ENDEAVOR PARENT, LLC

INTERIM REPORT FOR THE SIX MONTHS ENDED JUNE 30, 2024

TABLE OF CONTENTS

ITEM 1. FINANCIAL STATEMENTS

ENDEAVOR PARENT, LLC

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

(unaudited)

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

ENDEAVOR PARENT, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in millions)

(unaudited)

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

ENDEAVOR PARENT, LLC

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY AND

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

(dollars in millions)

(unaudited)

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

ENDEAVOR PARENT, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (dollars in millions)

(unaudited)

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

ENDEAVOR PARENT, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For purposes of the accompanying consolidated financial statements, for periods (i) prior to November 13, 2023, references to “Endeavor,” the “Partnership” or the “Company” refer to Endeavor Energy Resources, L.P., and, as applicable, its consolidated subsidiaries, and (ii) on and after November 13, 2023, references to “Endeavor,” “Endeavor Parent” or the “Company” refer to Endeavor Parent, LLC and, as applicable, its consolidated subsidiaries. Furthermore, for periods (i) prior to November 13, 2023, these financial statements reflect the balances and accounts of Endeavor Energy Resources, L.P. and, as applicable, its consolidated subsidiaries, and (ii) on and after November 13, 2023, these financial statements reflect the balances and accounts of Endeavor Parent, LLC and, as applicable, its consolidated subsidiaries.

 

Founded in 2000 as the successor to the sole proprietorship of Autry C. Stephens, the Company is an independent oil and natural gas producer with oilfield service operations, pipeline subsidiaries and a finance subsidiary based in Midland, Texas. The Company’s focus is on the acquisition, exploration, development and exploitation of long-lived oil, natural gas and NGL reserves. The Company’s business activities are currently carried out primarily in the Permian Basin of West Texas.

 

 

Endeavor Parent was formed in connection with the reorganization described above. Endeavor Parent is managed by its sole manager, Endeavor Manager. Endeavor Manager is managed by the Board of Managers and is owned and controlled by the Autry Stephens Management Trust, the sole trustee of which is Autry C. Stephens.

 

Effective January 1, 2024, the Company's tax status for U.S. federal income tax purposes was converted from an S-Corporation to a C-Corporation through a revocation of the Company's U.S. federal income tax status as an S-Corporation.

 

The oilfield service divisions of the Company are comprised of various Energy Services divisions, Bryant Ranch, Electrical Maintenance and Construction, ACS Pump & Supply and a wholly owned subsidiary, Environmental Disposal Systems, LLC.

 

The pipeline subsidiaries of the Company are comprised of Natural Gas Gatherers, Ltd., its wholly owned subsidiary, NGG Gathering Company, LLC, Barnett Gathering Company, LLC, Barnett Field Services, LLC and LCX Pipeline Company, LLC. The pipeline subsidiaries were formed or acquired to operate natural gas gathering systems.

 

DG Royalty, LLC, Wyatt Energy Partners, 1979 Royalties, LP and DRE Energy, LLC (the “Royalty Subsidiaries”) were formed to hold mineral interests, royalty interests, overriding royalty interests, and non-working interests in oil and natural gas properties.

 

 

Sprouts Energy, LLC is a subsidiary of the Company and was formed in June 2022 for the purpose of jointly owning and operating a daycare facility with Diamondback E&P LLC. The Company and Diamondback E&P LLC each own fifty percent (50%) of the issued and outstanding limited liability membership interests of Sprouts Energy, LLC. Employees of the Company and Diamondback E&P LLC are eligible to apply for their children to attend the daycare.

Planned merger of the Company with Diamondback Energy, Inc.

On February 11, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Diamondback pursuant to which, among other things, the Company will merge with and into a wholly owned subsidiary of Diamondback (the “Diamondback Merger”). As a result of the Diamondback Merger, Diamondback will acquire 100% of the issued and outstanding equity interests of the Endeavor Parent, being the entity that directly and indirectly owns all the issued and outstanding equity interests of the Partnership. Subject to the terms and conditions of the Merger Agreement, all the Company’s equity interests will be converted into the right to receive, in the aggregate, (i) cash consideration consisting of a base cash amount of $8.0 billion, subject to adjustments and (ii) approximately 117.3 million shares of Diamondback common stock. The transaction was unanimously approved by the board of directors of Diamondback, and the Company has all necessary approvals. The Merger Agreement requires that the Company use commercially reasonable efforts to conduct the Company’s business in the ordinary course and consistent with past practices. Accordingly, the Merger Agreement contains certain interim operating covenants which limit the Company’s ability to take certain material actions without Diamondback’s written consent (which consent shall not be unreasonably withheld, conditioned or delayed), including, without limitation, making capital expenditures in excess of 115% of the Company’s approved capital budget, selling a material portion of the Company’s assets, amending or changing the organizational documents of the Company, or entering into certain material contracts.

 

The accompanying consolidated financial statements of the Company as of June 30, 2024 and for six months ended June 30, 2024 and 2023, present the accounts of the Company, the oilfield service divisions and subsidiaries, the pipeline subsidiaries, the Royalty Subsidiaries and EER Finance subsidiary. All significant inter-company balances and transactions have been eliminated. The Company accounts for its interests in oil and natural gas ventures and working interests using the proportionate consolidation method. Under this method, the Company records its proportionate share of assets, liabilities, revenues and expenses.

 

 

The preparation of our financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management continually evaluates its estimates and assumptions based on available information and experience. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates. Normal recurring adjustments are made to the financial statements to ensure that the financial statements are presented fairly in all material respects in accordance with GAAP. Such adjustments are of a routine nature and are reflected in the financial statements in the period in which they are made.

 

Areas of significance requiring the use of management’s judgments include the estimation of proved oil, natural gas and NGL reserves used in calculating depletion, the estimation of future net revenues used in computing ceiling test limitations and the estimation of future abandonment obligations used in recording asset retirement obligations. Estimates and judgments also are required in determining allowances for doubtful accounts, impairments of unproved properties and other assets, fair value measurements, deferred taxes and contingencies. We analyze our estimates and base them on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

The process of estimating quantities of oil, natural gas and NGL reserves is complex, requiring significant judgment in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that our reserve estimates represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures.

The Company considers cash on hand, cash on deposit in banks and money market mutual funds with an original maturity of three months or less to be cash and cash equivalents. The Company maintains its cash and cash equivalents at financial institutions that are insured by the Federal Deposit Insurance Corporation. At June 30, 2024 and December 31, 2023, our cash and cash equivalents exceeded what is federally insured. The Company has not experienced any losses from such accounts.

 

The Company periodically enters into time deposits with financial institutions. Income related to these investments is recorded in interest and other income in the Company's consolidated statements of operations. As of June 30, 2024 and December 31, 2023, the Company had $567 million and $266 million, respectively, in short-term money market funds, which was included in the Company’s cash and cash equivalents. The following table summarizes the Company’s cash and cash equivalents for the periods presented (dollars in millions):

Substantially all of the Company’s accounts receivable result from oil, natural gas and NGL sales and other joint activity with other companies in the oil and natural gas industry. This concentration of customers may impact the Company’s overall credit risk, either positively or negatively, in that these entities may be similarly affected by industry-wide economic changes or other conditions. Receivables are generally not collateralized. The Company's principal exposure to credit risk is through the sale of its oil, natural gas and NGL production and its receivables associated with billings to joint interest owners. Accordingly, the Company classifies its receivables into two portfolio segments as depicted on the consolidated balance sheets as “Receivables—Accrued oil and natural gas revenues” and “Receivables—Joint interest billings.” Presented below are applicable disclosures required by Accounting Standard Update (“ASU”) 2016-13 for each portfolio segment.

 

Receivables— Accrued oil and natural gas revenues

 

The Company’s crude oil, natural gas, and NGL production from operated properties is generally sold to energy marketing companies, crude oil refining companies, and natural gas gathering and processing companies. The Company monitors its credit loss exposure to these counterparties primarily by reviewing credit ratings, financial statements and payment history. Credit terms are extended based on an evaluation of each counterparty’s creditworthiness. The Company has not generally required its counterparties to provide collateral to secure its accrued oil and natural gas revenues.

 

Receivables associated with oil, natural gas, and NGL sales are short term in nature and range anywhere from one to three months. There were no write-offs, recoveries or changes in the provision for credit losses on this portfolio segment during the six months ended June 30, 2024 and 2023.

 

Receivables—Joint interest billings

 

Joint interest and other receivables primarily arise from billing the individuals and entities who own a partial interest in the wells the Company operates. Joint interest receivables are due within 30 days. We evaluate delinquent receivables and create an allowance for doubtful accounts as deemed necessary.

 

The Company’s allowance for credit losses on joint interest receivables totaled $13 million and $13 million as of June 30, 2024 and December 31, 2023, respectively. The allowance was determined by considering a number of factors, primarily including the Company’s history of credit losses with adjustment as needed to reflect current conditions, the length of time accounts are past due, the ability to recoup amounts owed through netting of production proceeds, the balance of co-owner prepayments if any, and the co-owner’s ability to pay. There were no significant write-offs or recoveries for credit losses on this portfolio segment during the six months ended June 30, 2024 and 2023.

 

Inventories consist of pipe and other production equipment. Inventories are stated at the lower of average cost or net realizable value. For the six months ended June 30, 2024, the Company recorded a $1 million lower of cost or net realizable adjustment to inventories. For six months ended June 30, 2023, the Company did not record a lower of cost or net realizable value adjustment.

The Company follows the full cost method of accounting for oil and natural gas properties. Under this method of accounting all costs associated with the acquisition, exploration and development, including certain internal costs of oil, natural gas and NGL reserves are capitalized. Internal costs that are capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. Internal costs, including employee costs, related to production and operation of the properties are charged to expense as incurred. Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil, natural gas and NGL. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to amortization of capitalized costs. Depletion of proved oil and natural gas properties is calculated using the unit-of-production method, whereby capitalized costs of oil and natural gas properties including the estimated future costs to develop proved reserves, are amortized over the total proved reserves.

 

In addition, the capitalized costs are subject to a “ceiling test,” which limits such capitalized costs to the aggregate of the “estimated present value,” discounted at a 10 percent interest rate of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties. Unproved oil and natural gas properties are periodically assessed for impairment on a project-by-project basis. These impairment assessments are affected by the results of exploration activities, commodity price outlook, planned future sales or expirations of all or a portion of such projects. If the estimated future net cash flows attributable to such projects are not expected to be sufficient to fully recover the costs invested in each project, the Company will transfer all or a portion of the leasehold costs to the full cost pool and such costs are then subject to amortization.

 

 

Other property and equipment are carried at their cost basis. The cost of maintenance and repairs is charged to expense as paid; significant renewals and improvements are capitalized.

 

Upon retirement or disposition of other property and equipment the cost and related accumulated depreciation are removed from the accounts with the resulting gains or losses, if any, recognized in income. Depreciation of other property and equipment is computed using the straight-line method over the estimated useful lives of the property and equipment. The useful lives of the properties are as follows:

Periodically, the Company evaluates long-lived assets for impairment when indicators of possible impairment are present. If the related asset exceeds the undiscounted cash flows, the carrying value is reduced to the asset’s fair value, and an impairment loss is recorded against long-lived assets. For the six months ended June 30, 2024 and 2023, the Company did not recognize a material provision for impairment on other property and equipment.

Leases

 

The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum, chemical or other substances at various sites. Environmental costs that relate to current operations are expensed or capitalized as appropriate. Costs are expensed when they relate to an existing condition caused by past operations and will not contribute to current or future revenue generation. Liabilities related to environmental assessments and/or remedial efforts are accrued when property or services are provided or can reasonably be estimated.

 

 

The Company follows the provisions of the Derivatives and Hedging topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815 to account for its derivative financial instruments. Under this topic, all derivative instruments, whether designated as hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in our results of operations and comprehensive income (loss). If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the hedged item affects results of operations and comprehensive income (loss). If the derivative is not designated as a hedge, changes in the fair value are recognized in other income (expenses).

 

Oil, natural gas and NGL sales under the Company’s contracts are generally considered performed when the Company sells oil, natural gas and NGL production at the wellhead and receives an agreed-upon index price, net of any price differentials and costs to gather or transport the product, in some cases. The Company recognizes revenue when control transfers to the purchaser, generally at the wellhead, based on the net price received.

 

 

We measure the future cost to retire our tangible long-lived assets and recognize such cost as a liability for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction or normal operation of a long-lived asset. The fair value of a liability for an asset’s retirement obligation is recorded in the period in which it is incurred if a reasonable estimate of fair value can be made, and the corresponding cost is capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, the difference is recorded in oil and natural gas properties. The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. The Company estimates the future plugging and abandonment costs of wells, the ultimate productive life of the properties, a risk-adjusted discount rate and an inflation factor in order to determine the current present value of this obligation. To the extent future revisions to these assumptions impact the present value of the existing asset retirement obligation liability, a corresponding adjustment is made to the oil and natural gas property balance.

 

The financial statements of the Company account for deferred tax assets and liabilities in accordance with ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities.

 

 

 

The Company records premiums associated with the Senior Notes as a component of long-term debt which are amortized over the term of the Senior Notes.

 

The Company's deferred debt costs related to its Senior Notes are reported as a direct reduction from the carrying amount of the long-term debt liability. The Company amortizes deferred debt costs on a straight-line basis over the life of the respective long-term debt as a component of interest expense.

 

The Company's deferred debt costs related to its revolving credit facility are reported as other prepaid and other assets as of June 30, 2024 and other noncurrent assets as of December 31, 2023. The Company amortizes deferred debt costs on a straight-line basis over the life of the revolving credit facility as a component of interest expense.

 

15.    RECENTLY ADOPTED ACCOUNTING STANDARDS

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which is effective for fiscal years beginning after December 15, 2024 with early adoption permitted. The amendments in this Accounting Standard Update are focused on income tax disclosure requirements, primarily related to income tax rate reconciliation and income tax paid, with prospective application to a company's consolidated financial statements recommended. The Company is currently assessing the impact of this new accounting standard on its disclosures.

 

The Company values financial instruments as required by GAAP (ASC 820). The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments. The carrying amount of long-term debt approximates fair value because the interest rate on this instrument is variable. The fair value of derivative financial instruments is the amount at which they could be settled, based on quoted market prices.

 

NOTE B – CONCENTRATIONS OF CREDIT RISK

The Company’s accounts receivable consists principally of uncollateralized sales to customers in the oil and natural gas industry and working interest owners. The concentration of credit risk in a single industry affects the Company’s overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions.

 

In addition, our cash and cash equivalents balances held at third-party financial institutions exceed amounts insured by the Federal Deposit Insurance Corporation (“FDIC”), which could expose the Company to liquidity risk in the event that any such institutions are unable to deliver such amounts to the Company upon a withdrawal request as a result of insufficient cash reserves or otherwise.

NOTE C – RELATED PARTY TRANSACTIONS

 

The Company either receives revenues or is billed for services provided by entities wholly or partially owned by Autry C. Stephens, a member of Endeavor Parent, LLC and chairman of the Board of Managers.

 

Oasis Transportation and Marketing Corporation (“Oasis”), an entity in which Mr. Stephens is a majority owner, purchases a portion of our crude oil under the terms of a written contract. The contract may be terminated by either party without penalty upon 30 days’ notice. Under the terms of this contract Oasis purchases and transports crude oil produced from some of our Midland Basin operated wells at Oasis’s resale price less a transportation rate that is equal to or less than the rate that would be charged by unaffiliated parties.

 

Blue Streak Transportation, Inc., an entity indirectly controlled by Mr. Stephens, provides fuel and fuel delivery services to us under the terms of a written contract. The contract may be terminated by either party without penalty upon 30 days’ notice. In April 2021, Advanced Stimulation Technologies, Inc., a related party, acquired Blue Streak Transportation, Inc.

 

Advanced Stimulation Technologies, Inc. (“AST”), an entity that was wholly owned and controlled by Mr. Stephens, provides well fracturing, stimulation and cementing services to the Company at prices agreed upon by the parties from time to time, all in accordance with the terms of a written contract. In December 2023, the Company entered into an 18-month contract with AST for hydraulic fracturing and related services. This contract may be terminated by Endeavor upon 90 days’ notice. Mr. Stephens sold his entire interest in AST to a third party in June of 2024, and as such, the Company will no longer consider transactions after such date as related party.

 

ACME Energy Services, Inc. (“ACME”), an entity wholly owned by Mr. Stephens, has provided or provides oilfield services to the Company. The services provided include drilling and natural gas pipeline services in Texas, Oklahoma and Kansas, at market rates and terms. The oilfield services contract that the Company has with ACME may be terminated by either party without penalty upon 30 days’ notice. ACME also purchases natural gas from the Company in Oklahoma and Texas. The Company, through its oilfield service companies and pipeline subsidiaries, also bills for services provided to ACME. During the second quarter of 2024, ACME sold its interest to Endeavor in certain pipelines, compressor stations and surface facilities to settle certain receivables due to the Company. The Company has approximately $1 million in related party receivables due from ACME as of June 30, 2024.

The activities associated with related parties for the six months ended June 30, 2024 and 2023, respectively, are reflected in the table below (dollars in millions).

The following tables summarize the current and non-current related party receivables and payables as of June 30, 2024 and December 31, 2023 (dollars in millions).

 

		Non-Current
		June 30, 2024				December 31, 2023
Related Party Entity		Accounts and Notes Receivable
Autry C. Stephens		$	1				1
ACME Energy Services, Inc.			—			$	3
Other			—				1
Total related party receivables		$	1			$	5
Related party investments		Investments
Sprouts Energy LLC		$	3			$	2
Saltwater Partners #1 SWD, LLC			1				1
Total related party investments			4				3
Total other non-current related party assets		$	5			$	8

 

Since our inception in 2000 until 2016, the Company granted certain of our employees working interests in virtually all of our new oil and natural gas leases by allowing them to participate in our drilling activities. This practice was discontinued in 2016, and employees no longer participate in new leases. However, employees that were participants in the program prior to its discontinuance are able to participate in new wells drilled on leases in which they own working interests, but only to the extent of such working interests. The total employee participation in any well does not exceed 15%. We are reimbursed for costs associated with the employee joint working interest owners through the joint interest billing. Employees may defer payment of their joint interest billings beyond normal terms from time to time based on their individual financial circumstances. Ultimately, joint interest billing payment is made through the combination of application of oil and natural gas sales revenues and employee payments. The amount due from employees on open joint interest billing account was $2 million and $2 million at June 30, 2024 and December 31, 2023, respectively, and is included in current receivables-related parties in the accompanying financial statements.

NOTE D – OIL AND NATURAL GAS PROPERTIES, OTHER PROPERTY AND EQUIPMENT AND LEASE INFORMATION

The following is a summary of oil and natural gas properties and other property and equipment and the related accumulated depletion and depreciation as of June 30, 2024 and December 31, 2023, respectively (dollars in millions):

 

During January 2024, the Company closed an acquisition of deep leasehold rights for approximately $71 million. The Company funded the purchase price with cash on hand. The assets acquired in this acquisition consisted of approximately 10,980 net acres in Midland County, Texas. This acquisition was accounted for as an asset acquisition of unproved properties.

 

In addition, during February 2024, the Company, through its wholly owned subsidiary 1979 Royalties, L.P., closed an acquisition of approximately 7,182 net royalty acres in the Midland and Delaware Basins from an unrelated third party for an aggregate purchase price of $62 million (subject to customary closing and post-closing adjustments). The aggregate consideration for this acquisition consisted of approximately $62 million in cash paid to the seller. This acquisition was accounted for as an asset acquisition and the allocation of the purchase price, subject to customary post-closing adjustments, was approximately $34 million to proved properties and $28 million to unproved properties.

The following table provides the components of our depletion, depreciation, amortization and accretion expense for the six months ended June 30, 2024 and 2023, respectively (dollars in millions, except per BOE amounts):

Leases

A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right-of-use assets and finance lease right-of-use assets (collectively “ROU Assets”) represent the Company’s right to use an underlying asset for the lease term. Operating lease liabilities and finance lease liabilities (collectively, “Lease Liabilities”) represent the Company’s obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. ROU Assets and Lease Liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company excludes short-term leases having initial terms of 12-months or less from ROU Assets and Lease Liabilities and recognizes rent expense on a straight-line basis over the lease term. In addition, the Company has leases, primarily related to drilling rig commitments, that began in December 2023 and extend for approximately two years. As a result, the Company has recorded ROU Asset and ROU Liabilities associated with the long-term contracts.

 

The Company has leases for its office spaces and certain equipment. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. The Company has lease extension terms for our office spaces that have either been extended or are likely to be extended. The terms used to calculate the ROU Assets and Lease Liabilities for these properties include the renewal options that the Company is reasonably certain to exercise.

 

The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. ROU Assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both ROU Assets and Lease Liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants.

 

Total operating lease drilling costs were approximately $55 million for the six months ended June 30, 2024. Maturities of Lease Liabilities as of June 30, 2024 are as follows (dollars in millions):

The component of lease drilling costs, including amounts recoverable from joint operating partners, are as follows (dollars in millions):

(a) Represents costs associated with short-term leases (those with a contractual term of 12-months or less) that are not included in the consolidated balance sheet.

(b) Represents costs associated with operating lease cost that are long-term lease (those with contractual terms of greater than 12-months) that are included in the consolidated balance sheet.

Cash flow information related to leasing activity is as follows (dollars in millions):

(a) Represents costs associated with drilling operations that are capitalized as additions to oil and natural gas properties.

NOTE E – DEBT

 

The following table provides the carrying value and fair value of the Company’s long-term financial debt instruments that are not recorded at fair value in the consolidated balance sheets as of June 30, 2024 and December 31, 2023, respectively (dollars in millions):

The fair value of the Company’s consolidated debt obligation is a Level 2 valuation based on the observable inputs used for similar liabilities. The carrying amount of the Company’s revolving credit facility approximates its fair value as the applicable interest rates are variable and reflective of market rates.

 

As of June 30, 2024, the borrowing base under our revolving credit facility was $5,000 million, and the Company had elected commitments of $1,500 million, with no advances outstanding and $2 million of letters of credit issued and outstanding, resulting in $1,498 million in available borrowing capacity. In addition, our revolving credit facility is current with a maturity date of March 12, 2025.

 

The revolving credit facility places limitations on excess cash balances, if amounts drawn on the revolving credit facility are outstanding, to the greater of (i) $150 million and (ii) 10% of elected commitments. Additionally the revolving credit facility provides for the release of collateral, as well as adjustment to utilization pricing margins if the Company is rated as investment grade by two out of the three major rating agencies (Moody’s, S&P or Fitch), referred to as an “Investment Grade Period.”

 

The revolving credit facility bears interest, at our option, based on Adjusted Term SOFR or the Base Rate, plus a margin. The following margins for advances are only applicable during any time other than the Investment Grade Period. SOFR advances bear interest at the SOFR for the applicable period plus a margin of 175 basis points to 275 basis points based on utilizations. Base Rate advances bear an interest rate at the prime rate (8.50 percent as of June 30, 2024) plus a margin of 75 basis points to 175 basis points based on our utilization of the facility.

 

During the Investment Grade Period, SOFR advances bear an interest rate at the SOFR for the applicable period plus a margin of 125 basis points to 187.5 basis points determined by reference to the Credit Rating applicable on such day. Base Rate advances bear an interest rate at the prime rate plus a margin of 25 basis points to 87.5 basis points determined by reference to the Credit Rating applicable on such day. We pay commitment fees ranging from 37.5 basis points to 50 basis points dependent on utilization and ranging from 15 basis points to 27.5 basis points during an Investment Grade Period.

 

Distributions may be made by the borrower to purchase its equity interests from its members and to its members for any purposes and fund loans to Autry C. Stephens or other members evidenced by a note containing current market provisions if the following conditions are met: no default or event of default exists, there is at least 20% of availability under the revolving credit facility, and the ratio of Net Funded Debt to Adjusted EBITDA calculated on a pro forma basis is less than 3.0 to 1.0. Prior to the revocation of the Company’s election to be taxed as an S-corporation for U.S. federal income tax purposes, the revolving credit facility permitted the Company to make cash distributions to the members up to the then applicable maximum combined federal income tax rate percentage of the quarterly taxable income of the Company; provided, however, that immediately before and after giving effect thereto no (i) default or event of default or (ii) borrowing base deficiency or requirement to make any mandatory prepayment of principal shall exist

Our revolving credit facility has numerous affirmative covenants. The revolving credit facility required financial covenants are as follows: (i) minimum Current Ratio of 1.00 to 1.00 calculated as a ratio of Current Assets to Current Liabilities on a quarterly basis (this ratio stood at 1.95 to 1.00 at June 30, 2024) and (ii) maximum Net Funded Debt to EBITDA ratio of 3.50 to 1.00 determined quarterly based on the ending net funded debt of that quarter divided by the previous four quarters’ EBITDA (this ratio stood at 0.00 to 1.00 at June 30, 2024). The Company was in compliance with all financial covenants under our revolving credit facility as of June 30, 2024. The lenders may accelerate all of the indebtedness under our revolving credit facility upon the occurrence and during the continuance of any event of default. The Credit Agreement governing our revolving credit facility contains customary events of default, including non-payment and breach of covenants. With certain specified exceptions, the terms and provisions of our revolving credit facility generally may be amended with the consent of the lenders holding a majority of the outstanding loans or commitments to lend.

 

As of June 30, 2024 and December 31, 2023, the Company had $907 million in outstanding 2028 Senior Notes. The Senior Notes are guaranteed by certain of our subsidiaries, and interest on the Senior Notes is payable semi-annually. The following table summarizes the amount outstanding as of June 30, 2024, applicable interest rate and maturity date for the Senior Notes (dollars in millions):

During 2023, the Company entered into open market repurchases of its outstanding 2028 Senior Notes. As a result, the Company paid $71 million that included principal, accrued interest payable offset by the market discount as of the respective repurchase dates. In addition, the Company recorded a net gain on repurchases of $0.4 million primarily due to discounts on the repurchase of the 2028 Senior Notes.

 

The Company may on any one or more occasion redeem all or part of the 2028 Senior Notes, upon notice as provided in the indenture governing, at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest, if any, on the Senior Notes redeemed, to the applicable date of redemption, if redeemed during the twelve-month period beginning January 30 of the years indicated below, subject to the rights of holders of the Senior Notes on the relevant record date to receive interest on the relevant interest payment date:

Maturities of debt at June 30, 2024, excluding deferred debt costs and premiums, were as follows (dollars in millions):

Interest (Expense) Income, Net

The following amounts have been incurred and charged to interest (expense) income, net for the six months ended June 30, 2024 and 2023 (dollars in millions):

NOTE F – SIGNIFICANT CUSTOMERS

Oil, natural gas and NGL sales to purchasers that accounted for more than ten percent of the Company’s revenue for the six months ended June 30, 2024 and 2023 were as follows:

* Purchaser did not represent 10% or more of the Company's revenues during the applicable period.

Because there are numerous other parties available to purchase the Company’s production, the Company believes that the loss of these purchasers would not materially affect its ability to sell crude oil, natural gas or NGL.

NOTE G – ASSET RETIREMENT OBLIGATIONS (ARO)

The changes to ARO during the six months ended June 30, 2024 are as follows (dollars in millions):

NOTE H – DERIVATIVE CONTRACTS

The Company has entered into derivative instruments to mitigate a portion of its exposure to adverse market changes of hydrocarbon prices and electricity prices. Swap instruments require a sale of the hedged commodity at a fixed price and a purchase at a floating market price, as defined in each instrument, to a counterparty.

 

Collar instruments are the simultaneous purchase of a put option or “floor” and sale of a call option or “ceiling” for the hedged commodity at different fixed prices. Under the terms of these collar instruments, the Company generally does not pay or receive cash at inception of the instruments. Derivative instruments not designated as hedges are “marked to market” at each period end and the increases or decreases in fair values are recorded to earnings. The following table summarizes our outstanding swaps and collars for crude oil WTI price, oil basis, natural gas Henry Hub price, Waha basis and Electric Reliability Council of Texas (“ERCOT”) - ERCOT West 345 kV hub derivative contracts as of June 30, 2024:

Derivative Gains and Losses

Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly settlements (if any) of the instruments. Certain of our hedge contracts have been designated as cash flow hedges and as a result, the change in the fair value is reported in other comprehensive income (loss) and is reclassified to earnings when the forecasted transaction affects earnings. In addition, the Company has elected to not designate certain of our derivatives as hedging instruments for accounting purposes and, therefore, the Company does not apply hedge accounting treatment on these derivative instruments. Consequently, changes in the fair value of our oil and natural derivative instruments not designed as hedges and cash settlements on the instruments are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statement of cash flows. The following table presents the components of the net gain (loss) on derivative instruments for the periods indicated (dollars in millions):

The following tables represents our net cash receipts from (payments on) derivatives for the periods presented (dollars in millions):

The following table presents the effect of our derivative instruments designated as cash flow hedges on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the periods presented.

Derivative Fair Value

Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to enforceable master netting arrangements, which allow the Company to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our accounting policy is to not offset asset and liability positions in our balance sheets where applicable. The following tables present the gross amounts and classifications of our derivative assets and liabilities as of June 30, 2024, and December 31, 2023 (dollars in millions):