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☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 Commission File Number:  001-35371

(Exact name of registrant as specified in its charter) 

Delaware						61-1630631
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class			Trading Symbol			Name of exchange on which registered
Common Stock, par value $0.01 per share			CIVI			New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes ☐  No

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

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

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-accelerated Filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of August 2, 2023, the registrant had 93,760,666 shares of common stock outstanding.

This Quarterly Report on Form 10-Q contains various statements, including those that express belief, expectation or intention, as well as those that are not statements of historic fact, that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). When used in this Quarterly Report on Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project,” “plan,” “will,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

Forward-looking statements include statements related to, among other things:

•the Company’s business strategies;

•reserves estimates;

•estimated sales volumes;

•the amount and allocation of forecasted capital expenditures and plans for funding capital expenditures and operating expenses;

•our ability to modify future capital expenditures;

•anticipated costs;

•compliance with debt covenants;

•our ability to fund and satisfy obligations related to ongoing operations;

•compliance with government regulations, including those related to climate change as well as environmental, health, and safety regulations and liabilities thereunder;

•our ability to achieve, reach, or otherwise meet initiatives, plans, or ambitions with respect to environmental, social and governance matters;

•the adequacy of gathering systems and continuous improvement of such gathering systems;

•the impact from the lack of available gathering systems and processing facilities in certain areas;

•oil, natural gas, and natural gas liquid prices and factors affecting the volatility of such prices;

•the impact of commodity prices;

•sufficiency of impairments;

•the ability to use derivative instruments to manage commodity price risk and ability to use such instruments in the future;

•our drilling inventory and drilling intentions;

•the impact of potentially disruptive technologies;

•our estimated revenue gains and losses;

•the timing and success of specific projects;

•our implementation of standard and long reach laterals;

•our intention to continue to optimize enhanced completion techniques and well design changes;

•stated working interest percentages;

•our management and technical team;

•outcomes and effects of litigation, claims, and disputes;

•our ability to replace oil and natural gas reserves;

•our ability to convert proved undeveloped reserves to producing properties within five years of their initial proved booking;

•our ability to pay future cash dividends on or repurchase shares of our common stock;

•the impact of the loss of a single customer or any purchaser of our products;

•the timing and ability to meet certain volume commitments related to purchase and transportation agreements;

•the impact of any pandemic or other public health epidemic, including the COVID-19 pandemic;

•the impact of customary royalty interests, overriding royalty interests, obligations incident to operating agreements, liens for current taxes, and other industry-related constraints;

•our anticipated financial position, including our cash flow and liquidity;

•the adequacy of our insurance;

•plans and expectations with respect to the Acquisitions (as defined herein) and the anticipated impact of the Acquisitions on the Company’s results of operations, financial position, future growth opportunities, reserve estimates, and competitive position;

•the results, effects, benefits, and synergies of other mergers and acquisitions; and

•other statements concerning our anticipated operations, economic performance, and financial condition.

We have based these forward-looking statements on certain assumptions and analyses we have made in light of our experience and our perception of historical trends, current conditions, and expected future developments as well as other factors we believe are appropriate under the circumstances. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining actual future results. The actual results or developments anticipated by these forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, and may not be realized or, even if substantially realized, may not have the expected consequences. Actual results could differ materially from those expressed or implied in the forward-looking statements.

Factors that could cause actual results to differ materially include, but are not limited to, the following:

•the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”), Exhibit 99.2 to our Current Report on Form 8-K filed with the SEC on June 20, 2023, and in subsequent reports we file with the SEC (including Part II, Item 1A of this report);

•declines or volatility in the prices we receive for our oil, natural gas, and natural gas liquids;

•general economic conditions, whether internationally, nationally, or in the regional and local market areas in which we do business, including any future economic downturn, the impact of continued or further inflation, disruption in the financial markets, and the availability of credit on acceptable terms;

•the effects of disruption of our operations or excess supply of oil and natural gas and other effects of world health events, including the COVID-19 pandemic (including any worsening thereof), and the actions by certain oil and natural gas producing countries, including Russia;

•the ability of our customers to meet their obligations to us;

•our access to capital on acceptable terms;

•our ability to generate sufficient cash flow from operations, borrowings, or other sources to enable us to fully develop our undeveloped acreage positions;

•the presence or recoverability of estimated oil and natural gas reserves and the actual future sales volume rates and associated costs;

•uncertainties associated with estimates of proved oil and gas reserves;

•the possibility that the industry may be subject to future local, state, and federal regulatory or legislative actions (including additional taxes and changes in environmental regulation and regulations addressing climate change);

•environmental risks;

•seasonal weather conditions as well as severe weather and other natural events caused by climate change;

•lease stipulations;

•drilling and operating risks, including the risks associated with the employment of horizontal drilling and completion techniques;

•our ability to acquire adequate supplies of water for drilling and completion operations;

•availability of oilfield equipment, services, and personnel;

•exploration and development risks;

•operational interruption of centralized oil and natural gas processing facilities;

•competition in the oil and natural gas industry;

•management’s ability to execute our plans to meet our goals;

•our ability to attract and retain key members of our senior management and key technical employees;

•our ability to maintain effective internal controls;

•access to adequate gathering systems and pipeline take-away capacity;

•our ability to secure adequate processing capacity for natural gas we produce, to secure adequate transportation for oil, natural gas, and natural gas liquids we produce, and to sell the oil, natural gas, and natural gas liquids at market prices;

•costs and other risks associated with perfecting title for mineral rights in some of our properties;

•political conditions in or affecting other producing countries, including conflicts in or relating to the Middle East, South America, and Russia (including the current events involving Russia and Ukraine), and other sustained military campaigns or acts of terrorism or sabotage;

•the continuing effects of the COVID-19 pandemic, including any recurrence or the worsening thereof; and

•other economic, competitive, governmental, legislative, regulatory, geopolitical, and technological factors that may negatively impact our businesses, operations, or pricing.

All forward-looking statements speak only as of the date of this report. We disclaim any obligation to update or revise these statements unless required by law, and you should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved. We disclose other important factors that could cause our actual results to differ materially from our expectations under “Part I, Item 1A. Risk Factors” and other sections of our 2022 Form 10-K, Exhibit 99.2 to our Current Report on Form 8-K filed with the SEC on June 20, 2023 and in subsequent reports we file with the SEC (including Part II, Item 1A of this report). These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

(in thousands, except per share amounts)

			June 30, 2023						December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents			$	2,702,897					$	768,032
Accounts receivable, net:
Oil and natural gas sales			201,248						343,500
Joint interest and other			100,664						135,816
Derivative assets			4,335						2,490
Prepaid income taxes			2,266						29,604
Deposits for acquisitions			352,500						—
Prepaid expenses and other			49,297						48,988
Total current assets			3,413,207						1,328,430
Property and equipment (successful efforts method):
Proved properties			7,390,897						6,774,635
Less: accumulated depreciation, depletion, and amortization			(1,628,303)						(1,214,484)
Total proved properties, net			5,762,594						5,560,151
Unproved properties			578,508						593,971
Wells in progress			316,119						407,351
Other property and equipment, net of accumulated depreciation of $8,498 in 2023 and $7,329 in 2022			49,619						49,632
Total property and equipment, net			6,706,840						6,611,105
Long-term derivative assets			1,800						794
Right-of-use assets			41,572						24,125
Other noncurrent assets			7,567						6,945
Total assets			$	10,170,986					$	7,971,399
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses			$	240,555					$	295,297
Production taxes payable			389,392						258,932
Oil and natural gas revenue distribution payable			522,308						538,343
Derivative liability			21,438						46,334
Asset retirement obligations			25,557						25,557
Lease liability			21,841						13,464
Total current liabilities			1,221,091						1,177,927
Long-term liabilities:
Senior notes			3,048,511						393,293
Ad valorem taxes			153,371						412,650
Derivative liability			2,973						17,199
Deferred income tax liabilities			409,593						319,618
Asset retirement obligations			268,366						265,469
Lease liability			20,394						11,324
Total liabilities			5,124,299						2,597,480
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none outstanding			—						—
Common stock, $.01 par value, 225,000,000 shares authorized, 80,220,613 and 85,120,287 issued and outstanding as of June 30, 2023 and December 31, 2022, respectively			4,869						4,918
Additional paid-in capital			3,957,513						4,211,197
Retained earnings			1,084,305						1,157,804
Total stockholders’ equity			5,046,687						5,373,919
Total liabilities and stockholders’ equity			$	10,170,986					$	7,971,399

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

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

When we use the terms “Civitas,” the “Company,” “we,” “us,” or “our,” we are referring to Civitas Resources, Inc. and its consolidated subsidiaries unless the context otherwise requires. Civitas is an independent exploration and production company focused on the acquisition, development, and production of oil and associated liquids-rich natural gas primarily in the Denver-Julesburg Basin in Colorado (the “DJ Basin”) and Permian Basin in Texas and New Mexico.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Quarterly Report on Form 10-Q, and Regulation S-X. Accordingly, pursuant to such rules and regulations, certain notes and other financial information included in audited financial statements have been condensed or omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. All significant intercompany balances and transactions have been eliminated in consolidation.

The December 31, 2022 unaudited condensed consolidated balance sheet data has been derived from the audited consolidated financial statements contained in our 2022 Form 10-K, but does not include all disclosures, including notes required by GAAP. As such, this quarterly report should be read in conjunction with the audited consolidated financial statements and related notes included in our 2022 Form 10-K. In connection with the preparation of the unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of June 30, 2023, through the filing date of this report. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the full year or any other future period.

The significant accounting policies followed by the Company are set forth in Note 1 - Summary of Significant Accounting Policies in the 2022 Form 10-K and are supplemented by the notes to the unaudited condensed consolidated financial statements included in this report.

There are no accounting standards applicable to the Company that would have a material effect on the Company’s financial statements and disclosures that have been issued but not yet adopted by the Company as of June 30, 2023, and through the filing date of this report.

All mergers and acquisitions disclosed are accounted for under the acquisition method of accounting for business combinations. Accordingly, we conduct assessments of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisition are expensed as incurred. The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market, and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations are measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties include estimates of reserves, future operating and development costs, future commodity prices, estimated future cash flows, and a market-based weighted-average cost of capital. These inputs require significant judgments and estimates by management at the time of the valuation.

On June 19, 2023, the Company entered into a membership interest purchase agreement (the “Hibernia Acquisition Agreement”) with Hibernia Energy III Holdings, LLC and Hibernia Energy III-B Holdings, LLC, pursuant to which the Company agreed to purchase all of the issued and outstanding equity ownership interests of Hibernia Energy III, LLC and Hibernia Energy III-B, LLC. In connection with and upon execution of the Hibernia Acquisition Agreement, the Company deposited with an escrow agent a cash deposit equal to 7.5% of the unadjusted Hibernia Purchase Price (as defined below).

On August 2, 2023, the Company completed the transactions contemplated by the Hibernia Acquisition Agreement (the “Hibernia Acquisition”) for aggregate consideration of $2.25 billion in cash, subject to certain customary purchase price adjustments set forth in the Hibernia Acquisition Agreement (as adjusted, the “Hibernia Purchase Price”). All amounts deposited were applied towards the aggregate cash consideration due at the closing of the Hibernia Acquisition.

The preliminary purchase price allocation for the Hibernia Acquisition is not complete as of the date of this report. The Company expects to finalize the purchase price allocation as soon as practicable, which will not extend beyond the one-year measurement period.

On June 19, 2023, the Company entered into a membership interest purchase agreement (the “Tap Rock Acquisition Agreement”) with Tap Rock Resources Legacy, LLC (“Tap Rock I Legacy”), Tap Rock Resources Intermediate, LLC (“Tap Rock I Intermediate” and, together with Tap Rock I Legacy, the “Tap Rock I Sellers”), Tap Rock Resources II Legacy, LLC (“Tap Rock II Legacy”), Tap Rock Resources II Intermediate, LLC (“Tap Rock II Intermediate” and, together with Tap Rock II Legacy, the “Tap Rock II Sellers”), Tap Rock NM10 Legacy Holdings, LLC (“NM10 Legacy”), and Tap Rock NM10 Holdings Intermediate, LLC (“NM10 Intermediate” and together with NM10 Legacy, the “NM10 Sellers”, and the NM10 Sellers, together with the Tap Rock I Sellers and Tap Rock II Sellers, the “Tap Rock Sellers”), solely in its capacity as “Sellers’ Representative” (as defined therein), Tap Rock I Legacy (the “Tap Rock Sellers’ Representative”), and solely for the limited purposes set forth therein, Tap Rock Resources, LLC, pursuant to which the Company agreed to purchase all of the issued and outstanding equity ownership interests of a Delaware limited liability company to be formed by the Tap Rock I Sellers, Tap Rock Resources II, LLC, and Tap Rock NM10 Holdings, LLC from the Tap Rock I Sellers, the Tap Rock II Sellers and the NM10 Sellers, respectively. In connection with and upon execution of the Tap Rock Acquisition Agreement, the Company deposited with an escrow agent a cash deposit equal to 7.5% of the unadjusted Tap Rock Purchase Price (as defined below).

On August 2, 2023, the Company completed the transactions contemplated by the Tap Rock Acquisition Agreement (the “Tap Rock Acquisition” and, together with the Hibernia Acquisition, the “Acquisitions”) for aggregate consideration of approximately $2.45 billion, which was comprised of (i) $1.50 billion in cash, subject to certain customary purchase price adjustments set forth in the Tap Rock Acquisition Agreement and (ii) 13,538,472 shares of common stock, par value $0.01 per share, of the Company valued at approximately $950.0 million, subject to certain customary anti-dilution and purchase price adjustments (as adjusted, the “Tap Rock Purchase Price”). All amounts deposited were applied towards the aggregate cash consideration due at the closing of the Tap Rock Acquisition.

The preliminary purchase price allocation for the Tap Rock Acquisition is not complete as of the date of this report. The Company expects to finalize the purchase price allocation as soon as practicable, which will not extend beyond the one-year measurement period.

On March 1, 2022, the Company completed the acquisition of privately held DJ Basin operator Bison Oil & Gas II, LLC for merger consideration of approximately $280.4 million (the “Bison Acquisition”). Net assets acquired under the purchase price allocation were $294.0 million and consequently resulted in a bargain purchase gain of $13.6 million. Because of the immateriality of the Bison Acquisition, the related revenue and earnings, supplemental pro forma financial information, and detailed purchase price allocation are not disclosed.

Merger transaction costs related to the aforementioned mergers and acquisitions are accounted for separately from the assets acquired and liabilities assumed and are included in merger transaction costs in the accompanying unaudited condensed consolidated statements of operations (“statements of operations”). The Company incurred merger transaction costs of $31.1 million and $1.4 million during the three months ended June 30, 2023 and 2022, respectively, and $31.6 million and $22.0 million during the six months ended June 30, 2023 and 2022, respectively.

On July 5, 2022, the Company acquired additional working interests in certain Company-operated wells for cash consideration of $80.7 million, after customary purchase price adjustments.

Oil and natural gas sales revenue presented within the accompanying statements of operations is reflective of the revenue generated from contracts with customers. Revenue attributable to each identified revenue stream is disaggregated below (in thousands):

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
Operating net revenues:
Oil sales			$	541,043					$	778,258					$	1,001,417					$	1,327,760
Natural gas sales			45,364						205,840						148,919						319,001
Natural gas liquid (“NGL”) sales			74,119						167,266						166,212						322,413
Oil and natural gas sales			$	660,526					$	1,151,364					$	1,316,548					$	1,969,174

The Company recognizes revenue from the sale of produced oil, natural gas, and NGL at the point in time when control of produced oil, natural gas, or NGL volumes transfer to the purchaser, which may differ depending on the applicable contractual terms. The Company considers the transfer of control to have occurred when the purchaser has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the oil, natural gas, or NGL production. Transfer of control dictates the presentation of gathering, transportation, and processing expenses within the accompanying statements of operations. Gathering, transportation, and processing expenses incurred by the Company prior to the transfer of control are recorded gross within the gathering, transportation, and processing line item on the accompanying statements of operations. Conversely, gathering, transportation, and processing expenses incurred by the Company subsequent to the transfer of control are recorded net within the oil and natural gas sales line item on the accompanying statements of operations. Please refer to Note 1 - Summary of Significant Accounting Policies in the 2022 Form 10-K for more information regarding the types of contracts under which oil, natural gas, and NGL sales revenue is generated.

The Company records revenue in the month production is delivered and control is transferred to the purchaser. However, settlement statements and payment may not be received for 30 to 60 days after the date production is delivered and control is transferred. Until such time settlement statements and payment are received, the Company records a revenue accrual based on, amongst other factors, an estimate of the volumes delivered at estimated prices as determined by the applicable contractual terms. The Company records the differences between its estimates and the actual amounts received for product sales in the month in which payment is received from the purchaser. For the three and six months ended June 30, 2023 and 2022, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was insignificant. As of June 30, 2023 and December 31, 2022, the Company’s receivables from contracts with customers were $201.2 million and $343.5 million, respectively.

Accounts payable and accrued expenses contain the following (in thousands):

			June 30, 2023						December 31, 2022
Accounts payable trade			$	27,811					$	31,783
Accrued drilling and completion costs			80,826						137,171
Accrued lease operating expense			18,715						18,109
Accrued gathering, transportation, and processing			56,913						59,398
Accrued general and administrative expense			24,761						20,054
Accrued merger transaction costs			6,252						—
Accrued commodity derivative settlements			844						12,514
Accrued interest expense			6,778						5,509
Accrued settlement			5,727						1,497
Other accrued expenses			11,928						9,262
Total accounts payable and accrued expenses			$	240,555					$	295,297

Senior Notes are recorded net of unamortized discount and unamortized deferred financing costs within senior notes on the accompanying balance sheets, with no associated premiums. The tables below present the related carrying values as of June 30, 2023 and December 31, 2022 (in thousands):

8.375% Senior Notes due 2028 and 8.750% Senior Notes due 2031. On June 29, 2023, the Company issued $1.35 billion aggregate principal amount of 8.375% Senior Notes due 2028 (the “2028 Senior Notes”), at par, pursuant to an indenture (the “2028 Indenture”) among the Company, Computershare Trust Company, N.A., as trustee, and the guarantors party thereto, and $1.35 billion aggregate principal amount of 8.750% Senior Notes due 2031 (the “2031 Senior Notes” and, together with the 2028 Senior Notes, the “Acquisition Senior Notes”), at par, pursuant to an indenture (the “2031 Indenture”) among the Company, Computershare Trust Company, N.A., as trustee. Upon issuance of the Acquisition Senior Notes, the Company received net proceeds of $2.67 billion after deducting fees of $33.8 million. The Company used the net proceeds from the Acquisition Senior Notes, together with cash on hand and borrowings under the Credit Facility, to fund a portion of the consideration for the Acquisitions. Interest on the 2028 Senior Notes and the 2031 Senior Notes will accrue at the rate of 8.375% per annum and 8.750% per annum, respectively, and will be payable semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2024.

The 2028 Indenture and 2031 Indenture each contain covenants that limit, among other things, the Company’s ability and the ability of its subsidiaries to: incur or guarantee additional indebtedness; create liens securing indebtedness; pay dividends on or redeem or repurchase stock or subordinated debt; make specified types of investments and acquisitions; enter into or permit to exist contractual limits on the ability of the Company’s subsidiaries to pay dividends to the Company; enter into transactions with affiliates; and sell assets or merge with other companies. These covenants will not, however, restrict the activities of the entities that will be acquired in connection with the Acquisitions prior to the consummation of the Acquisitions. These covenants are subject to a number of important limitations and exceptions. The Company was in compliance with all covenants under the 2028 Indenture and 2031 Indenture as of June 30, 2023, and through the filing of this report. Each of the 2028 Indenture and 2031 Indenture also contain customary events of default.

At any time prior to July 1, 2025, the Company may redeem all or part of the 2028 Senior Notes, in whole or in part, at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) the “make-whole” premium at the redemption date, plus (iii) accrued and unpaid interest, if any. On or after July 1, 2025, the Company may redeem all or part of the 2028 Senior Notes at redemption prices (expressed as percentages of the principal amount redeemed) equal to (i) 104.188% for the twelve-month period beginning on July 1, 2025; (ii) 102.094% for the twelve-month period beginning on July 1, 2026; and (iii) 100.000% for the period beginning July 1, 2027 and at any time thereafter, plus accrued and unpaid interest, if any to, but excluding the redemption date (subject to the right of the noteholders on the relevant record date to receive interest on the relevant interest payment date).

At any time prior to July 1, 2026, the Company may redeem all or part of the 2031 Senior Notes, in whole or in part, at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) the “make-whole” premium at the redemption date, plus (iii) accrued and unpaid interest, if any. On or after July 1, 2026, the Company may redeem all or part of the 2031 Senior Notes at redemption prices (expressed as percentages of the principal amount redeemed) equal to (i) 104.375% for the twelve-month period beginning on July 1, 2026; (ii) 102.188% for the twelve-month period beginning on July 1, 2027; and (iii) 100.000% for the period beginning July 1, 2028 and at any time thereafter, plus accrued and unpaid interest, if any to, but excluding the redemption date (subject to the right of the noteholders on the relevant record date to receive interest on the relevant interest payment date).

The Company may redeem up to 35% of the aggregate principal amount of the 2028 Senior Notes or 2031 Senior Notes at any time prior to July 1, 2025 or 2026, respectively, with an amount not to exceed the net cash proceeds from certain equity offerings at a redemption price equal to 108.375%, with respect to the 2028 Senior Notes, and 108.750%, with respect to the 2031 Senior Notes, of the principal amount of such series of Acquisition Senior Notes redeemed, plus accrued and unpaid interest, if any, provided, however, that (i) at least 65.0% of the aggregate principal amount of Acquisition Senior Notes of such series originally issued on the issue date (but excluding Acquisition Senior Notes of such series held by the Company and its subsidiaries) remains outstanding immediately after the occurrence of such redemption (unless all such Acquisition Senior Notes are redeemed substantially concurrently) and (ii) the redemption occurs within 180 days after the date of the closing of such equity offering.

The Acquisition Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by all of the Company’s subsidiaries, including the entities that became subsidiaries of the Company upon the consummation of the Acquisitions, as well as by certain other future subsidiaries that may be required to guarantee the Acquisition Senior Notes.

5.000% Senior Notes due 2026. On October 13, 2021, the Company issued $400.0 million aggregate principal amount of 5.000% Senior Notes due 2026 (the “2026 Senior Notes”) pursuant to an indenture (the “2026 Indenture”), among Civitas Resources, Wells Fargo Bank, National Association, as trustee, and the guarantors party thereto. Interest accrues at the rate of 5.000% per annum and is payable semiannually in arrears on April 15 and October 15 of each year. Payments commenced on April 15, 2022.

The 2026 Indenture contains covenants that limit, among other things, the Company’s ability to: (i) incur or guarantee additional indebtedness; (ii) create liens securing indebtedness; (iii) pay dividends on or redeem or repurchase stock or subordinated debt; (iv) make specified types of investments and acquisitions; (v) enter into or permit to exist contractual limits on the ability of the Company’s subsidiaries to pay dividends to Civitas Resources; (vi) enter into transactions with affiliates; and (vii) sell assets or merge with other companies. These covenants are subject to a number of important limitations and exceptions. The Company was in compliance with all covenants under the 2026 Indenture as of June 30, 2023, and through the filing of this report. In addition, certain of these covenants will be terminated before the 2026 Senior Notes mature if at any time no default or event of default exists under the 2026 Indenture and the 2026 Senior Notes receive an investment-grade rating from at least two ratings agencies. The 2026 Indenture also contains customary events of default.

At any time prior to October 15, 2023, the Company may redeem the 2026 Senior Notes, in whole or in part, at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) the “make-whole” premium at the redemption date, plus (iii) accrued and unpaid interest, if any. On or after October 15, 2023, the Company may redeem all or part of the 2026 Senior Notes at redemption prices (expressed as percentages of the principal amount redeemed) equal to (i) 102.500% for the twelve-month period beginning on October 15, 2023; (ii) 101.250% for the twelve-month period beginning on October 15, 2024; and (iii) 100.000% for the twelve-month period beginning October 15, 2025 and at any time thereafter, plus accrued and unpaid interest, if any.

The Company may redeem up to 35% of the aggregate principal amount of the 2026 Senior Notes at any time prior to October 15, 2023 with an amount not to exceed the net cash proceeds from certain equity offerings at a redemption price equal to 105.000% of the principal amount of the 2026 Senior Notes redeemed, plus accrued and unpaid interest, if any, provided, however, that (i) at least 65.0% of the aggregate principal amount of the 2026 Senior Notes originally issued on the issue date (but excluding 2026 Senior Notes held by the Company) remains outstanding immediately after the occurrence of such redemption (unless all such 2026 Senior Notes are redeemed substantially concurrently) and (ii) the redemption occurs within 180 days after the date of the closing of such equity offering.

The 2026 Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by all of Civitas’ existing subsidiaries.

7.500% Senior Notes due 2026. In April 2021, the Company issued $100.0 million aggregate principal amount of 7.500% Senior Notes due 2026 pursuant to an indenture by and among Civitas Resources, U.S. Bank National Association, as trustee, and the guarantors party thereto. Interest accrued at the rate of 7.500% per annum and was payable semiannually in arrears on April 30 and October 31 of each year. On May 1, 2022, the Company redeemed all of the issued and outstanding 7.500% Senior Notes at 100.0% of their aggregate principal amount, plus accrued and unpaid interest thereon to the redemption date.

The Company is party to a reserve-based revolving facility, as the borrower, with JPMorgan Chase Bank, N.A. (“JPMorgan”), as the administrative agent, and a syndicate of financial institutions, as lenders, that had an aggregate maximum commitment amount of $2.0 billion and was set to mature on November 1, 2025 (with all subsequent amendments, the “Credit Facility” or the “Credit Agreement”).

The Credit Facility is guaranteed by all restricted domestic subsidiaries of the Company, including the entities that became subsidiaries of the Company upon the consummation of the Acquisitions, and is secured by first priority security interests on substantially all assets, including a mortgage on at least 90% of the total value of the proved properties evaluated in the most recently delivered reserve reports prior to the amendment effective date, including any engineering reports relating to the oil and natural gas properties of the restricted domestic subsidiaries of the Company, subject to customary exceptions.

The Credit Facility contains customary representations and affirmative covenants. The Credit Facility also contains customary negative covenants, which, among other things, and subject to certain exceptions, include restrictions on (i) liens, (ii) indebtedness, guarantees and other obligations, (iii) restrictions in agreements on liens and distributions, (iv) mergers or consolidations, (v) asset sales, (vi) restricted payments, (vii) investments, (viii) affiliate transactions, (ix) change of business, (x) foreign operations or subsidiaries, (xi) name changes, (xii) use of proceeds, letters of credit, (xiii) gas imbalances, (xiv) hedging transactions, (xv) additional subsidiaries, (xvi) changes in fiscal year or fiscal quarter, (xvii) operating leases, (xviii) prepayments of certain debt and other obligations, (xix) sales or discounts of receivables, (xx) dividend payment thresholds, and (xxi) cash balances. 

In addition, the Company is subject to certain financial covenants under the Credit Facility, as tested on the last day of each fiscal quarter, including, without limitation, (a) permitted net leverage ratio of 3.00 to 1 and (b) a current ratio, inclusive of the unused commitments then available to be borrowed, to not be less than 1.00 to 1. The Company was in compliance with all covenants under the Credit Facility as of June 30, 2023 and through the filing of this report.

On April 20, 2022, the Company entered into an amendment to the Credit Agreement that increased the Company’s borrowing base from $1.0 billion to $1.7 billion and increased the aggregate elected commitments from $800.0 million to $1.0 billion.

In addition, this amendment resulted in the removal and replacement of LIBOR with the Secured Overnight Financing Rate (“SOFR”) as a mechanism to determine interest for borrowings made under the Credit Facility using a term-specific SOFR. As a result, borrowings under the Credit Facility bear interest at a per annum rate equal to, at the option of the Company, either (i) the Alternate Base Rate (“ABR”, for ABR Revolving Credit Loans) plus the applicable margin, or (ii) the term-specific SOFR plus the applicable margin. ABR is established as a rate per annum equal to the greatest of (a) the rate of interest publicly announced by JPMorgan as its prime rate, (b) the applicable rate of interest published by the Federal Reserve Bank of New York plus 0.5%, or (c) the term-specific SOFR plus 1.0%, subject to a 1.5% floor plus the applicable margin of 1.0% to 2.0%, based on the utilization of the Credit Facility. Term-specific SOFR is based on one-, three-, or six-month terms as selected by the Company and is subject to a 0.5% floor plus the applicable margin of 2.0% to 3.0%, based on the utilization of the Credit Facility. Interest on borrowings that bear interest at the SOFR are payable on the last day of the applicable interest period selected by the Company, and interest on borrowings that bear interest at the ABR are payable quarterly in arrears. 

As part of the regularly scheduled, semi-annual borrowing base redeterminations under the Credit Facility, on October 27, 2022, the Company’s aggregate elected commitments of $1.0 billion were reaffirmed and borrowing base was increased from $1.7 billion to $1.85 billion.

In connection with the Company’s entry into the Hibernia Acquisition Agreement and the Tap Rock Acquisition Agreement, on June 23, 2023, the Company entered into an amendment to the Credit Agreement. Pursuant to the amendment, the Company was authorized to, among other things, (i) offer and issue the Acquisition Senior Notes, (ii) incur indebtedness pursuant to those certain debt commitment letters by and among the Company, Bank of America N.A., BofA Securities, Inc., and JPMorgan Chase Bank, N.A. providing for two separate 364-day bridge loan facilities in an aggregate principal amount of up to $2.7 billion (such facilities, the “Bridge Facilities” and the loans made thereunder, the “Bridge Loans”), the proceeds of which would have, if drawn, be used to partially fund the Acquisitions, (iii) incur the debt described in the immediately preceding clauses (i) and (ii) without any corresponding reduction in the borrowing base of the Credit Facility, and (iv) incur pari passu term loan indebtedness subject to a total secured leverage test of 2.00 to 1.00 and certain other customary terms and conditions. Because the Acquisition Senior Notes successfully closed and were issued on June 29, 2023, the Company did not draw on the Bridge Loans and has terminated the commitments under the Bridge Facilities. Consequently, approximately $22.6 million of fees associated with the Bridge Facilities and backstop fees associated with the Credit Facility amendment were incurred and expensed to merger transaction costs in the accompanying statements of operations for the three and six months ended June 30, 2023.

Finally, in connection with the Company’s closing of the Acquisitions, on August 2, 2023, the Company entered in an amendment to the Credit Agreement whereby aggregate elected commitments increased from $1.0 billion to $1.85 billion, the borrowing base increased from $1.85 billion to $3.0 billion, and the aggregate maximum credit commitment increased from $2.0 billion to $4.0 billion. In addition, the maturity of the Credit Facility was extended to August 2028. The next scheduled borrowing base redetermination date is set to occur in May 2024.

The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Facility as of the dates indicated (in thousands):

In connection with the amendments to the Credit Facility, the Company capitalized a total of approximately $13.0 million in deferred financing costs as of June 30, 2023. Of the total post-amortization net capitalized amounts, (i) $4.6 million and $5.5 million are presented within other noncurrent assets on the accompanying balance sheets as of June 30, 2023 and December 31, 2022, respectively, and (ii) $3.5 million and $3.0 million are presented within prepaid expenses and other on the accompanying balance sheets as of June 30, 2023 and December 31, 2022, respectively.

For the three months ended June 30, 2023 and 2022, the Company incurred interest expense of $8.8 million and $8.1 million, respectively. For the six months ended June 30, 2023 and 2022, the Company incurred interest expense of $16.2 million and $17.2 million, respectively. No interest was capitalized during the three and six months ended June 30, 2023 and 2022.

From time to time, the Company is involved in various commercial and regulatory claims, litigation, and other legal proceedings that arise in the ordinary course of its business. The Company assesses these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in its consolidated financial statements. In accordance with authoritative accounting guidance, an accrual is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the most likely anticipated outcome or the minimum amount within a range of possible outcomes. Because legal proceedings are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about uncertain future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures.

As of the filing date of this report, there were no probable, material pending, or overtly threatened legal actions against the Company of which it was aware, other than the following:

Boulder County. In prior periods, there was ongoing litigation between Boulder County and Extraction which has been previously disclosed as having the potential to prevent oil and gas operations for the development of minerals contained within Boulder County, Colorado. Boulder County had initiated suit in District Court for Boulder County that was primarily a contract case, where the relevant contracts were the conservation easement over the Blue Paintbrush location, Extraction’s Surface Use Agreement for the Blue Paintbrush location, and the leases that Boulder owns within the Blue Paintbrush drilling and spacing unit. Boulder sought invalidation of these leases in the litigation. This litigation has been resolved as to all substantive issues.

In May 2022, Boulder County alleged new legal theories and requested termination of the leases previously at issue in the Blue Paintbrush litigation. Boulder raised these same claims in opposition to the Company’s pooling application before the Colorado Energy & Carbon Management Commission (“ECMC”) (formerly the Colorado Oil & Gas Conservation Commission), which did not proceed to hearing after the Company withdrew the pooling application. If an action is brought by Boulder County, an adverse outcome in any such litigation could result in the Company failing to meet its development objectives in Blue Paintbrush.

Enforcement. Disclosure of certain environmental matters is required when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that the Company believes could exceed $0.3 million. The Company has received Notices of Alleged Violations (“NOAV”) from the ECMC alleging violations of various Colorado statutes and ECMC regulations governing oil and gas operations. The Company has further received notices from the Colorado Air Pollution Control Division. The Company continues to engage in discussions regarding resolution of the alleged violations. As of June 30, 2023 and December 31, 2022, the Company has accrued approximately $1.0 million and $0.7 million, respectively, associated with the NOAVs and Colorado Air Pollution Control Division notices.

Firm Transportation Agreements. The Company is party to a firm pipeline transportation contract to provide a guaranteed outlet for production on an oil pipeline system. The contract requires the Company to pay minimum volume transportation charges on 12,500 barrels (“Bbl”) per day through April 2025, regardless of the amount of pipeline capacity utilized by the Company. The aggregate financial commitment fee over the remaining term was $26.8 million as of June 30, 2023. The Company expects to utilize most, if not all, of the firm capacity on the oil pipeline system.

Minimum Volume Agreement - Oil. The Company is party to a purchase agreement to deliver fixed and determinable quantities of crude oil. Under the terms of the agreement, the Company is required to make periodic deficiency payments for any shortfalls in delivering the minimum volume commitment of 20,000 gross Bbls per day over a term ending in December 2023. The aggregate financial commitment fee over the remaining term is $22.6 million as of June 30, 2023. The Company has not and does not expect to incur any deficiency payments.

Minimum Volume Agreement - Gas and Other. The Company is party to a gas gathering and processing agreement (the “Gathering Agreement”) with a third-party midstream provider over a term ending in 2029 with an annual minimum volume commitment of 13.0 billion cubic feet of natural gas. The Gathering Agreement also includes a commitment to sell take-in-kind NGLs from other processing agreements of 7,500 Bbls a day through 2026 with the ability to roll forward up to a 10% shortfall in a given month to the subsequent month. The aggregate financial commitment fee over the remaining term is $107.6 million as of June 30, 2023, which fluctuates with commodity prices as this is a value-based percentage of proceeds sales contract. Based on current projections, the Company may incur approximately $31.0 million of shortfall payments under the Gathering Agreement during the remaining term of approximately seven years; however, the Company is actively engaging alternative strategies to reduce any potential contract deficiencies incurred in future periods.

Additionally, the Company is also party to a gas gathering and processing agreement with several third-party producers and a third-party midstream provider to deliver to two different plants over terms that end in August 2025 and July 2026. The Company’s share of these commitments requires an incremental 51.5 and 20.6 million cubic feet of natural gas (“MMcf”) per day, respectively, over a baseline volume of 65 MMcf per day for a period of seven years following the in-service dates of the plants. The Company may be required to pay a shortfall fee for any incremental volume deficiencies under these commitments. These contractual obligations can be reduced by the Company’s proportionate share of the collective volumes delivered to the plants by other incremental third-party volumes available to the midstream provider that are in excess of the total commitments. Because of the third-party producer reduction provision, we believe that the aggregate financial commitment fee over the remaining term is zero as of June 30, 2023. The Company has not and does not expect to incur any deficiency payments.

The Company is also party to additional individually immaterial agreements that require the Company to pay a fee associated with the minimum volumes over various terms ending in December 2025, regardless of the amount delivered. The aggregate financial commitment fee over the remaining term for these contracts was $8.5 million as of June 30, 2023.

The minimum annual payments under these agreements for the next five years as of June 30, 2023 are presented below (in thousands):

						Firm Transportation						Minimum Volume(1)
Remainder of 2023						$	7,360					$	34,182
2024						14,640						19,596
2025						4,800						20,434
2026						—						16,816
2027						—						16,250
2028 and thereafter						—						31,460
Total						$	26,800					$	138,738

___________________________

(1)The above calculation is based on the minimum volume commitment schedule (as defined in the relevant agreement) and applicable differential fees.

Other commitments. The Company is party to a drilling commitment agreement with a third-party midstream provider such that the Company is required to drill and complete a total of 106 qualifying wells, whereby a minimum number of wells out of the total must be drilled by a deadline occurring every two years over a period ending December 31, 2026. The drilling commitment agreement provides for, among other things, a number of specifications such as minimum consecutive days of production, well performance, and lateral length. Wells operated by others can satisfy this commitment, subject to limitations. If the Company were to fail to complete the wells by the applicable deadline, it would be in breach of the agreement and the third-party midstream provider could attempt to assert damages against Civitas and its affiliates. As of the date of filing, the Company cannot reasonably estimate how much, if any, damages will be paid.

Refer to Note 13 - Leases for lease commitments.

In April 2017, the Company adopted the 2017 Long Term Incentive Plan (“2017 LTIP”), which provides for the issuance of restricted stock units, performance stock units, and stock options, and reserved 2,467,430 shares of common stock. In June 2021, the Company adopted the 2021 Long Term Incentive Plan (“2021 LTIP”), which reserved an incremental 700,000 shares of common stock to those previously reserved under the 2017 LTIP. Finally, in conjunction with the Company’s merger with Extraction Oil & Gas, Inc. (“Extraction”) in November 2021, Civitas assumed Extraction’s 2021 Long Term Incentive Plan (the “Extraction Equity Plan”), which reserved 3,305,080 shares of common stock now issuable by Civitas. The 2017 LTIP, 2021 LTIP, and Extraction Equity Plan are collectively referred to herein as the “LTIP”.

The Company records compensation expense associated with the issuance of awards under the LTIP on a straight-line basis over the vesting period based on the fair value of the awards as of the date of grant within general and administrative expense. The following table outlines the compensation expense recorded by type of award (in thousands):

As of June 30, 2023, unrecognized compensation expense related to the awards granted under the LTIP will be amortized through the relevant periods as follows (in thousands):

			Unrecognized Compensation Expense						Final Year of Recognition
Restricted and deferred stock units			$	27,578					2026
Performance stock units			26,364						2025
Total unrecognized stock-based compensation			$	53,942

The Company grants time-based Restricted Stock Units (“RSUs”) to its officers, executives, and employees and time-based Deferred Stock Units (“DSUs”) to its non-employee directors as part of its LTIP. Each RSU and DSU represents a right to receive one share of the Company’s common stock at the end of the specified vesting period. RSUs generally vest and settle either over a (i) one-year vesting period, with the entire grant vesting and settling on the anniversary date or (ii) three-year vesting period, with one-third of the total grant vesting and settling on each anniversary date. Each RSU is entitled to a dividend equivalent right to receive, upon settlement, a cash payment based on the regular cash dividends that would have been paid on a share of the Company’s common stock during the period between the grant date and the date the RSUs vest and are settled. Accrued but unpaid dividend equivalents are recognized as a liability on the accompanying balance sheets, until the recipients receive the dividend equivalents upon vesting and settlement. DSUs generally vest over a one-year period following the grant date. DSUs are settled in shares of the Company’s common stock upon the non-employee director’s separation of service from the Board of Directors (the “Board”). Each DSU is entitled to a dividend equivalent right to receive, upon vesting, a cash payment based on the regular cash dividends that would have been paid on a share of the Company’s common stock. The grant-date fair value of RSUs and DSUs is equal to the closing price of the Company’s common stock on the date of the grant.

A summary of the status and activity of non-vested RSUs and DSUs for the six months ended June 30, 2023 is presented below:

			RSUs and DSUs						Weighted-Average Grant-Date Fair Value
Non-vested, beginning of year			675,898						$	50.27
Granted			309,500						71.12
Vested			(342,563)						46.67
Forfeited			(34,072)						57.36
Non-vested, end of period			608,763						$	62.50

The aggregate grant-date fair value of the RSUs and DSUs granted under the LTIP during the six months ended June 30, 2023 was $22.0 million.

The Company grants market-based performance stock units (“PSUs”) to its officers and certain executives as part of its LTIP. The number of shares of the Company’s common stock issued to settle PSUs ranges from zero to 225% (or, for PSUs granted prior to fiscal year 2023, 200%) of the number of PSUs granted and is determined based on performance achievement against certain market-based criteria over a three-year performance period. PSUs generally vest and settle on December 31 of the year preceding the third anniversary of the date of grant. Each PSU is entitled to a dividend equivalent right to receive, upon settlement, a cash payment based on the regular cash dividends that would have been paid on a share of the Company’s common stock during the period between the grant date and the date the PSUs vest and are settled. Accrued but unpaid dividend equivalents are recognized as a liability on the accompanying balance sheets, until the recipients receive the dividend equivalents upon vesting and settlement.

Performance achievement is determined based on either, or a combination of, (1) the Company’s annualized absolute total shareholder return (“TSR”) or (2) for certain PSUs granted prior to fiscal year 2023, the Company’s absolute TSR relative to that of a defined peer group. Absolute TSR is determined based upon the performance of the Company’s common stock over the performance period relative to the price of the Company’s common stock at the grant date. For awards with a relative TSR component, the Company’s absolute TSR is compared with the absolute TSRs of a group of peer companies over the performance period. The absolute TSR for the Company and each of the peer companies is determined by dividing (A) (i) the volume-weighted average share price for the last 30 trading days of the performance period, minus (ii) the volume-weighted average share price for the 30 trading days preceding the beginning of the performance period, plus (iii) dividends paid by (B)

the volume-weighted average share price for the 30 trading days preceding the beginning of the performance period. The resultant amount is then annualized based on the length of the performance period.

The grant-date fair value of the PSUs was estimated using a Monte Carlo valuation model. The Monte Carlo valuation model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Significant assumptions used in this valuation include the Company’s expected volatility as well as the volatilities for each of the Company’s peers and an interpolated risk-free interest rate based on U.S. Treasury yields with maturities consistent with the performance period.

A summary of the status and activity of non-vested PSUs for the six months ended June 30, 2023 is presented below:

			PSUs (1)						Weighted-Average Grant-Date Fair Value
Non-vested, beginning of year			345,999						$	77.42
Granted			233,861						103.39
Vested			(89,901)						78.49
Forfeited			(59,726)						87.80
Expired			(242)						18.26
Non-vested, end of period			429,991						$	89.92

___________________________

(1)The number of awards assumes that the associated performance condition is met at the target amount (multiplier of one). The final number of shares of the Company’s common stock issued may vary depending on the performance multiplier, which ranges from zero to 225% (or, for PSUs granted prior to fiscal year 2023, 200%), depending on the level of satisfaction of the performance condition.

The aggregate grant-date fair value of the PSUs granted under the LTIP during the six months ended June 30, 2023 was $24.2 million.

The LTIP allows for the issuance of stock options to the Company’s employees at the sole discretion of the Board. Options expire ten years from the grant date unless otherwise determined by the Board.

Stock options are valued using a Black-Scholes Model where expected volatility is based on an average historical volatility of a peer group selected by management over a period consistent with the expected life assumption on the grant date, the risk-free rate of return is based on the U.S. Treasury constant maturity yield on the grant date with a remaining term equal to the expected term of the awards, and the Company’s expected life of stock option awards is derived from the midpoint of the average vesting time and contractual term of the awards.

A summary of the status and activity of stock options for the six months ended June 30, 2023 is presented below:

			Stock Options						Weighted- Average Exercise Price						Weighted-Average Remaining Contractual Term (in years)						Aggregate Intrinsic Value (in thousands)
Outstanding, beginning of year			15,170						$	34.36
Exercised			(13,463)						34.36
Expired			(111)						34.36
Outstanding, end of period			1,596						$	34.36					3.8						$	56
Options outstanding and exercisable			1,596						$	34.36					3.8						$	56

The aggregate intrinsic value of options exercised during the six months ended June 30, 2023 was $0.5 million.

NOTE 8 - FAIR VALUE MEASUREMENTS

The Company follows authoritative accounting guidance for measuring the fair value of assets and liabilities in its financial statements. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Further, this guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

The fair value hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities 

Level 2: Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable

Level 3: Significant inputs to the valuation model are unobservable

Financial and non-financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy.

The Company uses Level 2 inputs to measure the fair value of oil and natural gas commodity price derivatives. The fair value of the Company’s commodity price derivatives is estimated using industry-standard models that contemplate various inputs including, but not limited to, the contractual price of the underlying position, current market prices, forward commodity price curves, volatility factors, time value of money, and the credit risk of both the Company and its counterparties. We validate our fair value estimate by corroborating the original source of inputs, monitoring changes in valuation methods and assumptions, and reviewing counterparty mark-to-market statements and other supporting documentation. Refer to Note 9 - Derivatives for more information regarding the Company’s derivative instruments.

The following tables present the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 and their classification within the fair value hierarchy (in thousands):

			As of June 30, 2023
			Level 1						Level 2						Level 3
Derivative assets			$	—					$	6,135					$	—
Derivative liabilities			$	—					$	24,411					$	—

The 2026 Senior Notes, 2028 Senior Notes, and 2031 Senior Notes are recorded at cost, net of any unamortized discount or deferred financing costs. As of June 30, 2023, the fair value of the 2026 Senior Notes, 2028 Senior Notes, and 2031 Senior Notes were $377.3 million, $1.37 billion, and $1.37 billion, respectively. These fair values are based on quoted market prices, and as such, are designated as Level 1 within the fair value hierarchy. The recorded value of the Credit Facility, if any, approximates its fair value as it bears interest at a floating rate that approximates a current market rate. Please refer to Note 5 - Long-Term Debt for additional information.

Warrants issued are indexed to the Company’s common stock and required to be net share settled via a cashless exercise. Accordingly, they are classified as equity instruments. The Company’s share price traded below the exercise price of the warrants and therefore were not exercisable during the three and six months ended June 30, 2023 and 2022.

The fair value of the warrants on the issuance date was determined using Level 3 inputs including, but not limited to, volatility, risk-free rate, and dividend yield under the Cox-Ross-Rubinstein binomial option pricing model. The warrants are recorded within additional paid-in capital on the accompanying balance sheets at a fair value of $77.5 million, with no recurring fair value measurement required. There have been no changes to the initial carrying amount of the warrants since issuance.

We measure acquired assets or businesses at fair value on a nonrecurring basis and review our proved and unproved oil and natural gas properties for impairment using inputs that are not observable in the market, and are therefore designated as Level 3 within the valuation hierarchy. There were no impairments of proved properties recorded during the three and six months ended June 30, 2023 and 2022, and no abandonment and impairment of unproved properties expense was incurred during the three months ended June 30, 2023 and 2022. During the six months ended June 30, 2023 and 2022, the Company incurred abandonment and impairment of unproved properties expense of zero and $18.0 million, respectively. Please refer to Note 1 – Summary of Significant Accounting Policies for information on the Company’s policies for determining fair value of its proved and unproved properties and related impairment expense.

The Company periodically enters into commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices for its expected future oil and natural gas production and the associated impact on cash flows. The Company’s commodity derivative contracts consist of swaps, collars, basis protection swaps, and puts. As of June 30, 2023, all derivative counterparties were members of the Credit Facility lender group and all commodity derivative contracts are entered into for other-than-trading purposes. The Company does not designate its commodity derivative contracts as hedging instruments.

A typical swap arrangement guarantees a fixed price on contracted volumes. If the agreed upon published third-party index price (“index price”) is lower than the fixed contract price at the time of settlement, the Company receives the difference between the index price and the fixed contract price. If the index price is higher than the fixed contact price at the time of settlement, the Company pays the difference between the index price and the fixed contract price.

A typical collar arrangement establishes a floor and ceiling price on contracted volumes through the use of a short call and a long put (“two-way collar”). When the index price is above the ceiling price at the time of settlement, the Company pays the difference between the index price and the ceiling price. When the index price is below the floor price at the time of settlement, the Company receives the difference between the index price and floor price. When the index price is between the floor price and ceiling price, no payment or receipt occurs. A minority of our collar arrangements combine a two-way collar with a short put that holds an exercise price below the floor price (“three-way collar”). In these arrangements, when the index price is below the floor price at the time of settlement, the Company receives the difference between the index price and the floor price, capped at the difference between the floor price and the exercise price of the short put.

Basis protection swaps are arrangements that guarantee a price differential for natural gas from a specified delivery point. For basis protection swaps, the Company receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract.

A put arrangement gives the Company the right to sell the underlying commodity at a strike price over the term of the contract. If the index price is higher than the strike price, no payment or receipt occurs. If the index price is lower than the strike price, the Company receives the difference between the index price and the strike price.

As of June 30, 2023, the Company had entered into the following commodity price derivative contracts:

						Contract Period
						Q3 2023						Q4 2023						Q1 2024						Q2 2024						Q3 - Q4 2024
Oil Derivatives (volumes in Bbl/day and prices in $/Bbl)
Swaps
NYMEX WTI Volumes						5,695						7,984						4,814						5,562						4,852
Weighted-Average Contract Price						$	70.44					$	70.36					$	69.13					$	66.47					$	68.28
Two-Way Collars
NYMEX WTI Volumes						663						1,000						—												—
Weighted-Average Ceiling Price						$	82.15					$	82.15					$	—											$	—
Weighted-Average Floor Price						$	60.00					$	60.00					$	—											$	—
Three-Way Collars
NYMEX WTI Volumes						1,302						1,172						573						—						—
Weighted-Average Ceiling Price						$	57.48					$	56.49					$	56.25					$	—					$	—
Weighted-Average Floor Price						$	47.91					$	49.04					$	45.00					$	—					$	—
Weighted-Average Sold Put Price						$	37.41					$	39.04					$	35.00					$	—					$	—
Natural Gas Derivatives (volumes in MMBtu/day and prices in $/million British thermal units (“MMBtu”))
Swaps
NYMEX HH Volumes						46,120						45,947						31,790						31,686						16,639
Weighted-Average Contract Price						$	2.61					$	2.60					$	2.69					$	2.68					$	2.74
Two-Way Collars
NYMEX HH Volumes						1,887						1,756						736						1,732						834
Weighted-Average Ceiling Price						$	2.96					$	2.96					$	3.16					$	2.89					$	3.16
Weighted-Average Floor Price						$	2.34					$	2.38					$	2.50					$	2.20					$	2.50
Three-Way Collars
NYMEX HH Volumes						—						—						1,166						55						—
Weighted-Average Ceiling Price						$	—					$	—					$	3.50					$	3.42					$	—
Weighted-Average Floor Price						$	—					$	—					$	2.50					$	2.50					$	—
Weighted-Average Sold Put Price						$	—					$	—					$	2.00					$	2.00					$	—
Basis Protection Swaps
CIG-NYMEX HH Volumes						48,008						47,703						33,691						33,473						16,623
Weighted-Average Contract Price						$	(0.46)					$	(0.46)					$	(0.27)					$	(0.27)					$	(0.27)

As of the filing date of this report, the Company had entered into the following commodity price derivative contracts:

						Contract Period
						Q3 2023						Q4 2023						Q1 2024						Q2 2024						Q3 - Q4 2024
Oil Derivatives (volumes in Bbl/day and prices in $/Bbl)
Swaps
NYMEX WTI Volumes						23,055						29,161						12,727						11,991						9,767
Weighted-Average Contract Price						$	72.30					$	71.83					$	70.39					$	68.75					$	69.15
Two-Way Collars
NYMEX WTI Volumes						7,334						9,392						11,913						10,430						8,914
Weighted-Average Ceiling Price						$	82.63					$	82.28					$	81.51					$	80.83					$	80.07
Weighted-Average Floor Price						$	60.00					$	60.00					$	58.00					$	58.00					$	58.00
Three-Way Collars
NYMEX WTI Volumes						1,302						1,172						573						—						—
Weighted-Average Ceiling Price						$	57.48					$	56.49					$	56.25					$	—					$	—
Weighted-Average Floor Price						$	47.91					$	49.04					$	45.00					$	—					$	—
Weighted-Average Sold Put Price						$	37.41					$	39.04					$	35.00					$	—					$	—
Puts
NYMEX WTI Volumes						—						—						7,942						6,953						5,943
Weighted-Average Strike Price						$	—					$	—					$	55.00					$	55.00					$	55.00
Natural Gas Derivatives (volumes in MMBtu/day and prices in $/MMBtu)
Swaps
NYMEX HH Volumes						46,120						45,947						31,790						31,686						16,639
Weighted-Average Contract Price						$	2.61					$	2.60					$	2.69					$	2.68					$	2.74
Two-Way Collars
NYMEX HH Volumes						1,887						1,756						736						1,732						834
Weighted-Average Ceiling Price						$	2.96					$	2.96					$	3.16					$	2.89					$	3.16
Weighted-Average Floor Price						$	2.34					$	2.38					$	2.50					$	2.20					$	2.50
Three-Way Collars
NYMEX HH Volumes						—						—						1,166						55						—
Weighted-Average Ceiling Price						$	—					$	—					$	3.50					$	3.42					$	—
Weighted-Average Floor Price						$	—					$	—					$	2.50					$	2.50					$	—
Weighted-Average Sold Put Price						$	—					$	—					$	2.00					$	2.00					$	—
Basis Protection Swaps
CIG-NYMEX HH Volumes						48,008						47,703						33,691						33,473						16,623
Weighted-Average Contract Price						$	(0.46)					$	(0.46)					$	(0.27)					$	(0.27)					$	(0.27)