total Proved Reserves
Years Ended December 31,
2022
2021
2023
170,866
149,898
351,278
376,070
63,788
65,891
293,200
278,467
104,743
89,362
241,565
185,423
41,321
34,777
186,325
155,043
275,609
239,260
592,843
561,493
105,109
100,668
479,525
433,510
162,886
170,866
332,266
351,278
55,720
63,788
273,983
293,200
127,410
104,743
245,061
241,565
42,384
41,321
210,638
186,325
290,296
275,609
577,327
592,843
98,104
105,109
484,621
479,525
128,923
162,886
238,119
332,266
43,315
55,720
211,925
273,983
160,564
127,410
303,479
245,061
52,811
42,384
263,954
210,638
289,487
290,296
541,598
577,327
96,126
98,104
475,879
484,621
For the year ended December 31, 2023, the Company’s net decrease in proved reserves of 46.0 MMBoe was primarily due to the following:
•
•
Increase of 68.0 MMBoe through extensions and discoveries through the Company’s development efforts in its operating areas, of which 2.5 MMBoe were proved
developed reserves;
Decrease of 23.9 MMBoe for revisions of previous estimates that were primarily comprised of:
◦
◦
10.8 MMBoe reduction from the removal of PUD locations due to revised development spacing and changes in lateral lengths, primarily in the Company’s
Delaware West operating area, as it focuses on the ongoing optimization of the value of the reservoir system through co-development of multiple target zones
within the system utilizing larger scale projects and extended lateral lengths;
10.7 MMBoe reduction primarily due to the change in 12-Month Average Realized Price of crude oil which decreased by approximately 18% as compared to
December 31, 2022; and
102
◦
2.4 MMBoe reduction primarily due to higher operating costs as well as lower than expected recoveries from wells turned to production primarily in the
western portion of our Permian acreage during 2023.
•
•
•
Increase of 55.4 MMBoe for purchase of reserves in place associated with the Percussion Acquisition;
Decrease of 65.8 MMBoe for sales of reserves in place primarily associated with the Eagle Ford Divestiture;
Decrease of 42.1 MMBoe reduction due to PUD locations that were reclassified to unproved reserve categories as the Company adjusted its future Permian Basin
development and capital allocation plans following the Eagle Ford Divestiture and the concurrent Percussion Acquisition, resulting in previously scheduled PUDs,
primarily in the Delaware West operating area that is more weighted to natural gas volumes, now forecast to be developed outside of the five-year period from initial
booking; and
•
Decrease of 37.6 MMBoe for production.
For the year ended December 31, 2022, the Company’s net decrease in proved reserves of 5.1 MMBoe was primarily due to the following:
•
•
•
•
Increase of 68.0 MMBoe through extensions and discoveries through the Company’s development efforts in its operating areas, of which 8.7 MMBoe were proved
developed reserves;
Decrease of 31.6 MMBoe for revisions of previous estimates that were primarily comprised of:
◦
◦
◦
◦
44.4 MMBoe reduction due to PUD locations that were reclassified to unproved reserve categories, all of which were in the Permian. Certain PUDs were
moved outside of their five-year development window as we continue to refine our future development plans for the Permian, including increased application
of our “Life of Field” co-development model. This development model focuses on optimization of the value of a reservoir system through concurrent, co-
development of multiple target zones within the system utilizing larger scale projects. As a result, we believe the model contributes to more consistent capital
efficiency of our well inventory over time and our broader Permian development program is now being targeted for larger project sizes, accompanied by
longer associated cycle times, based on our testing and delineation efforts during 2022;
13.1 MMBoe reduction primarily due to higher operating costs; offset by
13.7 MMBoe increase primarily due to the change in 12-Month Average Realized Price of crude oil which increased by approximately 45% as compared to
December 31, 2021;
12.2 MMBoe increase primarily due to better results than previously forecasted on certain wells turned to production during 2022 in both the Permian and
Eagle Ford.
Decrease of 3.4 MMBoe for sales of reserves in place primarily associated with the divestitures of non-core assets primarily in the Western Delaware Basin; and
Decrease of 38.1 MMBoe for production.
For the year ended December 31, 2021, the Company’s net increase in proved reserves of 8.7 MMBoe was primarily due to the following:
•
•
•
•
Increase of 36.2 MMBoe through extensions and discoveries through the Company’s development efforts in its operating areas, of which 10.1 MMBoe were proved
developed reserves;
Decrease of 14.2 MMBoe for revisions of previous estimates that were primarily comprised of:
◦
◦
◦
27.9 MMBoe increase primarily due to the change in 12-Month Average Realized Price of crude oil which increased by approximately 75% as compared to
December 31, 2020; offset by
29.0 MMBoe reduction due to PUDs that were removed primarily as a result of changes in anticipated well densities as the Company develops its properties
in an effort to increase capital efficiency and cash flow generation as well as changes in its development plans, primarily due to the Primexx Acquisition,
which resulted in PUDs being moved outside of the five-year development window;
13.1 MMBoe reduction due to reductions in anticipated hydrocarbon recoveries resulting from observed well performance over longer production timeframes
during the testing of various full field development plan concepts.
Increase of 57.7 MMBoe for purchase of reserves in place associated with the Primexx Acquisition;
Decrease of 36.0 MMBoe for sales of reserves in place associated with the Western Delaware Basin, Eagle Ford, and Midland non-core asset sales; and
103
•
Decrease of 34.9 MMBoe for production.
Capitalized Costs
Capitalized costs related to oil and natural gas production activities with applicable accumulated depreciation, depletion, amortization and impairment are as follows:
Oil and natural gas properties:
Proved properties
Unproved properties
Total oil and natural gas properties
Accumulated depreciation, depletion, amortization and impairment
Total oil and natural gas properties capitalized
Costs Incurred
Costs incurred in oil and natural gas property acquisitions, exploration and development activities are as follows:
As of December 31,
2023
2022
(In thousands)
$9,657,105
1,063,033
10,720,138
(4,570,132)
$6,150,006
$9,268,135
1,225,768
10,493,903
(4,416,606)
$6,077,297
Acquisition costs:
Proved properties
Unproved properties
Development costs
Exploration costs
Total costs incurred
Standardized Measure
2023
Years Ended December 31,
2022
(In thousands)
$503,433
78,144
872,808
113,782
$1,568,167
$—
32,548
742,991
133,080
$908,619
2021
$677,250
301,404
396,181
137,989
$1,512,824
The following tables present the standardized measure of future net cash flows related to estimated proved oil and natural gas reserves together with changes therein, including
a reduction for estimated plugging and abandonment costs that are also reflected as a liability on the balance sheet at December 31, 2023. You should not assume that the future
net cash flows or the discounted future net cash flows, referred to in the tables below, represent the fair value of our estimated oil and natural gas reserves. Proved reserve
estimates and future cash flows are based on the average realized prices for sales of oil, natural gas, and NGLs on the first calendar day of each month during the year. The
following average realized prices were used in the calculation of proved reserves and the standardized measure of discounted future net cash flows.
Oil ($/Bbl)
Natural gas ($/Mcf)
NGLs ($/Bbl)
Years Ended December 31,
2022
2021
2023
$78.17
$1.53
$22.27
$95.02
$5.75
$36.40
$65.44
$3.31
$29.19
104
Future production and development costs are based on current costs with no escalations. Estimated future cash flows net of future income taxes have been discounted to their
present values based on a 10% annual discount rate.
Future cash inflows
Future costs
Production
Development and net abandonment
Future net inflows before income taxes
Future income taxes
Future net cash flows
10% discount factor
Standardized measure of discounted future net cash flows
Standardized measure at the beginning of the period
Sales and transfers, net of production costs
Net change in sales and transfer prices, net of production costs
Net change due to purchases of in place reserves
Net change due to sales of in place reserves
Extensions, discoveries, and improved recovery, net of future production and development costs incurred
Changes in future development cost
Previously estimated development costs incurred
Revisions of quantity estimates
Accretion of discount
Net change in income taxes
Changes in production rates, timing and other
Aggregate change
Standardized measure at the end of period
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Standardized Measure
For the Year Ended December 31,
2022
(In thousands)
2021
2023
$21,804,152
$33,424,190
$23,775,358
(8,850,777)
(1,943,594)
11,009,781
(936,057)
10,073,724
(4,639,540)
$5,434,184
(10,702,897)
(2,326,789)
20,394,504
(3,000,300)
17,394,204
(8,390,068)
$9,004,136
(8,038,362)
(1,927,789)
13,809,207
(1,481,005)
12,328,202
(6,077,447)
$6,250,755
Changes in Standardized Measure
For the Year Ended December 31,
2022
(In thousands)
2021
2023
$9,004,136
(1,428,805)
(3,387,434)
868,016
(1,724,612)
702,960
21,705
570,765
(1,217,925)
1,053,483
1,075,309
(103,414)
(3,569,952)
$5,434,184
$6,250,755
(2,208,492)
4,168,425
—
(36,389)
1,338,286
(257,344)
289,207
(215,828)
705,127
(730,185)
(299,426)
2,753,381
$9,004,136
$2,310,390
(1,466,413)
4,336,078
797,327
(105,376)
583,976
(81,480)
209,078
(104,572)
234,495
(765,956)
303,208
3,940,365
$6,250,755
Disclosure Controls and Procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal
executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”) performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Based on this evaluation, our principal executive and principal financial officers have concluded that the Company’s disclosure controls and procedures were
effective as of December 31, 2023.
Changes in Internal Control Over Financial Reporting. There were no changes to our internal control over financial reporting during our last fiscal quarter that have materially
affected, or are reasonable likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control structure is designed to provide reasonable assurance to our management
and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of our financial statements prepared for external purposes in
accordance with U.S. GAAP. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an
105
evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the framework in Internal Control – Integrated Framework
published by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission (2013 framework) (the COSO criteria). Based on that evaluation, management
concluded that our internal control over financial reporting was effective as of December 31, 2023.
Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance that the objectives of the control system are met and may not
prevent or detect misstatements. In addition, any evaluation of the effectiveness of internal controls over financial reporting in future periods is subject to risk that those internal
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent registered public accounting firm, Grant Thornton, LLP, has issued an attestation report regarding its assessment of the Company’s internal control
over financial reporting as of December 31, 2023, presented preceding the Company’s financial statements included in Part II, Item 8 of this 2023 Annual Report on Form 10-
K.
ITEM 9B. Other Information
None.
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III.
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to the definitive proxy statement (the “2024 Proxy Statement”) for our 2024 annual meeting of
shareholders. In the event the 2024 Proxy Statement is not filed with the SEC in the 120-day period after December 31, 2023, the information required by this item will be
included in an amendment to this 2023 Annual Report on Form 10-K that will be filed by the Company not later than the end of such 120-day period.
The Company has adopted a code of ethics that applies to the Company’s officers, directors, employees, agents and representatives and includes a code of ethics for senior
financial officers that applies to the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. The full text of such code of ethics has been posted on the
Company’s website at www.callon.com.
ITEM 11. Executive Compensation
The information required by this item is incorporated herein by reference to the 2024 Proxy Statement. In the event the 2024 Proxy Statement is not filed with the SEC in the
120-day period after December 31, 2023, the information required by this item will be included in an amendment to this 2023 Annual Report on Form 10-K that will be filed by
the Company not later than the end of such 120-day period.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the 2024 Proxy Statement. In the event the 2024 Proxy Statement is not filed with the SEC in the
120-day period after December 31, 2023, the information required by this item will be included in an amendment to this 2023 Annual Report on Form 10-K that will be filed by
the Company not later than the end of such 120-day period.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated herein by reference to the 2024 Proxy Statement. In the event the 2024 Proxy Statement is not filed with the SEC in the
120-day period after December 31, 2023, the information required by this item will be included in an amendment to this 2023 Annual Report on Form 10-K that will be filed by
the Company not later than the end of such 120-day period.
ITEM 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the 2024 Proxy Statement. In the event the 2024 Proxy Statement is not filed with the SEC in the
120-day period after December 31, 2023, the information required by this item will be included in an amendment to this 2023 Annual Report on Form 10-K that will be filed by
the Company not later than the end of such 120-day period.
106
PART IV.
ITEM 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this 2023 Annual Report on Form 10-K:
(1) Financial Statements
See index to Financial Statements and Supplementary Data on page 61.
(2) Financial Statement Schedules
All schedules have been omitted because they are either not applicable, not required or the information called for therein appears in the consolidated financial
statements or notes thereto.
(3) Exhibits
Exhibit Number
(d)
2.1
(d)
(d)
(d)
(a)
2.2
2.3
2.4
2.5
2.6
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Incorporated by reference (File No. 001-
14039, unless otherwise indicated)
Description
Agreement and Plan of Merger, dated as of July 14, 2019, by and between Callon Petroleum Company and Carrizo Oil &
Gas, Inc.
Amendment No. 1 to Agreement and Plan of Merger, dated August 19, 2019, by and between Callon Petroleum Company
and Carrizo Oil & Gas, Inc.
Amendment No. 2 to Agreement and Plan of Merger, dated November 13, 2019, by and between Callon Petroleum
Company and Carrizo Oil & Gas, Inc.
Membership Interest Purchase Agreement by and among Percussion Petroleum Management II, LLC, Percussion Petroleum
Operating II, LLC, Callon Petroleum Operating Company and Callon Petroleum Company dated May 3, 2023
Membership Interest Purchase Agreement by and among Callon Petroleum Operating Company, Callon (Eagle Ford) LLC
and Ridgemar Energy Operating, LLC dated May 3, 2023
Agreement and Plan of Merger, dated as of January 3, 2024, by and among APA Corporation, Astro Comet Merger Sub
Corp., and Callon Petroleum Company
Certificate of Incorporation of the Company, as amended through May 12, 2016
Certificate of Amendment to the Certificate of Incorporation of Callon, effective December 20, 2019
Certificate of Amendment to the Certificate of Incorporation of Callon, effective August 7, 2020
Certificate of Amendment to the Certificate of Incorporation of Callon, effective May 14, 2021
Certificate of Amendment to the Certificate of Incorporation of Callon, effective May 25, 2022
Amended and Restated Bylaws of the Company
Specimen Common Stock Certificate
Description of Common Stock
Indenture of 6.375% Senior Notes Due 2026, dated as of June 7, 2018, among Callon Petroleum Company, the Guarantors
party thereto and U.S. Bank National Association, as Trustee
First Supplemental Indenture, dated December 20, 2019, among Callon, the Guarantors named therein and U.S. Bank
National Association, as trustee
Registration Rights Agreement of 6.375% Senior Notes Due 2026, dated June 7, 2018, among Callon Petroleum Company,
Callon Petroleum Operating Company and J.P. Morgan Securities LLC, as representative of the Initial Purchasers named on
Annex E thereto
Warrant Agreement, dated as of December 20, 2019, between Callon and American Stock Transfer And Trust Company,
LLC, as warrant agent
Indenture, dated as of July 6, 2021, by and among the Company, Callon Petroleum Operating Company, Callon (Eagle Ford)
LLC, Callon (Niobrara) LLC, Callon (Permian) LLC, Callon (Permian) Minerals LLC, Callon (Utica) LLC, Callon
Marcellus Holding, Inc. and U.S. Bank National Association, as trustee
Registration Rights Agreement among Callon Petroleum Company, Callon Petroleum Operating Company and Primexx
Resource Development, LLC, dated October 1, 2021
Registration Rights Agreement among Callon Petroleum Company, Callon Petroleum Operating Company and BPP
Acquisition, LLC, dated October 1, 2021
Registration Rights Agreement, by and between the Company and Chambers Investment, LLC, dated November 5, 2021
Indenture, dated as of June 24, 2022, by and among Callon Petroleum Company, Callon Petroleum Operating Company,
Callon (Permian) LLC, Callon (Eagle Ford) LLC, Callon (Permian) Minerals LLC, Callon (Niobrara) LLC, Callon (Utica)
LLC and Callon Marcellus Holding, Inc. and U.S. Bank Trust Company, National Association, as trustee
Form
8-K
10-Q
8-K
8-K
8-K
8-K
10-Q
8-K
8-K
8-K
8-K
10-K
10-K
8-K
8-K
8-K
8-K
8-K
10-K
10-K
8-K
8-K
Exhibit
2.1
2.2
2.1
10.1
10.2
2.1
3.1
3.1
3.1
3.1
3.1
3.2
4.1
4.1
4.4
4.2
4.5
4.1
4.17
4.18
4.1
4.1
Filing
Date
07/15/2019
11/05/2019
11/14/2019
05/08/2023
05/08/2023
01/04/2024
11/03/2016
12/20/2019
08/07/2020
05/14/2021
05/25/2022
02/27/2019
02/28/2018
06/07/2018
12/20/2019
06/07/2018
12/20/2019
07/07/2021
02/24/2022
02/24/2022
11/08/2021
06/24/2022
107
4.12
4.13
4.14
4.15
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
21.1
22.1
Registration Rights Agreement by and between Callon Petroleum Company and Percussion Petroleum Management II,
LLC, dated July 3, 2023
Second Supplemental Indenture of 6.375% Senior Notes Due 2026, dated July 3, 2023, among Callon Petroleum Company,
Callon Permian II, LLC and U.S. Bank Trust Company, National Association, as Trustee
First Supplemental Indenture of 8.00% Senior Notes Due 2028, dated July 3, 2023, among Callon Petroleum Company,
Callon Permian II, LLC and U.S. Bank Trust Company, National Association, as Trustee
First Supplemental Indenture of 7.500% Senior Notes Due 2030, dated July 3, 2023, among Callon Petroleum Company,
Callon Permian II, LLC and U.S. Bank Trust Company, National Association, as Trustee
Amended & Restated Credit Agreement, dated as of October 19, 2022, by and among the Company, JPMorgan Chase Bank,
N.A., as administrative agent for the lenders party thereto, and the other lenders party thereto
Amended and Restated Deferred Compensation Plan for Outside Directors - Callon Petroleum Company, dated as of May
10, 2017 and effective as of May 1, 2017
Amended and Restated 2018 Omnibus Incentive Plan
Form of Callon Petroleum Company Officer Restricted Stock Unit Award Agreement, adopted on January 31, 2019 under
the 2018 Omnibus Incentive Plan
Form of Callon Petroleum Company Officer Cash-Settleable Performance Share Award Agreement, adopted on January 31,
2020 under the Amended & Restated 2018 Omnibus Incentive Plan
Form of Callon Petroleum Company Officer Stock-Settleable Performance Share Award Agreement, adopted on January 31,
2020 under the Amended & Restated 2018 Omnibus Incentive Plan
Form of Callon Petroleum Company Officer Restricted Stock Unit Award Agreement, adopted on January 31, 2020 under
the Amended & Restated 2018 Omnibus Incentive Plan
Callon Petroleum Company 2020 Omnibus Incentive Plan
First Amendment to Callon Petroleum Company 2020 Omnibus Incentive Plan
Form of Callon Petroleum Company Employee Restricted Stock Unit Award Agreement, adopted on June 8, 2020, under the
2020 Omnibus Incentive Plan
Form of Callon Petroleum Company Director Restricted Stock Unit Award Agreement, adopted on June 8, 2020, under the
2020 Omnibus Incentive Plan
Form of Callon Petroleum Company Officer Cash Retention Award Agreement, adopted on September 30, 2020, under the
2020 Omnibus Incentive Plan
Form of Callon Petroleum Company Officer Cash Incentive Award Agreement, adopted on September 30, 2020, under the
2020 Omnibus Incentive Plan
Deferred Compensation Plan for Outside Directors, as Amended and Restated as of January 1, 2021
Form of Callon Petroleum Company Restricted Stock Unit Award Agreement, adopted on March 12, 2021 under the 2020
Omnibus Incentive Plan
Form of Callon Petroleum Company Cash Performance Unit Award Agreement, adopted on March 12, 2021 under the 2020
Omnibus Incentive Plan
Form of Amendment, adopted on September 21, 2022, to Callon Petroleum Company Cash Performance Unit Award
Agreement, originally adopted on March 12, 2021 under the 2020 Omnibus Incentive Plan
Form of Callon Petroleum Company Returns Program Cash Incentive Award Agreement, adopted on March 9, 2022 under
the 2020 Omnibus Incentive Plan
Form of Amendment, adopted on September 21, 2022, to Callon Petroleum Company Returns Program Cash Incentive
Award Agreement, originally adopted on March 9, 2022 under the 2020 Omnibus Incentive Plan
Form of Callon Petroleum Company Business Sustainability Cash Incentive Award Agreement, adopted on March 9, 2022
under the 2020 Omnibus Incentive Plan
Form of Amendment, adopted on September 21, 2022, to Callon Petroleum Company Business Sustainability Cash
Incentive Award Agreement, originally adopted on March 9, 2022 under the 2020 Omnibus Incentive Plan
Form of Callon Petroleum Company Market Stock Unit Award Agreement, adopted on April 26, 2023, under the 2020
Omnibus Incentive Plan
Callon Petroleum Company Executive Severance Pay Plan
Callon Executive Change in Control Severance Compensation Plan
Separation Agreement, dated July 5, 2023, by and between Jeffrey S. Balmer and Callon Petroleum Company
Consulting Agreement, dated July 5, 2023, by and between Jeffrey S. Balmer and Callon Petroleum Company
Subsidiaries of the Company
Subsidiary Guarantors
(d)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(a)
(a)
8-K
10-Q
10-Q
10-Q
8-K
10-K
10-K
10-K
10-K
10-K
10-K
DEF 14A
8-K
10-Q
10-Q
10-Q
10-Q
10-K
8-K
8-K
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
4.1
4.2
4.3
4.4
10.1
10.11
10.7
10.23
10.23
10.24
10.25
B
10.5
10.3
10.4
10.4
10.5
10.29
10.1
10.2
10.3
10.1
10.4
10.2
10.5
10.1
10.1
10.2
10.1
10.2
07/07/2023
08/02/2023
08/02/2023
08/02/2023
10/24/2022
02/28/2018
02/27/2020
02/27/2019
02/27/2020
02/27/2020
02/27/2020
04/28/2020
04/16/2021
08/05/2020
08/05/2020
11/03/2020
11/03/2020
02/25/2021
04/16/2021
04/16/2021
11/03/2022
05/05/2022
11/03/2022
05/05/2022
11/03/2022
08/02/2023
11/03/2022
11/03/2022
11/01/2023
11/01/2023
108
23.1
23.2
31.1
31.2
32.1
97.1
99.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
(a)
(a)
(a)
(a)
(c)
(a)
(a)
(a)
(a)
(a)
(a)
(a)
(a)
(a)
Consent of Grant Thornton LLP
Consent of DeGolyer and MacNaughton, Inc.
Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a)
Certification of Chief Financial Officer pursuant to Rule 13(a)-14(a)
Section 1350 Certifications of Chief Executive and Financial Officers pursuant to Rule 13(a)-14(b)
Callon Petroleum Company Clawback Policy
Reserve Report Summary prepared by DeGolyer and MacNaughton, Inc. as of December 31, 2023
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Inline XBRL Taxonomy Extension Calculation Linkbase Document.
Inline XBRL Taxonomy Extension Definition Linkbase Document.
Inline XBRL Taxonomy Extension Label Linkbase Document.
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(a)
(b)
(c)
Filed herewith.
Indicates management compensatory plan, contract, or arrangement.
Furnished herewith. Pursuant to SEC Release No. 33-8212, this certification will be treated as “accompanying” this report and not “filed” as part of such report for purposes of Section 18 of the Exchange Act
or otherwise subject to the liability of Section 18 of the Exchange Act, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, except to the
extent that the registrant specifically incorporates it by reference.
(d) Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Callon agrees to furnish a supplemental copy of any omitted schedule or attachment to the SEC upon
request.
ITEM 16. Form 10-K Summary
None.
109
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Callon Petroleum Company
/s/ Kevin Haggard
By: Kevin Haggard
Chief Financial Officer (principal financial officer)
Date:
February 26, 2024
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Joseph C. Gatto, Jr.
Joseph C. Gatto, Jr. (principal executive officer)
/s/ Kevin Haggard
Kevin Haggard (principal financial officer)
/s/ Gregory F. Conaway
Gregory F. Conaway (principal accounting officer)
/s/ Matthew R. Bob
Matthew R. Bob (chairman of the board of directors)
/s/ Frances Aldrich Sevilla-Sacasa
Frances Aldrich Sevilla-Sacasa (director)
/s/ James E. Craddock
James E. Craddock (director)
/s/ Barbara J. Faulkenberry
Barbara J. Faulkenberry (director)
/s/ Anthony J. Nocchiero
Anthony J. Nocchiero (director)
/s/ Mary Shafer-Malicki
Mary Shafer-Malicki (director)
/s/ Steven A. Webster
Steven A. Webster (director)
110
Date:
February 26, 2024
Date:
February 26, 2024
Date:
February 26, 2024
Date:
February 26, 2024
Date:
February 26, 2024
Date:
February 26, 2024
Date:
February 26, 2024
Date:
February 26, 2024
Date:
February 26, 2024
Date:
February 26, 2024
DESCRIPTION OF COMMON STOCK
Exhibit 4.2
Throughout this exhibit, references to “we,” “our,” and “us” refer to Callon Petroleum Company. The following summary of terms of our common stock, par value
$0.01 per share (the “common stock”), is based upon our certificate of incorporation (as amended, our “Certificate of Incorporation”) and amended and restated bylaws (our
“Bylaws”). This summary is not complete and is subject to, and qualified in its entirety by reference to, our Certificate of Incorporation and our Bylaws. For a complete
description of the terms and provisions of the common stock, refer to our Certificate of Incorporation and our Bylaws. We encourage you to read these documents and the
applicable portions of the Delaware General Corporation Law (the “DGCL”) carefully.
Common Stock
We are currently authorized to issue up to 130,000,000 shares of common stock. Holders of common stock are entitled to cast one vote for each share held of record on
each matter submitted to a vote of shareholders. There is no cumulative voting for election of directors. Subject to the prior rights of any series of preferred stock that may from
time to time be outstanding, if any, holders of common stock are entitled to receive ratably dividends when, as and if declared by our board of directors out of funds legally
available for such purpose and, upon our liquidation, dissolution or winding up, are entitled to share ratably in all assets remaining after payment of liabilities and payment of
accrued dividends and liquidation preferences on the preferred stock, if any. There are no redemption or sinking fund provisions that are applicable to the common stock.
Subject only to the requirements of the DGCL, our board of directors may issue shares of common stock without shareholder approval, at any time and from time to time, to
such persons and for such consideration as our board of directors deems appropriate. Holders of our common stock have no preemptive rights and have no rights to convert
their common stock into any other securities.
Preferred Stock
We are authorized to issue up to 2,500,000 shares of preferred stock, par value $0.01 per share. As of February 26, 2024, there are no shares of preferred stock
outstanding. Shares of preferred stock may be issued from time to time in one or more series as our board of directors may from time to time determine, each of said series to be
distinctively designated. The voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions thereof, if
any, of each such series of preferred stock may differ from those of any and all other series of preferred stock at any time outstanding, and, subject to certain limitations set
forth in our Certificate of Incorporation and the DGCL, our board of directors may fix or alter, by resolution or resolutions, the designation, number, voting powers, preferences
and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, of each such series of preferred stock.
The issuance of any such preferred stock could adversely affect the rights of the holders of common stock and therefore, reduce the value of the common stock. The
ability of our board of directors to issue preferred stock could discourage, delay, or prevent a takeover of us.
Anti-Takeover Effects of Provisions of Our Certificate of Incorporation and Our Bylaws
Some provisions of our Certificate of Incorporation and our Bylaws contain provisions that could make it more difficult to acquire us by means of a merger, tender
offer, proxy contest or otherwise, or to remove our incumbent officers and directors. These provisions, summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors.
We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us
outweigh the disadvantages of discouraging such proposals because negotiation of such proposals could result in an improvement of their terms.
Preferred Stock. Our Certificate of Incorporation permits our board of directors to authorize and issue one or more series of preferred stock, which may render more
difficult or discourage an attempt to change control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary
obligations, our board of directors were to determine that a takeover proposal is not in our best interest, it could cause shares of preferred stock to be issued without shareholder
approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent shareholder or shareholder
group.
Staggered Board of Directors. Our Certificate of Incorporation and our Bylaws divide our board of directors into three classes, as nearly equal in number as possible,
serving staggered three-year terms. Our Certificate of Incorporation and our Bylaws also provide that the classified board provision may not be amended without the affirmative
vote of the holders of 80% or more of the voting power of our capital stock. The classification of our board of directors has the effect of requiring at least two annual
shareholder meetings, instead of one, to effect a change in control of our board of directors, unless our Certificate of Incorporation and our Bylaws are amended.
Shareholder Meetings. Our Bylaws provide that a special meeting of shareholders may be called only by the chairman of our board of directors, our chief executive
officer or president or by our board of directors or at the request of shareholders owning 80% or more of the entire capital stock issued and outstanding and entitled to vote.
Requirements for Advance Notification of Shareholder Nominations. Our Certificate of Incorporation and our Bylaws establish advance notice procedures with
respect to shareholder nomination of candidates for election as directors, other than nominations made by or at the direction of our board of directors.
Shareholder Action By Written Consent. Our Certificate of Incorporation and our Bylaws provide that, except as may otherwise be provided with respect to the rights
of the holders of preferred stock, no action that is required or permitted to be taken by our shareholders at any annual or special meeting may be effected by written consent of
shareholders in lieu of a meeting of shareholders, unless the action to be effected is approved by the written consent of all of the shareholders entitled to vote thereon. This
provision, which may not be amended except by the affirmative vote of holders of at least 80% of the voting power of all then outstanding shares of capital stock entitled to
vote generally in the election of directors, voting together as a single class, makes it difficult for shareholders to initiate or effect an action by written consent that is opposed by
our board of directors.
Amendment of Our Bylaws. Under Delaware law, the power to make, alter or repeal bylaws is conferred upon a corporation’s shareholders. A corporation may,
however, in its certificate of incorporation also confer upon its board of directors the power to make, alter or repeal its bylaws. Our Certificate of Incorporation and our Bylaws
grant our board of directors the power to make, alter or repeal our Bylaws at any regular or special meeting of our board of directors. By majority vote, our shareholders may
make, alter or repeal our Bylaws but provisions of our Bylaws relating to shareholder meetings, directors and amendment of our Bylaws may only be amended by holders of at
least 80% of the voting power of all then outstanding shares of capital stock entitled to vote generally in the election of directors, voting together as a single class.
The provisions of our Certificate of Incorporation and our Bylaws could have the effect of discouraging others from attempting hostile takeovers and, as a
consequence, they may also inhibit temporary fluctuations in the market price of the common stock that often result from actual or rumored hostile takeover attempts. These
provisions may also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that
shareholders may otherwise deem to be in their best interests.
Forum Selection. Our Bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative
action or proceeding brought on behalf of us, (ii) any action or proceeding asserting a claim for breach of a fiduciary duty owed by any current or former director, officer, or
other employee of ours to us or our shareholders, (iii) any action or proceeding asserting a claim against us or any current or former director, officer, or other employee of ours
arising pursuant to any provision of the DGCL, our Certificate of Incorporation or our Bylaws (as each may be amended from time to time), (iv) any action or proceeding
asserting a claim against us or any current or former director, officer, or other employee of ours governed by the internal affairs doctrine, or (v) any action or proceeding as to
which the DGCL confers jurisdiction on the Delaware Court of Chancery shall be the Delaware Court of Chancery or, if and only if the Delaware Court of Chancery lacks
subject matter jurisdiction, any state court located within Delaware or, if and only if such state courts lack subject matter jurisdiction, the federal district court for the District of
Delaware, in all cases to the fullest extent permitted by law and subject to the court’s having personal jurisdiction over the indispensable parties named as defendants.
Our exclusive forum provision is not intended to apply to claims arising under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended. To the extent the provision could be construed to apply to such claims, there is uncertainty as to whether a court would enforce the forum selection provision with
respect to such claims, and in any event, shareholders would not be deemed to have waived our compliance with federal securities laws and the rules and regulations
thereunder.
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Delaware Anti-Takeover Statute
We are a Delaware corporation and are subject to Section 203 of the DGCL (“Section 203”). In general, Section 203 prevents us from engaging in a business
combination with an “interested stockholder” (generally, a person owning 15% or more of our outstanding voting stock) for three years following the time that person becomes
an interested stockholder unless either:
•
•
•
before that person became an interested stockholder, our board of directors approved either the business combination or the transaction that resulted in the that
person becoming an interested stockholder;
upon completion of the transaction that resulted in that person becoming an interested stockholder, that person owned at least 85% of our voting stock outstanding
at the time the transaction began (excluding stock held by directors who are also officers and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or
after the transaction in which that person became an interested stockholder, the business combination is approved by our board of directors and authorized at a
shareholder meeting by the affirmative vote of at least two-thirds of the outstanding voting stock not owned by the interested stockholder.
Under Section 203, these restrictions also do not apply to certain business combinations proposed by an interested stockholder following the disclosure of an
extraordinary transaction with a person who was not an interested stockholder during the previous three years or who became an interested stockholder with the approval of a
majority of our directors. This exception generally applies only if the extraordinary transaction is approved or not opposed by a majority of our directors who were directors
before any person became an interested stockholder in the previous three years.
3
Name
Callon Petroleum Operating Company
Callon (Permian) LLC
Callon Permian II, LLC
State of Incorporation
Delaware
Delaware
Delaware
Subsidiaries of Callon Petroleum Company
Exhibit 21.1
Name
Callon Petroleum Operating Company
Callon (Permian) LLC
Callon Permian II, LLC
Callon (Permian) Minerals LLC
Callon (Niobrara) LLC
Callon (Utica) LLC
Callon Marcellus Holding Inc.
Subsidiary Guarantors of Callon Petroleum Company
State of Incorporation
Exhibit 22.1
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Each of the above subsidiaries of Callon Petroleum Company has fully guaranteed on a senior unsecured, joint and several basis each of the debt securities of the Company
listed below:
Debt Securities of the Company Guaranteed by each of the Subsidiary Guarantors.
6.375% Senior Notes due July 1, 2026
8.0% Senior Notes due August 1, 2028
7.5% Senior Notes due June 15, 2030
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We have issued our reports dated February 26, 2024, with respect to the consolidated financial statements and internal control over financial reporting included in the Annual
Report of Callon Petroleum Company on Form 10-K for the year ended December 31, 2023. We consent to the incorporation by reference of said reports in the Registration
Statements of Callon Petroleum Company on Forms S-3ASR (File No. 333-261235 and File No. 333-273171), on Form S-3 (File No. 333-251490) and on Forms S-8 (File No.
333-29529, File No. 333-100646, File No. 333-109744, File No. 333-135703, File No. 333-160223, File No. 333-176061, File No. 333-188008, File No. 333-212044, File No.
333-224829, File No. 333-235635, File No. 333-235636, and File No. 333-239006).
/s/ GRANT THORNTON LLP
Houston, Texas
February 26, 2024
Exhibit 23.2
DeGolyer and MacNaughton
5001 Spring Valley Road
Suite 800 East
Dallas, Texas 75244
February 26, 2024
Callon Petroleum Company
2000 W. Sam Houston Parkway S.
Suite 2000
Houston, Texas 77042
Ladies and Gentlemen:
We hereby consent to the use of the name DeGolyer and MacNaughton, to the references to us and to our reserves reports for the years ended December
31, 2021, December 31, 2022, and December 31, 2023, in Callon Petroleum Company’s Annual Report on Form 10-K for the year ended December 31, 2023,
to the references to DeGolyer and MacNaughton as an independent petroleum engineering consulting firm, to the references to our report of third party dated
February 6, 2024, containing our opinion on the proved reserves, as of December 31, 2023, attributable to certain properties in which Callon Petroleum
Company has represented it holds an interest (our Report), and to the inclusion of our Report as an exhibit in Callon Petroleum Company’s Annual Report on
Form 10-K for the year ended December 31, 2023. We also consent to all such references and to the incorporation by reference of our Report in the Registration
Statements to be filed by Callon Petroleum Company on Form S-3ASR (File Nos. 333-261235 and 333-273171), Form S-3 (File No. 333-251490), and Form S-
8 (File Nos. 333-29529, 333-100646, 333-109744, 333-135703, 333-160223, 333-176061, 333-188008, 333-212044, 333-224829, 333-235635, 333-235636,
and 333-239006).
Very truly yours,
/s/ DeGolyer and MacNaughton
DeGOLYER and MacNAUGHTON
Texas Registered Engineering Firm F-716
I, Joseph C. Gatto, Jr., certify that:
1.
I have reviewed this Annual Report on Form 10-K of Callon Petroleum Company;
CERTIFICATIONS
Exhibit 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date:
February 26, 2024
/s/ Joseph C. Gatto, Jr.
Joseph C. Gatto, Jr.
President and Chief Executive Officer
(Principal executive officer)
I, Kevin Haggard, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Callon Petroleum Company;
CERTIFICATIONS
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date:
February 26, 2024
/s/ Kevin Haggard
Kevin Haggard
Senior Vice President & Chief Financial Officer
(Principal financial officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Callon Petroleum Company for the year ended December 31, 2023, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, each hereby certify pursuant to 18 U.S.C. section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
February 26, 2024
Date:
February 26, 2024
/s/ Joseph C. Gatto, Jr.
Joseph C. Gatto, Jr.
(Principal executive officer)
/s/ Kevin Haggard
Kevin Haggard
(Principal financial officer)
The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Report for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of
any general incorporation language in such filing.
Exhibit 97.1
CLAWBACK POLICY
CALLON PETROLEUM COMPANY
Effective as of November 13, 2023
PURPOSE
The Compensation Committee (the “Compensation Committee”) of the Board of Directors (the “Board”) of Callon Petroleum Company
(the “Company”), believes that it is in the best interests of the Company and its shareholders to create and maintain a culture that emphasizes
integrity and accountability and that reinforces the Company’s pay-for-performance compensation philosophy. The Compensation Committee
has therefore adopted this policy (this “Policy”), which provides for mandatory and discretionary recoupment of certain executive and certain
employee compensation, as further described herein.
MANDATORY RECOUPMENT; DISCRETIONARY RECOUPMENT
The mandatory recoupment components of this Policy are designed to comply with and be interpreted in a manner consistent with the
requirements of Section 10D of the Securities Exchange Act of 1934 (the “Exchange Act”) and the applicable rules or standards adopted by the
U.S. Securities and Exchange Commission (the “SEC”) and any national securities exchange on which the Company’s securities are listed (the
“Mandatory Recoupment Component” and any recoupment made pursuant to such component, “Mandatory Recoupment”).
The discretionary recoupment components of this Policy are designed to provide the Company with additional remedies for recoupment
in the event of a performance metric error, violation of post-employment restrictive covenants, other misconduct, or as otherwise determined in
the discretion of the Compensation Committee (the “Discretionary Recoupment Component” and any recoupment made pursuant to such
component, “Discretionary Recoupment”), which Discretionary Recoupment shall be in addition to, but not in place of, the Mandatory
Recoupment.
For the avoidance of doubt, in the event of the occurrence of a trigger that would require Mandatory Recoupment, the Mandatory
Recoupment Component will apply.
ADMINISTRATION; INTERPRETATION
General. This Policy shall be administered by the Compensation Committee. The Compensation Committee is authorized to interpret
and construe this Policy and to make all determinations necessary, appropriate, or advisable for the administration of this Policy. The
Compensation Committee will determine, in its sole discretion, the method(s) for recoupment of any overpayment under this Policy. Any
determinations made by the Compensation Committee under this Policy shall be final and binding on all affected individuals.
Mandatory Recoupment. In administering the Mandatory Recoupment Component, the Compensation Committee shall interpret such
component in a manner consistent with the
requirements of Section 10D of the Exchange Act and the applicable rules or standards adopted by the SEC and any national securities exchange
on which the Company’s securities are listed.
Discretionary Recoupment. In administering the Discretionary Recoupment Component, the Compensation Committee may consider,
among other things: the nature and impact of the affected individual’s conduct; the relationship of the conduct to the compensation being
considered for Discretionary Recoupment; the feasibility of the various types of Discretionary Recoupment; cost of implementation; legal,
compliance, and other disciplinary actions that may be taken; retention and succession planning; pay relativity; and the effect that the
Discretionary Recoupment may have on litigation or investigations involving the Company.
Except for any Mandatory Recoupment required by this Policy and as may otherwise be required by law, nothing in this Policy shall
mandate recoupment actions or create a presumption that recoupment actions should be taken in any particular case. In the exercise of its
business judgment, the Compensation Committee has full discretion to administer the Discretionary Recoupment Component on behalf of the
Company. The Compensation Committee may exercise this discretion in consultation with other Board committees, members of management,
or outside advisors as the Compensation Committee deems appropriate.
COVERED PERSONS
Mandatory Recoupment. The Mandatory Recoupment Component applies to the Company’s current and former executive officers (as
determined by the Compensation Committee in accordance with Section 10D of the Exchange Act, the rules promulgated thereunder, and the
listing standards of the national securities exchange on which the Company’s securities are listed) and such other senior executives or
employees who may from time-to-time be deemed subject to this Policy by the Compensation Committee (“Covered Executives”).
Discretionary Recoupment. The Discretionary Recoupment Component applies to the Company’s current and former senior executives
or employees who participate in any plan, program or agreement that provides for Covered Compensation (“Covered Employees” and together
with Covered Executives, “Covered Persons”).
COVERED COMPENSATION
For purposes of this Policy:
•
“Incentive-Based Compensation” means any compensation that is granted, earned, or vested based wholly or in part upon the attainment
of a financial reporting measure, including, but not limited to: (i) non-equity incentive plan awards that are earned solely or in part by
satisfying a financial reporting measure performance goal; (ii) bonuses paid from a bonus pool, where the size of the pool is determined
solely or in part by satisfying a financial reporting measure performance goal; (iii) other cash awards based on satisfaction of a financial
reporting measure performance goal; (iv) restricted stock, restricted stock units, stock options, stock appreciation rights, performance
share units and deferred stock that are granted or vest solely or in part on satisfying a financial reporting measure performance goal; and
(v) proceeds from the sale of shares acquired through an incentive plan that were granted or vested solely or in part on satisfying a
2
financial reporting measure performance goal. Compensation that would not be considered Incentive-Based Compensation includes, but
is not limited to: (a) salaries; (b) Time-Based Compensation (which is defined and separately addressed below); (c) bonuses paid solely
on satisfying subjective standards, such as demonstrating leadership, and/or completion of a specified employment period; (d) non-
equity incentive plan awards earned solely on satisfying strategic or operational measures; and (e) discretionary bonuses or other
compensation that is not paid from a bonus pool that is determined by satisfying a financial reporting measure performance goal.
A “financial reporting measure” is: (i) any measure that is determined and presented in accordance with the accounting principles used in
preparing financial statements, or any measure derived wholly or in part from such measure, such as revenues, EBITDA, or net income
and (ii) stock price and total shareholder return. Financial reporting measures include, but are not limited to: revenues; net income;
operating income; profitability of one or more reportable segments; financial ratios (e.g., accounts receivable turnover and inventory
turnover rates); net assets or net asset value per share; earnings before interest, taxes, depreciation and amortization; funds from
operations and adjusted funds from operations; liquidity measures (e.g., working capital, operating cash flow); return measures (e.g.,
return on invested capital, return on assets); earnings measures (e.g., earnings per share); sales per square foot or same store sales, where
sales is subject to an accounting restatement; revenue per user, or average revenue per user, where revenue is subject to an accounting
restatement; cost per employee, where cost is subject to an accounting restatement; any of such financial reporting measures relative to a
peer group, where the Company’s financial reporting measure is subject to an accounting restatement; and tax basis income.
“Time-Based Compensation” means any equity-based compensation that is subject to vesting based solely on continued employment or
service.
“Covered Compensation” means, collectively, Incentive-Based Compensation; Time- Based Compensation; incentive compensation
based on operational, strategic, or qualitative measures; and compensation paid as consideration for agreement to restrictive covenants.
•
•
•
MANDATORY RECOUPMENT
Mandatory Recoupment Trigger - Accounting Restatement. In the event the Company is required to prepare an accounting restatement
of its financial statements due to the Company’s material noncompliance with any financial reporting requirement under applicable securities
laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the
previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left
uncorrected in the current period (each an “Accounting Restatement”), the Compensation Committee will require reimbursement or forfeiture of
the Incentive-Based Overpayment (as defined below) received by any Covered Executive during the three (3) completed fiscal years
immediately preceding the date on which the Company is required to prepare an Accounting Restatement and any transition period (that results
from a change in the Company’s fiscal year) within or immediately following those three (3) completed fiscal years.
3
Mandatory Recoupment - Calculation of Incentive-Based Overpayment. The amount to be recovered will be the amount of Incentive-
Based Compensation received that exceeds the amount of Incentive-Based Compensation that otherwise would have been received had it been
determined based on the restated amounts and must be computed without regard to any taxes paid (the “Incentive-Based Overpayment”).
Incentive-Based Compensation is deemed received in the Company’s fiscal period during which the financial reporting measure specified in the
Incentive-Based Compensation award is attained, as applicable, even if the payment or grant of the Incentive-Based Compensation occurs after
the end of that period.
For Incentive-Based Compensation based on stock price or total shareholder return, where the amount of erroneously awarded
compensation is not subject to mathematical recalculation directly from the information in the Accounting Restatement, the amount must be
based on a reasonable estimate of the effect of the Accounting Restatement on the stock price or total shareholder return upon which the
Covered Compensation was received; and the Company must maintain documentation of the determination of that reasonable estimate and
provide such documentation to the exchange on which the Company’s securities are listed.
Mandatory Recoupment - Method of Recoupment. The Compensation Committee will determine, in its sole discretion, the method or
methods for recouping any Incentive-Based Overpayment hereunder which may include, without limitation: (i) requiring reimbursement of cash
Incentive-Based Compensation previously paid; (ii) seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or
other disposition of any equity-based awards; (iii) offsetting the recouped amount from any compensation otherwise owed by the Company to
the Covered Executive; (iv) cancelling outstanding vested or unvested equity awards; and/or (v) taking any other remedial or recovery action
permitted by law, as determined by the Compensation Committee.
Mandatory Recoupment - Limitations. Mandatory Recoupment will be limited to Incentive-Based Overpayments paid or distributed
during the three (3) completed fiscal years prior to the date on which the Company is required to prepare an Accounting Restatement and any
transition period (that results from a change in the Company’s fiscal year) within or immediately following those three (3) completed fiscal
years. In no event shall the Company be required to award Covered Executives an additional payment if the restated or accurate financial results
would have resulted in a higher Incentive-Based Compensation payment.
The Compensation Committee shall recover any Incentive-Based Overpayment in accordance with this Policy, except to the extent that
the Compensation Committee determines such recovery would be impracticable because:
(a) The direct expense paid to a third party to assist in enforcing this Policy would exceed the amount to be recovered;
(b) After obtaining an opinion from local counsel, the Compensation Committee concludes recovery would violate home country law
where that law was adopted prior to November 28, 2022; or
4
(c) Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of
the Company, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.
DISCRETIONARY RECOUPMENT
Discretionary Recoupment - Applicability. For the avoidance of doubt, in the event of an Accounting Restatement, the Mandatory
Recoupment Component shall apply and control, and any application of the Discretionary Recoupment Component shall be in addition to, and
not in place or, the Mandatory Recoupment Component.
Discretionary Recoupment Triggers. The Compensation Committee shall have the ability to exercise its discretion to effect recoupment
of Covered Compensation under the Discretionary Recoupment Component upon the occurrence of any the following:
•
•
•
the Compensation Committee’s determination that a previously approved performance metric or other criteria is materially
inaccurate, whether or not the Company is required to restate its financial statements and without regard to whether such
miscalculation was due to fraud or intentional misconduct (“Performance Metric Error”);
any Covered Person’s breach of any restrictive covenant set forth in any employment agreement, award agreement, or other written
agreement entered into between the Covered Person and the Company (or an affiliate thereof) (“RCA Breach”); or
the Compensation Committee’s determination that a Covered Person (i) committed fraud or willful misconduct, (ii) was grossly
negligent in a supervisory role; provided that, in any case, such action caused, or could reasonably lead to, material financial or
reputational harm to the Company, or (iii) engaged in any other acts or omissions for which the Compensation Committee deems it
appropriate to effect recoupment under the Discretionary Recoupment Component ((i),(ii) and (iii), each constituting “Other
Misconduct”).
Discretionary Recoupment - Calculation of Overpayment. The amount that may be recovered under the Discretionary Recoupment
Component will be as set forth below in respect of each applicable trigger, in each case to be calculated in the manner determined appropriate by
the Compensation Committee.
•
•
In the event of a Performance Metric Error, the Compensation Committee may in its sole discretion, require reimbursement or
forfeiture of all or part of any excess Covered Compensation received by any Covered Person during the three (3) completed fiscal
years immediately preceding the Compensation Committee’s determination of an error. Notwithstanding the foregoing, with respect
to a Covered Person that is a non-officer, such reimbursement or forfeiture will only be required if such non-officer is directly or
indirectly responsible for fraud or misconduct that results in the Compensation Committee’s determination that a previously
approved performance metric or other criteria is materially inaccurate.
In the event of a RCA Breach, the Compensation Committee may, in its sole discretion, require reimbursement or forfeiture of all or
part of any Covered
5
Compensation received by the Covered Person during the most recently completed fiscal year immediately preceding the date on
which the Covered Person is found to have committed such RCA Breach.
•
In the event of Other Misconduct, the Compensation Committee may, in its sole discretion, require reimbursement or forfeiture of all
or a portion of any Covered Compensation received by a Covered Person pursuant during the most recently completed fiscal year
immediately preceding the date on which the Covered Person is determined to have engaged in such Other Misconduct.
Discretionary Recoupment - Method of Recoupment. The Compensation Committee will determine, in its sole discretion, the method or
methods for recouping any amount that may be recovered under the Discretionary Recoupment Component hereunder which may include,
without limitation: (i) requiring reimbursement of Covered Compensation previously paid; (ii) seeking recovery of any gain realized on the
vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based awards; (iii) offsetting the recouped amount from any
compensation otherwise owed by the Company to the Covered Executive; (iv) cancelling outstanding vested or unvested equity awards; and/or
(v) taking any other remedial or recovery action permitted by law, as determined by the Compensation Committee.
Discretionary Recoupment - Enforcement. Regardless of the applicability of the Discretionary Recoupment Component, the
Compensation Committee may determine that it is not in the best interests of the Company to pursue Discretionary Recoupment, based on such
factors as the Compensation Committee determines in its discretion to be appropriate, including, without limitation, (i) the likelihood of success
under governing law versus the cost and effort involved, (ii) whether the assertion of a claim may prejudice the interests of the Company,
including in any related proceedings or investigations, (iii) the presence or absence of intentional misconduct by the Covered Persons who
would be affected by the recovery, (iv) the passage of time since the occurrence, and (v) any pending legal proceedings related to the applicable
restatement.
NO INDEMNIFICATION
The Company shall not indemnify any Covered Persons against the loss of any incorrectly awarded Covered Compensation.
EFFECTIVE DATE
This Policy shall be effective as of the date it is adopted by the Compensation Committee (the “Effective Date”), shall supersede and
replace any other clawback policies previously adopted by the Company, and shall apply to Incentive-Based Compensation (including
Incentive-Based Compensation granted pursuant to arrangements existing prior to the Effective Date). Notwithstanding the foregoing, the
Mandatory Recoupment Component shall only apply to Incentive-Based Compensation received (as determined pursuant to this Policy) on or
after October 2, 2023.
6
AMENDMENT; TERMINATION
The Board or the Compensation Committee may amend this Policy from time to time in its discretion and shall amend this Policy as it
deems necessary to reflect final rules or additional standards adopted by a national securities exchange on which the Company’s securities are
listed. The Board or the Compensation Committee may terminate this Policy at any time.
OTHER RECOUPMENT RIGHTS
The Compensation Committee intends that this Policy will be applied to the fullest extent of the law. The Compensation Committee may
require that any employment or service agreement, equity award agreement, or similar agreement shall, as a condition to the grant of any benefit
thereunder, require a Covered Person to agree to abide by the terms of this Policy. Any right of recoupment under this Policy is in addition to,
and not in lieu of, any other remedies or rights of recoupment that may be available to the Company pursuant to the terms of any similar policy
in any employment agreement, equity award agreement, or similar agreement and any other legal remedies available to the Company.
SUCCESSORS
This Policy shall be binding and enforceable against all Covered Person and their beneficiaries, heirs, executors, administrators or other
legal representatives.
7
CERTIFICATION
I, Michol L. Ecklund, Corporate Secretary of the Callon Petroleum Company (the “Company”), do hereby certify that the foregoing is a full, true,
and correct copy of the Company’s Clawback Policy, as adopted by the Company’s Compensation Committee on November 13, 2023.
/s/ Michol L. Ecklund
Corporate Secretary
8
Exhibit 99.1
DeGolyer and MacNaughton
5001 Spring Valley Road
Suite 800 East
Dallas, Texas 75244
February 6, 2024
Callon Petroleum Company
2000 W. Sam Houston Parkway South
Suite 2000
Houston, Texas 77042
Ladies and Gentlemen:
Pursuant to your request, this report of third party presents an independent evaluation, as of December 31, 2023, of the extent and value
of the estimated net proved oil, condensate, natural gas liquids (NGL), and gas reserves of certain properties in which Callon Petroleum
Company (Callon) has represented it holds an interest. This evaluation was completed on February 6, 2024. The properties evaluated herein
consist of working interests located in Texas. Callon has represented that these properties account for 100 percent on a net equivalent barrel
basis of Callon’s net proved reserves as of December 31, 2023. The net proved reserves estimates have been prepared in accordance with the
reserves definitions of Rules 4–10(a) (1)–(32) of Regulation S–X of the United States Securities and Exchange Commission (SEC). This report
was prepared in accordance with guidelines specified in Item 1202 (a)(8) of Regulation S–K and is to be used for inclusion in certain SEC filings
by Callon.
Reserves estimates included herein are expressed as net reserves. Gross reserves are defined as the total estimated petroleum
remaining to be produced from these properties after December 31, 2023. Net reserves are defined as that portion of the gross reserves
attributable to the interests held by Callon after deducting all interests held by others.
Values for proved reserves in this report are expressed in terms of future gross revenue, future net revenue, and present worth. Future
gross revenue is defined as that revenue which will accrue to the evaluated interests from the production and sale of the estimated net reserves.
Future net revenue is calculated by deducting production taxes, ad valorem taxes, operating expenses, capital costs, and abandonment costs
from future gross revenue. Operating expenses include field operating expenses, transportation and processing expenses, and an allocation of
overhead that directly relates to production
DeGolyer and MacNaughton
2
activities. Capital costs include drilling and completion costs, facilities costs, and field maintenance costs. Abandonment costs are represented by
Callon to be inclusive of those costs associated with the removal of equipment, plugging of wells, and reclamation and restoration associated
with the abandonment. At the request of Callon, future income taxes were not taken into account in the preparation of these estimates. Present
worth is defined as future net revenue discounted at a discount rate of 10 percent per year compounded monthly over the expected period of
realization. Present worth should not be construed as fair market value because no consideration was given to additional factors that influence
the prices at which properties are bought and sold.
Estimates of reserves and revenue should be regarded only as estimates that may change as further production history and additional
information become available. Not only are such estimates based on that information which is currently available, but such estimates are also
subject to the uncertainties inherent in the application of judgmental factors in interpreting such information.
Information used in the preparation of this report was obtained from Callon and from public sources. In the preparation of this report we
have relied, without independent verification, upon information furnished by Callon with respect to the property interests being evaluated,
production from such properties, current costs of operation and development, current prices for production, agreements relating to current and
future operations and sale of production, and various other information and data that were accepted as represented. A field examination was not
considered necessary for the purposes of this report.
Definition of Reserves
Petroleum reserves included in this report are classified as proved. Only proved reserves have been evaluated for this report. Reserves
classifications used by us in this report are in accordance with the reserves definitions of Rules 4–10(a)(1)–(32) of Regulation S–X of the SEC.
Reserves are judged to be economically producible in future years from known reservoirs under existing economic and operating conditions and
assuming continuation of current regulatory practices using conventional production methods and equipment. In the analyses of production-
decline curves, reserves were estimated only to the limit of economic rates of production under existing economic and operating conditions using
prices and costs consistent with the effective date of this report, including consideration of changes in existing prices provided only by contractual
arrangements but not including escalations based upon future conditions. The petroleum reserves are classified as follows:
DeGolyer and MacNaughton
3
Proved oil and gas reserves – Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience
and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from
known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at
which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of
whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have
commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
(i) The area of the reservoir considered as proved includes:
(A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir
that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on
the basis of available geoscience and engineering data.
(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons
(LKH) as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology
establishes a lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential
exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir
only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable
certainty.
(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not
limited to, fluid injection) are included in the proved classification when:
(A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir
as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using
reliable technology establishes the reasonable certainty of the engineering analysis on
DeGolyer and MacNaughton
4
which the project or program was based; and (B) The project has been approved for development by all necessary parties
and entities, including governmental entities.
(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be
determined. The price shall be the average price during the 12-month period prior to the ending date of the period covered
by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within
such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
Developed oil and gas reserves – Developed oil and gas reserves are reserves of any category that can be expected to be
recovered:
(i) Through existing wells with existing equipment and operating methods or in which the cost of the required equipment is
relatively minor compared to the cost of a new well; and
(ii) Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the
extraction is by means not involving a well.
Undeveloped oil and gas reserves – Undeveloped oil and gas reserves are reserves of any category that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for
recompletion.
(i) Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are
reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable
certainty of economic producibility at greater distances.
(ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted
indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time.
DeGolyer and MacNaughton
5
(iii) Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been
proved effective by actual projects in the same reservoir or an analogous reservoir, as defined in [section 210.4–10 (a)
Definitions], or by other evidence using reliable technology establishing reasonable certainty.
Methodology and Procedures
Estimates of reserves were prepared by the use of appropriate geologic, petroleum engineering, and evaluation principles and techniques
that are in accordance with the reserves definitions of Rules 4–10(a) (1)–(32) of Regulation S–X of the SEC and with practices generally
recognized by the petroleum industry as presented in the publication of the Society of Petroleum Engineers entitled “Standards Pertaining to the
Estimating and Auditing of Oil and Gas Reserves Information (revised June 2019) Approved by the SPE Board on 25 June 2019” and in
Monograph 3 and Monograph 4 published by the Society of Petroleum Evaluation Engineers. The method or combination of methods used in the
analysis of each reservoir was tempered by experience with similar reservoirs, stage of development, quality and completeness of basic data,
and production history.
Based on the current stage of field development, production performance, the development plans provided by Callon, and analyses of
areas offsetting existing wells with test or production data, reserves were classified as proved. The proved undeveloped reserves estimates were
based on opportunities identified in the plan of development provided by Callon.
Callon has represented that its senior management is committed to the development plan provided by Callon and that Callon has the
financial capability to execute the development plan, including the drilling and completion of wells and the installation of equipment and facilities.
For the evaluation of unconventional reservoirs, a performance-based methodology integrating the appropriate geology and petroleum
engineering data was utilized for this report. Performance-based methodology primarily includes (1) production diagnostics, (2) decline-curve
analysis, and (3) model-based analysis (if necessary, based on availability of data). Production diagnostics include data quality control,
identification of flow regimes, and characteristic well performance behavior. These analyses were performed for all well groupings (or type-curve
areas).
DeGolyer and MacNaughton
6
Characteristic rate-decline profiles from diagnostic interpretation were translated to modified hyperbolic rate profiles, including one or
multiple b-exponent values followed by an exponential decline. Based on the availability of data, model-based analysis may be integrated to
evaluate long-term decline behavior, the effect of dynamic reservoir and fracture parameters on well performance, and complex situations
sourced by the nature of unconventional reservoirs.
In the evaluation of undeveloped reserves, type-well analysis was performed using well data from analogous reservoirs for which more
complete historical performance data were available.
Data provided by Callon from wells drilled through December 31, 2023, and made available for this evaluation were used to prepare the
reserves estimates herein. These reserves estimates were based on consideration of daily and monthly production data available for certain
properties only through November 2023. Estimated cumulative production, as of December 31, 2023, was deducted from the estimated gross
ultimate recovery to estimate gross reserves. This required that production be estimated for up to 1 month.
Oil and condensate reserves estimated herein are to be recovered by normal field separation. NGL reserves estimated herein include
pentanes and heavier fractions (C ) and liquefied petroleum gas (LPG), which consists primarily of propane and butane fractions, and are the
result of low-temperature plant processing. Oil, condensate, and NGL reserves included in this report are expressed in thousands of barrels
5+
(Mbbl). In these estimates, 1 barrel equals 42 United States gallons. For reporting purposes, oil and condensate reserves have been estimated
separately and are presented herein as a summed quantity.
Gas quantities estimated herein are expressed as sales gas. Sales gas is defined as the total gas to be produced from the reservoirs,
measured at the point of delivery, after reduction for fuel usage, flare, and shrinkage resulting from field separation and processing. Gas reserves
estimated herein are reported as sales gas. Gas quantities are expressed at a temperature base of 60 degrees Fahrenheit (°F) and at a pressure
base of 14.65 pounds per square inch absolute (psia). Gas quantities included in this report are expressed in millions of cubic feet (MMcf).
Gas quantities are identified by the type of reservoir from which the gas will be produced. Nonassociated gas is gas at initial reservoir
conditions with no oil present in the reservoir. Associated gas is both gas-cap gas and solution gas. Gas-cap gas is gas at initial reservoir
conditions and is in communication with an underlying oil zone. Solution gas is
DeGolyer and MacNaughton
7
gas dissolved in oil at initial reservoir conditions. Gas quantities estimated herein include both associated and nonassociated gas.
At the request of Callon, sales gas reserves estimated herein were converted to oil equivalent using an energy equivalent factor of 6,000
cubic feet of gas per 1 barrel of oil equivalent.
Primary Economic Assumptions
Revenue values in this report were estimated using initial prices, expenses, and costs provided by Callon. Future prices were estimated
using guidelines established by the SEC and the Financial Accounting Standards Board (FASB). The following economic assumptions were used
for estimating the revenue values reported herein:
Oil, Condensate, NGL Prices
Callon has represented that the oil, condensate, and NGL prices were based on a reference price, calculated as the
unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the
end of the reporting period, unless prices are defined by contractual agreements. Callon supplied differentials to a West
Texas Intermediate (WTI) reference price of $78.22 per barrel and the prices were held constant thereafter. The volume-
weighted average prices attributable to the estimated proved reserves over the lives of the properties were $78.17 per
barrel of oil and condensate and $22.27 per barrel of NGL.
Gas Prices
Callon has represented that the gas prices were based on a reference price, calculated as the unweighted arithmetic
average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting
period, unless prices are defined by contractual agreements. Callon supplied differentials to a Henry Hub reference price of
$2.64 per million Btu and the prices were held constant thereafter. Btu factors provided by Callon were used to convert
prices from dollars per million Btu to dollars per thousand cubic feet. The volume-weighted average price attributable to the
estimated proved reserves over the lives of the properties was $1.531 per thousand cubic feet of gas.
DeGolyer and MacNaughton
8
Production and Ad Valorem Taxes
Production taxes and ad valorem taxes were calculated using rates provided by Callon based on recent payments.
Operating Expenses, Capital Costs, and Abandonment Costs
Estimates of operating expenses and future capital expenditures, provided by Callon and based on existing economic
conditions, were held constant for the lives of the properties. Certain operating expenses and abandonment costs for the
developed and undeveloped properties were provided by Callon at the asset level. Abandonment costs, which are those
costs associated with the removal of equipment, plugging of wells, and reclamation and restoration associated with the
abandonment, were provided by Callon for all properties and were not adjusted for inflation. Operating expenses, capital
costs, and abandonment costs were considered, as appropriate, in determining the economic viability of the undeveloped
reserves estimated herein.
In our opinion, the information relating to estimated proved reserves, estimated future net revenue from proved reserves, and present
worth of estimated future net revenue from proved reserves of oil, condensate, NGL, and gas contained in this report has been prepared in
accordance with Paragraphs 932-235-50-4, 932-235-50-6, 932-235-50-7, 932-235-50-9, 932-235-50-30, and 932-235-50-31(a), (b), and (e) of
the Accounting Standards Update 932-235-50, Extractive Industries – Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures
(January 2010) of the FASB and Rules 4–10(a) (1)–(32) of Regulation S–X and Rules 302(b), 1201, 1202(a) (1), (2), (3), (4), (8), and 1203(a) of
Regulation S–K of the SEC; provided, however, that (i) future income tax expenses have not been taken into account in estimating the future net
revenue and present worth values set forth herein and (ii) estimates of the proved developed and proved undeveloped reserves are not
presented at the beginning of the year.
To the extent the above-enumerated rules, regulations, and statements require determinations of an accounting or legal nature, we, as
engineers, are necessarily unable to express an opinion as to whether the above-described information is in accordance therewith or sufficient
therefor.
9
DeGolyer and MacNaughton
Summary of Conclusions
DeGolyer and MacNaughton has performed an independent evaluation of the extent and value of the estimated net proved oil,
condensate, NGL, and gas reserves of certain properties in which Callon has represented it holds an interest. The estimated net proved
reserves, as of December 31, 2023, of the properties evaluated herein were based on the definition of proved reserves of the SEC and are
summarized as follows, expressed in thousands of barrels (Mbbl), millions of cubic feet (MMcf), and thousands of barrels of oil equivalent
(Mboe):
Estimated by DeGolyer and MacNaughton
Net Proved Reserves
as of December 31, 2023
Oil and
Condensate
(Mbbl)
NGL
(Mbbl)
Sales
Gas
(MMcf)
Oil Equivalent
(Mboe)
Proved Developed
Proved Undeveloped
Total Proved
149,898
89,362
239,260
65,890
34,778
100,668
376,070
185,423
561,493
278,466
155,044
433,510
Note: Sales gas reserves estimated herein were converted to oil equivalent using an energy equivalent factor of 6,000 cubic feet of gas
per 1 barrel of oil equivalent.
The estimated future revenue to be derived from the production and sale of the net proved reserves, as of December 31, 2023, of the
properties evaluated using the guidelines established by the SEC is summarized as follows, expressed in thousands of dollars (M$):
Future Gross Revenue
Production and Ad Valorem Taxes
Operating Expenses
Capital and Abandonment Costs
Future Net Revenue
Present Worth at 10 Percent
Proved
Developed
(M$)
Total
Proved
(M$)
13,753,696
824,832
5,418,460
125,991
7,384,413
4,294,854
21,804,152
1,307,499
7,543,278
1,943,594
11,009,781
5,889,572
Note: Future income taxes have not been taken into account in the preparation of these estimates.
While the oil and gas industry may be subject to regulatory changes from time to time that could affect an industry participant’s ability to
recover its reserves, we are not aware of any such governmental actions which would restrict the recovery of the December 31, 2023, estimated
reserves.
DeGolyer and MacNaughton
10
DeGolyer and MacNaughton is an independent petroleum engineering consulting firm that has been providing petroleum consulting
services throughout the world since 1936. DeGolyer and MacNaughton does not have any financial interest, including stock ownership, in Callon.
Our fees were not contingent on the results of our evaluation. This report has been prepared at the request of Callon. DeGolyer and
MacNaughton has used all assumptions, data, procedures, and methods that it considers necessary and appropriate to prepare this report.
Submitted,
/s/ DeGolyer and MacNaughton
DeGOLYER and MacNAUGHTON
Texas Registered Engineering Firm F-716
/s/ Dilhan Ilk
Dilhan Ilk, P.E.
Executive Vice President
DeGolyer and MacNaughton
DeGolyer and MacNaughton
CERTIFICATE of QUALIFICATION
I, Dilhan Ilk, Petroleum Engineer with DeGolyer and MacNaughton, 5001 Spring Valley Road, Suite 800 East, Dallas, Texas, 75244 U.S.A.,
hereby certify:
1. That I am an Executive Vice President with DeGolyer and MacNaughton, which firm did prepare the report of third party addressed to
Callon Petroleum Company dated February 6, 2024, and that I, as Executive Vice President, was responsible for the preparation of this
report of third party.
2. That I attended Istanbul Technical University, and that I graduated with a Bachelor of Science degree in Petroleum Engineering in the
year 2003, a Master of Science degree in Petroleum Engineering from Texas A&M University in 2005, and a Doctor of Philosophy degree
in Petroleum Engineering from Texas A&M University in 2010; that I am a Registered Professional Engineer in the State of Texas; that I
am a member of the Society of Petroleum Engineers; and that I have in excess of 13 years of experience in oil and gas reservoir studies
and reserves evaluations.
/s/ Dilhan Ilk
Dilhan Ilk, P.E.
Executive Vice President
DeGolyer and MacNaughton