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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
November 15, 2024
EXPAND ENERGY CORPORATION
(Exact name of registrant as specified in its Charter)
Oklahoma |
|
001-13726 |
|
73-1395733 |
(State or other jurisdiction of
incorporation) |
|
(Commission File Number) |
|
(IRS Employer Identification No.) |
6100 North Western Avenue |
Oklahoma City |
OK |
|
73118 |
(Address of principal executive offices) |
|
(Zip Code) |
(405) 848-8000
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K
filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|
|
¨ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
|
|
¨ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
|
|
¨ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbol |
|
Name of each exchange on
which registered |
Common Stock, $0.01 par value per share |
|
EXE |
|
The Nasdaq Stock Market LLC |
Class A Warrants to purchase Common Stock |
|
EXEEW |
|
The Nasdaq Stock Market LLC |
Class B Warrants to purchase Common Stock |
|
EXEEZ |
|
The Nasdaq Stock Market LLC |
Class C Warrants to purchase Common Stock |
|
EXEEL |
|
The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). |
|
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. |
¨ |
Item 8.01 Other Events.
Southwestern Merger
As previously disclosed, on
October 1, 2024, Expand Energy Corporation (formerly known as Chesapeake Energy Corporation), an Oklahoma corporation (the “Company”
or “Expand Energy”), completed its previously announced merger with Southwestern Energy Company, a Delaware corporation (“Southwestern”),
pursuant to that certain Agreement and Plan of Merger, dated as of January 10, 2024 (the “Merger Agreement”), by and
among the Company, Southwestern, Hulk Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company, and
Hulk LLC Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“Merger Sub LLC”). Pursuant
to the terms of the Merger Agreement, Merger Sub Inc. was merged with and into Southwestern (the “First Merger”), with Southwestern
continuing as the surviving corporation and as a wholly owned subsidiary of the Company. Immediately following the effective time of the
First Merger, the surviving corporation was merged with and into Merger Sub LLC, with Merger Sub LLC continuing as the surviving entity
and as a wholly owned subsidiary of the Company (the “Second Merger”). Following the effective time of the Second Merger,
Merger Sub LLC was merged with and into the Company with the Company continuing as the surviving entity (together with the First Merger
and the Second Merger, the “Merger”).
Financial Statements
The following audited consolidated financial
statements of Southwestern as of December 31, 2023 and 2022 and for the three years ended December 31, 2023, 2022 and 2021 and
the related notes thereto are filed as Exhibit 99.1 to this Current Report on Form 8-K and are incorporated herein by
reference:
| · | Management’s Report on Internal Control
Over Financial Reporting; |
| · | Report of Independent Registered Public Accounting
Firm; |
| · | Consolidated Statements of Operations for the
three years ended December 31, 2023; |
| · | Consolidated Statements of Comprehensive Income
(Loss) for the three years ended December 31, 2023; |
| · | Consolidated Balance Sheets as of December 31,
2023 and 2022; |
| · | Consolidated Statement of Cash Flows for the
three years ended December 31, 2023; |
| · | Consolidated Statement of Changes in Equity for
the three years ended December 31, 2023; and |
| · | Notes to Consolidated Financial Statements. |
Attached hereto as Exhibit 23.1 is the
consent of PricewaterhouseCoopers LLP, the independent registered public accounting firm of Southwestern, related to the
above-referenced audited consolidated financial statements of Southwestern, which are incorporated by reference to the
Company’s Registration Statements Nos. 333-282773, 333-253340 and 333-260834 on Form S-8 and the Company’s Registration Statements Nos. 333-263820
and 333-260833
on Form S-3 and filed as Exhibit 99.1 to this Current Report on Form 8-K.
The reserve audit report prepared by Netherland,
Sewell & Associates, Inc. relating to Southwestern’s estimated quantities of its proved natural gas, natural gas liquids
and crude oil reserves as of December 31, 2023 is filed as Exhibit 99.2 to this Current Report on Form 8-K and is incorporated
by reference herein.
Attached hereto as Exhibit 23.2 is the consent
of Netherland, Sewell & Associates, Inc., the independent petroleum engineering firm of Southwestern, related to the above-referenced
report filed as Exhibit 99.2 to this Current Report on Form 8-K.
The following unaudited consolidated financial
statements of Southwestern as of and for the quarterly period ended September 30, 2024 and the related notes thereto are filed as
Exhibit 99.3 to this Current Report on Form 8-K and are incorporated herein by reference:
| · | Consolidated Statements of Operations for the
three and nine months ended September 30, 2024 and 2023; |
| · | Consolidated Statements of Comprehensive Income
(Loss) for the three and nine months ended September 30, 2024 and 2023; |
| · | Consolidated Balance Sheets at September 30,
2024 and December 31, 2023; |
| · | Consolidated Statement of Cash Flows for the
nine months ended September 30, 2024 and 2023; |
| · | Consolidated Statement of Changes in Equity for
the quarterly periods ended March 31, 2023, June 30, 2023, September 30, 2023, March 31, 2024, June 30, 2024
and September 30, 2024; and |
| · | Notes to Consolidated Financial Statements. |
The following unaudited pro forma condensed combined
financial statements combining the historical consolidated financial statements of Expand Energy and its subsidiaries and Southwestern
and its subsidiaries to give effect to the Merger are filed as Exhibit 99.4 to this Current Report on Form 8-K and are incorporated
herein by reference:
| · | Unaudited Pro Forma Condensed Combined Balance
Sheet as of September 30, 2024; |
| · | Unaudited Pro Forma Combined Statement of Operations
for the nine months ended September 30, 2024 and the year ended December 31, 2023; and |
| · | Notes to Pro Forma Condensed Combined Financial
Statements. |
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
Exhibit
No. |
|
Document
Description |
23.1* |
|
Consent
of PricewaterhouseCoopers LLP, independent registered public accounting firm of Southwestern Energy Company. |
23.2* |
|
Consent
of Netherland, Sewell & Associates, Inc., independent petroleum engineering firm of Southwestern Energy Company. |
99.1 |
|
Southwestern
Energy Company Audited Consolidated Financial Statements as of December 31, 2023 and for the years ended December 31, 2023, 2022
and 2021, and accompanying notes thereto (incorporated by reference to Item 8 of the Annual Report on Form 10-K, File No. 001-08246,
filed by Southwestern Energy Company with the SEC on February 22, 2024). |
99.2 |
|
Reserve
Audit Report of Netherland, Sewell & Associates, Inc., dated February 14, 2024 (incorporated by reference to Exhibit 99.1 to
the Annual Report on Form 10-K, File No. 001-08246, filed by Southwestern Energy Company with the SEC on February 22, 2024). |
99.3* |
|
Southwestern
Energy Company Unaudited Condensed Consolidated Financial Statements as of September 30, 2024 and for the three and nine months ended
September 30, 2024, and accompanying notes thereto. |
99.4* |
|
Unaudited Pro Forma
Condensed Combined Financial Statements. |
104 |
|
Cover Page Interactive Data File (formatted as inline
XBRL and contained in Exhibit 101) |
*Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
EXPAND ENERGY CORPORATION |
|
|
|
|
|
|
|
By: |
/s/ Chris Lacy |
|
|
Chris Lacy |
|
|
Executive Vice President, General Counsel and Corporate Secretary |
|
Date:
November 15, 2024
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
We hereby consent to the incorporation
by reference in the Registration Statements on Form S-3 (Nos. 333-263820 and 333-260833) and Form S-8 (Nos. 333-282773, 333-253340 and 333-260834)
of Expand Energy Corporation of our report dated February 22, 2024 relating to the financial statements of Southwestern Energy Company,
which is incorporated by reference in this Current Report on Form 8-K.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
November 15, 2024
Exhibit 23.2
CONSENT
OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the inclusion in or
incorporation by reference into the Registration Statements on Form S-3 (Nos. 333-263820 and 333-260833) and Form S-8 (Nos.
333-282773, 333-253340 and 333-260834) of Expand Energy Corporation of our audit letter, dated February 14, 2024, with respect to estimates of reserves and future net
revenues to the Southwestern Energy Company interest, as of December 31, 2023, which is incorporated by reference in this
Current Report on Form 8-K. We also hereby consent to all references to our firm or such reports included in or incorporated by
reference into such Registration Statements.
|
NETHERLAND, SEWELL & ASSOCIATES, INC. |
|
|
|
|
By: |
/s/ Eric J. Stevens |
|
|
Eric J. Stevens, P.E. |
|
|
President and Chief Operating Officer |
Houston, Texas
November 15, 2024
Exhibit 99.3
SOUTHWESTERN ENERGY COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND ACCOMPANYING NOTES
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
2024
Consolidated Statements of Operations |
2 |
Consolidated Statements of Comprehensive Income (Loss) |
3 |
Consolidated Balance Sheets |
4 |
Consolidated Statements of Cash Flows |
5 |
Consolidated Statements of Changes in Equity |
6 |
Notes to Consolidated Financial Statements |
8 |
|
Note 1. Basis of Presentation |
8 |
|
Note 2. Revenue Recognition |
9 |
|
Note 3. Cash and Cash Equivalents |
11 |
|
Note 4. Natural Gas and Oil Properties |
11 |
|
Note 5. Earnings per Share |
12 |
|
Note 6. Derivatives and Risk Management |
13 |
|
Note 7. Reclassifications From Accumulated Other Comprehensive Income (Loss) |
18 |
|
Note 8. Fair Value Measurements |
18 |
|
Note 9. Debt |
20 |
|
Note 10. Commitments and Contingencies |
23 |
|
Note 11. Income Taxes |
24 |
|
Note 12. Long-Term Incentive Compensation |
25 |
|
Note 13. Segment Information |
29 |
|
Note 14. New Accounting Pronouncements |
31 |
|
Note 15. Subsequent Events |
31 |
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| |
For the three months ended September 30, | | |
For the nine months ended September 30, | |
(in millions, except share/per share amounts) | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Operating Revenues: | |
| | | |
| | | |
| | | |
| | |
Gas sales | |
$ | 475 | | |
$ | 627 | | |
$ | 1,470 | | |
$ | 2,323 | |
Oil sales | |
| 89 | | |
| 94 | | |
| 261 | | |
| 281 | |
NGL sales | |
| 164 | | |
| 169 | | |
| 496 | | |
| 523 | |
Marketing | |
| 485 | | |
| 553 | | |
| 1,488 | | |
| 1,707 | |
Other | |
| — | | |
| — | | |
| (2 | ) | |
| (4 | ) |
| |
| 1,213 | | |
| 1,443 | | |
| 3,713 | | |
| 4,830 | |
Operating Costs and Expenses: | |
| | | |
| | | |
| | | |
| | |
Marketing purchases | |
| 488 | | |
| 545 | | |
| 1,509 | | |
| 1,693 | |
Operating expenses | |
| 420 | | |
| 444 | | |
| 1,240 | | |
| 1,280 | |
General and administrative expenses | |
| 49 | | |
| 46 | | |
| 150 | | |
| 133 | |
Merger-related expenses | |
| 20 | | |
| — | | |
| 39 | | |
| — | |
Depreciation, depletion and amortization | |
| 208 | | |
| 338 | | |
| 696 | | |
| 979 | |
Impairments | |
| 478 | | |
| — | | |
| 3,202 | | |
| — | |
Taxes, other than income taxes | |
| 17 | | |
| 63 | | |
| 110 | | |
| 189 | |
| |
| 1,680 | | |
| 1,436 | | |
| 6,946 | | |
| 4,274 | |
Operating Income (Loss) | |
| (467 | ) | |
| 7 | | |
| (3,233 | ) | |
| 556 | |
Interest Expense: | |
| | | |
| | | |
| | | |
| | |
Interest on debt | |
| 62 | | |
| 61 | | |
| 182 | | |
| 184 | |
Other interest charges | |
| 4 | | |
| 3 | | |
| 9 | | |
| 9 | |
Interest capitalized | |
| (25 | ) | |
| (28 | ) | |
| (78 | ) | |
| (87 | ) |
| |
| 41 | | |
| 36 | | |
| 113 | | |
| 106 | |
| |
| | | |
| | | |
| | | |
| | |
Gain on Derivatives | |
| 152 | | |
| 93 | | |
| 243 | | |
| 1,811 | |
Loss on Early Extinguishment of Debt | |
| — | | |
| — | | |
| — | | |
| (19 | ) |
Other Income (Loss), Net | |
| 1 | | |
| 2 | | |
| (1 | ) | |
| 1 | |
| |
| | | |
| | | |
| | | |
| | |
Income (Loss) Before Income Taxes | |
| (355 | ) | |
| 66 | | |
| (3,104 | ) | |
| 2,243 | |
Provision (Benefit) for Income Taxes: | |
| | | |
| | | |
| | | |
| | |
Current | |
| — | | |
| — | | |
| — | | |
| — | |
Deferred | |
| (75 | ) | |
| 21 | | |
| (681 | ) | |
| 28 | |
| |
| (75 | ) | |
| 21 | | |
| (681 | ) | |
| 28 | |
Net Income (Loss) | |
$ | (280 | ) | |
$ | 45 | | |
$ | (2,423 | ) | |
$ | 2,215 | |
| |
| | | |
| | | |
| | | |
| | |
Earnings (Loss) Per Common Share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.25 | ) | |
$ | 0.04 | | |
$ | (2.20 | ) | |
$ | 2.01 | |
Diluted | |
$ | (0.25 | ) | |
$ | 0.04 | | |
$ | (2.20 | ) | |
$ | 2.01 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Common Shares Outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 1,102,844,908 | | |
| 1,101,231,113 | | |
| 1,102,470,380 | | |
| 1,100,895,642 | |
Diluted | |
| 1,102,844,908 | | |
| 1,104,027,634 | | |
| 1,102,470,380 | | |
| 1,102,867,675 | |
The accompanying notes are an integral part of
these consolidated financial statements.
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(Unaudited)
| |
For the three months ended September 30, | | |
For the nine months ended September 30, | |
(in millions) | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Net income (loss) | |
$ | (280 | ) | |
$ | 45 | | |
$ | (2,423 | ) | |
$ | 2,215 | |
Change in value of pension and other postretirement liabilities: | |
| | | |
| | | |
| | | |
| | |
Amortization of prior service cost and net gain, including gain on settlements and curtailments included in net periodic pension cost | |
| — | | |
| — | | |
| — | | |
| 1 | |
Net actuarial gain (loss) incurred in period | |
| — | | |
| — | | |
| 2 | | |
| (2 | ) |
Net tax loss attributable to pension termination | |
| — | | |
| — | | |
| — | | |
| (14 | ) |
Total change in value of pension and postretirement liabilities | |
| — | | |
| — | | |
| 2 | | |
| (15 | ) |
Comprehensive income (loss) | |
$ | (280 | ) | |
$ | 45 | | |
$ | (2,421 | ) | |
$ | 2,200 | |
The accompanying notes are an integral part of
these consolidated financial statements.
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| |
September 30, 2024 | | |
December 31, 2023 | |
| |
| | |
| |
| |
(in millions) | |
ASSETS | |
| |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 126 | | |
$ | 21 | |
Accounts receivable, net | |
| 472 | | |
| 680 | |
Derivative assets | |
| 279 | | |
| 614 | |
Other current assets | |
| 150 | | |
| 100 | |
Total current assets | |
| 1,027 | | |
| 1,415 | |
Natural gas and oil properties, using the full cost method, including $1,881 million as of September 30, 2024 and $2,075 million as of December 31, 2023 excluded from amortization | |
| 39,072 | | |
| 37,772 | |
Other | |
| 583 | | |
| 566 | |
Less: Accumulated depreciation, depletion and amortization | |
| (32,337 | ) | |
| (28,425 | ) |
Total property and equipment, net | |
| 7,318 | | |
| 9,913 | |
Operating lease assets | |
| 126 | | |
| 154 | |
Long-term derivative assets | |
| 44 | | |
| 175 | |
Deferred tax assets | |
| 924 | | |
| 238 | |
Other long-term assets | |
| 83 | | |
| 96 | |
Total long-term assets | |
| 1,177 | | |
| 663 | |
TOTAL ASSETS | |
$ | 9,522 | | |
$ | 11,991 | |
LIABILITIES AND EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Current portion of long-term debt | |
$ | 389 | | |
$ | — | |
Accounts payable | |
| 1,143 | | |
| 1,384 | |
Taxes payable | |
| 96 | | |
| 128 | |
Interest payable | |
| 26 | | |
| 77 | |
Derivative liabilities | |
| 57 | | |
| 79 | |
Current operating lease liabilities | |
| 39 | | |
| 44 | |
Other current liabilities | |
| 29 | | |
| 17 | |
Total current liabilities | |
| 1,779 | | |
| 1,729 | |
Long-term debt | |
| 3,922 | | |
| 3,947 | |
Long-term operating lease liabilities | |
| 87 | | |
| 107 | |
Long-term derivative liabilities | |
| 40 | | |
| 100 | |
Other long-term liabilities | |
| 207 | | |
| 220 | |
Total long-term liabilities | |
| 4,256 | | |
| 4,374 | |
Commitments and contingencies (Note 10) | |
| | | |
| | |
Equity: | |
| | | |
| | |
Common stock, $0.01 par value; 2,500,000,000 shares authorized; issued 1,164,596,399 shares as of September 30, 2024 and 1,163,077,745 shares as of December 31, 2023 | |
| 12 | | |
| 12 | |
Additional paid-in capital | |
| 7,208 | | |
| 7,188 | |
Accumulated deficit | |
| (3,405 | ) | |
| (982 | ) |
Accumulated other comprehensive loss | |
| (1 | ) | |
| (3 | ) |
Common stock in treasury, 61,614,693 shares as of September 30, 2024 and December 31, 2023 | |
| (327 | ) | |
| (327 | ) |
Total equity | |
| 3,487 | | |
| 5,888 | |
TOTAL LIABILITIES AND EQUITY | |
$ | 9,522 | | |
$ | 11,991 | |
The accompanying notes are an integral part of
these consolidated financial statements.
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| |
For the nine months ended September 30, | |
(in millions) | |
2024 | | |
2023 | |
Cash Flows From Operating Activities: | |
| | | |
| | |
Net income (loss) | |
$ | (2,423 | ) | |
$ | 2,215 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | | |
| | |
Depreciation, depletion and amortization | |
| 696 | | |
| 979 | |
Amortization of debt issuance costs | |
| 5 | | |
| 5 | |
Impairments | |
| 3,202 | | |
| — | |
Deferred income taxes | |
| (681 | ) | |
| 28 | |
(Gain) loss on derivatives, unsettled | |
| 384 | | |
| (1,562 | ) |
Stock-based compensation | |
| 14 | | |
| 7 | |
Loss on early extinguishment of debt | |
| — | | |
| 19 | |
Other | |
| 4 | | |
| 3 | |
Change in assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 209 | | |
| 799 | |
Accounts payable | |
| (161 | ) | |
| (362 | ) |
Taxes payable | |
| (32 | ) | |
| (2 | ) |
Interest payable | |
| (30 | ) | |
| (33 | ) |
Inventories | |
| (10 | ) | |
| (15 | ) |
Other assets and liabilities | |
| (58 | ) | |
| (42 | ) |
Net cash provided by operating activities | |
| 1,119 | | |
| 2,039 | |
| |
| | | |
| | |
Cash Flows From Investing Activities: | |
| | | |
| | |
Capital investments | |
| (1,349 | ) | |
| (1,833 | ) |
Proceeds from sale of property and equipment | |
| 4 | | |
| 123 | |
Net cash used in investing activities | |
| (1,345 | ) | |
| (1,710 | ) |
| |
| | | |
| | |
Cash Flows From Financing Activities: | |
| | | |
| | |
Payments on long-term debt | |
| — | | |
| (437 | ) |
Payments on revolving credit facility | |
| (2,104 | ) | |
| (3,044 | ) |
Borrowings under revolving credit facility | |
| 2,467 | | |
| 3,182 | |
Change in bank drafts outstanding | |
| (27 | ) | |
| (50 | ) |
Cash paid for tax withholding | |
| (5 | ) | |
| (4 | ) |
Net cash provided by (used in) financing activities | |
| 331 | | |
| (353 | ) |
| |
| | | |
| | |
Increase (decrease) in cash and cash equivalents | |
| 105 | | |
| (24 | ) |
Cash and cash equivalents at beginning of year | |
| 21 | | |
| 50 | |
Cash and cash equivalents at end of period | |
$ | 126 | | |
$ | 26 | |
The accompanying notes are an integral part of
these consolidated financial statements.
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
| |
Common
Stock | |
Additional | |
| |
Accumulated
Other | |
Common
Stock in
Treasury | | |
| |
| |
Shares
Issued | | |
Amount | |
Paid-In Capital | |
Accumulated
Deficit | |
Comprehensive
Income (Loss) | |
Shares | | |
Amount | | |
Total | |
| |
| | |
| |
| |
| |
| |
| | |
| | |
| |
| |
(in millions,
except share amounts) | |
Balance at
December 31, 2023 | |
| 1,163,077,745 | | |
$ | 12 | |
$ | 7,188 | |
$ | (982 | ) |
$ | (3 | ) |
| 61,614,693 | | |
$ | (327 | ) | |
$ | 5,888 | |
Comprehensive
loss: | |
| | | |
| | |
| | |
| | |
| | |
| | | |
| | | |
| | |
Net loss | |
| — | | |
| — | |
| — | |
| (1,535 | ) |
| — | |
| — | | |
| — | | |
| (1,535 | ) |
Other
comprehensive income | |
| — | | |
| — | |
| — | |
| — | |
| 2 | |
| — | | |
| — | | |
| 2 | |
Total comprehensive
loss | |
| — | | |
| — | |
| — | |
| — | |
| — | |
| — | | |
| — | | |
| (1,533 | ) |
Stock-based
compensation | |
| — | | |
| — | |
| 10 | |
| — | |
| — | |
| — | | |
| — | | |
| 10 | |
Restricted
units vested | |
| 2,108,403 | | |
| — | |
| 6 | |
| — | |
| — | |
| — | | |
| — | | |
| 6 | |
Tax
withholding – stock compensation | |
| (726,549 | ) | |
| — | |
| (5 | ) |
| — | |
| — | |
| — | | |
| — | | |
| (5 | ) |
Balance
at March 31, 2024 | |
| 1,164,459,599 | | |
$ | 12 | |
$ | 7,199 | |
$ | (2,517 | ) |
$ | (1 | ) |
| 61,614,693 | | |
$ | (327 | ) | |
$ | 4,366 | |
Comprehensive
loss: | |
| | | |
| | |
| | |
| | |
| | |
| | | |
| | | |
| | |
Net loss | |
| — | | |
| — | |
| — | |
| (608 | ) |
| — | |
| — | | |
| — | | |
| (608 | ) |
Other
comprehensive income | |
| — | | |
| — | |
| — | |
| — | |
| — | |
| — | | |
| — | | |
| — | |
Total comprehensive
loss | |
| — | | |
| — | |
| — | |
| — | |
| — | |
| — | | |
| — | | |
| (608 | ) |
Stock-based
compensation | |
| — | | |
| — | |
| 7 | |
| — | |
| — | |
| — | | |
| — | | |
| 7 | |
Issuance
of restricted stock | |
| 136,800 | | |
| — | |
| — | |
| — | |
| — | |
| — | | |
| — | | |
| — | |
Balance
at June 30, 2024 | |
| 1,164,596,399 | | |
$ | 12 | |
$ | 7,206 | |
$ | (3,125 | ) |
$ | (1 | ) |
| 61,614,693 | | |
$ | (327 | ) | |
$ | 3,765 | |
Comprehensive
loss: | |
| | | |
| | |
| | |
| | |
| | |
| | | |
| | | |
| | |
Net loss | |
| — | | |
| — | |
| — | |
| (280 | ) |
| — | |
| — | | |
| — | | |
| (280 | ) |
Other
comprehensive income | |
| — | | |
| — | |
| — | |
| — | |
| — | |
| — | | |
| — | | |
| — | |
Total comprehensive
loss | |
| — | | |
| — | |
| — | |
| — | |
| — | |
| — | | |
| — | | |
| (280 | ) |
Stock-based
compensation | |
| — | | |
| — | |
| 2 | |
| — | |
| — | |
| — | | |
| — | | |
| 2 | |
Balance
at September 30, 2024 | |
| 1,164,596,399 | | |
$ | 12 | |
$ | 7,208 | |
$ | (3,405 | ) |
$ | (1 | ) |
| 61,614,693 | | |
$ | (327 | ) | |
$ | 3,487 | |
| |
Common
Stock | |
Additional | |
| | |
Accumulated
Other | |
Common
Stock in
Treasury | | |
| |
| |
Shares
Issued | | |
Amount | |
Paid-In Capital | |
Accumulated
Deficit | | |
Comprehensive
Income (Loss) | |
Shares | |
Amount | | |
Total | |
| |
| | |
| |
| |
| | |
| |
| |
| | |
| |
| |
(in millions,
except share amounts) | |
Balance at December 31, 2022 | |
| 1,161,545,588 | | |
$ | 12 | |
$ | 7,172 | |
$ | (2,539 | ) | |
$ | 6 | |
| 61,614,693 | |
$ | (327 | ) | |
$ | 4,324 | |
Comprehensive loss: | |
| | | |
| | |
| | |
| | | |
| | |
| | |
| | | |
| | |
Net income | |
| — | | |
| — | |
| — | |
| 1,939 | | |
| — | |
| — | |
| — | | |
| 1,939 | |
Other comprehensive
loss | |
| — | | |
| — | |
| — | |
| — | | |
| (15 | ) |
| — | |
| — | | |
| (15 | ) |
Total comprehensive income | |
| — | | |
| — | |
| — | |
| — | | |
| — | |
| — | |
| — | | |
| 1,924 | |
Stock-based compensation | |
| — | | |
| — | |
| 2 | |
| — | | |
| — | |
| — | |
| — | | |
| 2 | |
Restricted units vested | |
| 1,999,039 | | |
| — | |
| 8 | |
| — | | |
| — | |
| — | |
| — | | |
| 8 | |
Tax withholding
– stock compensation | |
| (662,163 | ) | |
| — | |
| (4 | ) |
| — | | |
| — | |
| — | |
| — | | |
| (4 | ) |
Balance at March 31,
2023 | |
| 1,162,882,464 | | |
$ | 12 | |
$ | 7,178 | |
$ | (600 | ) | |
$ | (9 | ) |
| 61,614,693 | |
$ | (327 | ) | |
$ | 6,254 | |
Comprehensive income: | |
| | | |
| | |
| | |
| | | |
| | |
| | |
| | | |
| | |
Net income | |
| — | | |
| — | |
| — | |
| 231 | | |
| — | |
| — | |
| — | | |
| 231 | |
Other comprehensive
income | |
| — | | |
| — | |
| — | |
| — | | |
| — | |
| — | |
| — | | |
| — | |
Total comprehensive income | |
| — | | |
| — | |
| — | |
| — | | |
| — | |
| — | |
| — | | |
| 231 | |
Stock-based compensation | |
| — | | |
| — | |
| 4 | |
| — | | |
| — | |
| — | |
| — | | |
| 4 | |
Issuance of restricted stock | |
| 188,382 | | |
| — | |
| — | |
| — | | |
| — | |
| — | |
| — | | |
| — | |
Restricted stock units vested | |
| 9,968 | | |
| — | |
| — | |
| — | | |
| — | |
| — | |
| — | | |
| — | |
Tax withholding
– stock compensation | |
| (3,069 | ) | |
| — | |
| — | |
| — | | |
| — | |
| — | |
| — | | |
| — | |
Balance at June 30,
2023 | |
| 1,163,077,745 | | |
$ | 12 | |
$ | 7,182 | |
$ | (369 | ) | |
$ | (9 | ) |
| 61,614,693 | |
$ | (327 | ) | |
$ | 6,489 | |
Comprehensive income: | |
| | | |
| | |
| | |
| | | |
| | |
| | |
| | | |
| | |
Net income | |
| — | | |
| — | |
| — | |
| 45 | | |
| — | |
| — | |
| — | | |
| 45 | |
Other comprehensive
income | |
| — | | |
| — | |
| — | |
| — | | |
| — | |
| — | |
| — | | |
| — | |
Total comprehensive income | |
| — | | |
| — | |
| — | |
| — | | |
| — | |
| — | |
| — | | |
| 45 | |
Stock-based
compensation | |
| — | | |
| — | |
| 3 | |
| — | | |
| — | |
| — | |
| — | | |
| 3 | |
Balance at September 30,
2023 | |
| 1,163,077,745 | | |
$ | 12 | |
$ | 7,185 | |
$ | (324 | ) | |
$ | (9 | ) |
| 61,614,693 | |
$ | (327 | ) | |
$ | 6,537 | |
The accompanying notes are an integral part of
these consolidated financial statements.
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Nature of Operations
Southwestern Energy Company
(including its subsidiaries, collectively “Southwestern” or the “Company”) is an independent energy company engaged
in natural gas, oil and NGLs development, exploration and production (“E&P”). The Company is also focused on creating
and capturing additional value through its marketing business (“Marketing”). Southwestern conducts most of its business through
subsidiaries and operates principally in two segments: E&P and Marketing.
E&P. Southwestern’s
primary business is the development and production of natural gas as well as associated NGLs and oil, with ongoing operations focused
on the development of unconventional natural gas and oil reservoirs located in Pennsylvania, West Virginia, Ohio and Louisiana. The Company’s
operations in Pennsylvania, West Virginia and Ohio, herein referred to as “Appalachia,” are primarily focused on the Marcellus
Shale, the Utica and the Upper Devonian unconventional natural gas and liquids reservoirs. The Company’s operations in Louisiana,
herein referred to as “Haynesville,” are primarily focused on the Haynesville and Bossier natural gas reservoirs (“Haynesville
and Bossier Shales”). The Company also operates drilling rigs and provides certain oilfield products and services, principally serving
the Company’s E&P operations through vertical integration.
Marketing. Southwestern’s
marketing activities capture opportunities that arise through the marketing and transportation of natural gas, oil and NGLs primarily
produced in its E&P operations.
Basis of Presentation
The accompanying consolidated
financial statements were prepared using accounting principles generally accepted in the United States (“GAAP”) for interim
financial information. Certain information relating to the Company’s organization and footnote disclosures normally included
in financial statements prepared in accordance with GAAP have been appropriately condensed or omitted in this Quarterly Report.
Principles of Consolidation
The consolidated financial
statements contained in this report include all normal and recurring material adjustments that, in the opinion of management, are necessary
for a fair statement of the financial position, results of operations and cash flows for the interim periods presented herein. It
is recommended that these consolidated financial statements be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Annual
Report”).
The Company’s significant
accounting policies, which have been reviewed and approved by the Audit Committee of the Company’s board of directors (the “Board”),
are summarized in Note 1 in the Notes to the Consolidated Financial Statements included in the Company’s 2023 Annual Report.
Merger of the Company with Chesapeake Energy
Corporation
On January 10, 2024,
the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Chesapeake Energy Corporation, an Oklahoma
corporation (“Chesapeake”), Hulk Merger Sub, Inc., a Delaware corporation and a newly formed, wholly owned subsidiary
of Chesapeake (“Merger Sub”) and Hulk LLC Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of
Chesapeake (“LLC Sub” and together with Merger Sub, the Company and Chesapeake, the “Parties”), pursuant to which
Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as a wholly owned subsidiary of
Chesapeake (the “Surviving Corporation”). Immediately following the time the Merger becomes effective (the “Effective
Time”), the Surviving Corporation will be merged with and into LLC Sub, with LLC Sub continuing as the surviving entity and as a
wholly owned subsidiary of Chesapeake.
On June 18, 2024, the
shareholders of both the Company and Chesapeake approved the proposed Merger at their respective special meetings of shareholders. On
October 1, 2024, the Company completed the Merger and Chesapeake changed its name to Expand Energy Corporation (“Expand Energy”).
Immediately following the effective time of the Merger, the surviving corporation was merged with and into Merger Sub LLC, with Merger
Sub LLC continuing as the surviving entity and as a wholly owned subsidiary of Expand Energy (the “Second Merger”). Following
the effective time of the Second Merger, Merger Sub LLC was merged with and into Expand Energy with Expand Energy continuing as the surviving
entity (the “Third Merger”).
For the three and nine months
ended September 30, 2024, the Company incurred approximately $20 million and $39 million, respectively, in merger-related expenses,
mostly comprised of professional fees, associated with the Merger.
(2) REVENUE RECOGNITION
Revenues from Contracts with Customers
Natural gas and liquids.
Natural gas, oil and NGL sales are recognized when control of the product is transferred to the customer at a designated delivery
point. The pricing provisions of the Company’s contracts are primarily tied to a market index with certain adjustments based
on factors such as delivery, quality of the product and prevailing supply and demand conditions in the geographic areas in which the Company
operates. Under the Company’s sales contracts, the delivery of each unit of natural gas, oil and NGLs represents a separate
performance obligation, and revenue is recognized at the point in time when the performance obligations are fulfilled. There is no
significant financing component to the Company’s revenues as payment terms are typically within 30 to 60 days of control transfer. Furthermore,
consideration from a customer corresponds directly with the value to the customer of the Company’s performance completed to date. As
a result, the Company recognizes revenue in the amount for which the Company has a right to invoice and has not disclosed information
regarding its remaining performance obligations.
The Company records revenue
from its natural gas and liquids production in the amount of its net revenue interest in sales from its properties. Accordingly, natural
gas and liquid sales are not recognized for deliveries in excess of the Company’s net revenue interest, while natural gas and liquid
sales are recognized for any under-delivered volumes.
Marketing. The
Company, through its marketing affiliate, generally markets natural gas, oil and NGLs for its affiliated E&P companies as well as
other joint owners who choose to market with the Company. In addition, the Company markets some products purchased from third parties. Marketing
revenues for natural gas, oil and NGL sales are recognized when control of the product is transferred to the customer at a designated
delivery point. The pricing provisions of the Company’s contracts are primarily tied to market indices with certain adjustments
based on factors such as delivery, quality of the product and prevailing supply and demand conditions. Under the Company’s
marketing contracts, the delivery of each unit of natural gas, oil and NGLs represents a separate performance obligation, and revenue
is recognized at the point in time when the performance obligations are fulfilled. Customers are invoiced and revenues are recorded
each month as natural gas, oil and NGLs are delivered, and payment terms are typically within 30 to 60 days of control transfer. Furthermore,
consideration from a customer corresponds directly with the value to the customer of the Company’s performance completed to date. As
a result, the Company recognizes revenue in the amount to which the Company has a right to invoice and has not disclosed information regarding
its remaining performance obligations.
Disaggregation of Revenues
The Company presents a disaggregation
of E&P revenues by product on the consolidated statements of operations net of intersegment revenues. The following table reconciles
operating revenues as presented on the consolidated statements of operations to the operating revenues by segment:
(in millions) | |
E&P | | |
Marketing | | |
Intersegment Revenues | | |
Total | |
Three months ended September 30, 2024 | |
| | | |
| | | |
| | | |
| | |
Gas sales | |
$ | 461 | | |
$ | — | | |
$ | 14 | | |
$ | 475 | |
Oil sales | |
| 88 | | |
| — | | |
| 1 | | |
| 89 | |
NGL sales | |
| 164 | | |
| — | | |
| — | | |
| 164 | |
Marketing | |
| — | | |
| 1,183 | | |
| (698 | ) | |
| 485 | |
Total | |
$ | 713 | | |
$ | 1,183 | | |
$ | (683 | ) | |
$ | 1,213 | |
| |
| | | |
| | | |
| | | |
| | |
(in millions) | |
| | | |
| | | |
| | | |
| | |
Three months ended September 30, 2023 | |
| | | |
| | | |
| | | |
| | |
Gas sales | |
$ | 610 | | |
$ | — | | |
$ | 17 | | |
$ | 627 | |
Oil sales | |
| 93 | | |
| — | | |
| 1 | | |
| 94 | |
NGL sales | |
| 170 | | |
| — | | |
| (1 | ) | |
| 169 | |
Marketing | |
| — | | |
| 1,379 | | |
| (826 | ) | |
| 553 | |
Total | |
$ | 873 | | |
$ | 1,379 | | |
$ | (809 | ) | |
$ | 1,443 | |
| |
| | |
| | |
| | |
| |
(in millions) | |
E&P | | |
Marketing | | |
Intersegment Revenues | | |
Total | |
Nine months ended September 30, 2024 | |
| | | |
| | | |
| | | |
| | |
Gas sales | |
$ | 1,427 | | |
$ | — | | |
$ | 43 | | |
$ | 1,470 | |
Oil sales | |
| 258 | | |
| — | | |
| 3 | | |
| 261 | |
NGL sales | |
| 496 | | |
| — | | |
| — | | |
| 496 | |
Marketing | |
| — | | |
| 3,617 | | |
| (2,129 | ) | |
| 1,488 | |
Other (1) | |
| (2 | ) | |
| — | | |
| — | | |
| (2 | ) |
Total | |
$ | 2,179 | | |
$ | 3,617 | | |
$ | (2,083 | ) | |
$ | 3,713 | |
| |
| | | |
| | | |
| | | |
| | |
(in millions) | |
| | | |
| | | |
| | | |
| | |
Nine months ended September 30, 2023 | |
| | | |
| | | |
| | | |
| | |
Gas sales | |
$ | 2,281 | | |
$ | — | | |
$ | 42 | | |
$ | 2,323 | |
Oil sales | |
| 278 | | |
| — | | |
| 3 | | |
| 281 | |
NGL sales | |
| 524 | | |
| — | | |
| (1 | ) | |
| 523 | |
Marketing | |
| — | | |
| 4,651 | | |
| (2,944 | ) | |
| 1,707 | |
Other (1) | |
| (4 | ) | |
| — | | |
| — | | |
| (4 | ) |
Total | |
$ | 3,079 | | |
$ | 4,651 | | |
$ | (2,900 | ) | |
$ | 4,830 | |
| (1) | For the nine months ended September 30, 2024 and September 30, 2023, other E&P revenues
consist primarily of losses on purchaser imbalances associated with natural gas and certain NGLs. |
Associated E&P revenues
are also disaggregated for analysis on a geographic basis by the core areas in which the Company operates, which are Appalachia and Haynesville.
| |
For the three months ended September 30, | | |
For the nine months ended September 30, | |
(in millions) | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Appalachia | |
$ | 476 | | |
$ | 500 | | |
$ | 1,454 | | |
$ | 1,891 | |
Haynesville | |
| 237 | | |
| 373 | | |
| 725 | | |
| 1,188 | |
Total | |
$ | 713 | | |
$ | 873 | | |
$ | 2,179 | | |
$ | 3,079 | |
Receivables from Contracts with Customers
The following table reconciles
the Company’s receivables from contracts with customers to consolidated accounts receivable as presented on the consolidated balance
sheet:
(in millions) | |
September 30, 2024 | | |
December 31, 2023 | |
Receivables from contracts with customers | |
$ | 421 | | |
$ | 622 | |
Other accounts receivable | |
| 51 | | |
| 58 | |
Total accounts receivable | |
$ | 472 | | |
$ | 680 | |
Amounts recognized against
the Company’s allowance for doubtful accounts related to receivables arising from contracts with customers were not significant
for both the nine months ended September 30, 2024 and year ended December 31, 2023. The Company has no contract assets
or contract liabilities associated with its revenues from contracts with customers.
(3) CASH AND CASH EQUIVALENTS
The following table presents
a summary of cash and cash equivalents as of September 30, 2024 and December 31, 2023:
(in millions) | |
September 30, 2024 | | |
December 31, 2023 | |
Cash | |
$ | 2 | | |
$ | 1 | |
Marketable securities (1) | |
| 124 | | |
| 20 | |
Total | |
$ | 126 | | |
$ | 21 | |
| (1) | Typically consists of government stable value money market funds. |
(4) NATURAL GAS AND OIL PROPERTIES
The Company utilizes the
full cost method of accounting for costs related to the development, exploration and acquisition of natural gas and oil properties. Under
this method, all such costs (productive and nonproductive), including salaries, benefits and other internal costs directly attributable
to these activities, are capitalized on a country-by-country basis and amortized over the estimated lives of the properties using the
units-of-production method. These capitalized costs are subject to a ceiling test that limits such pooled costs, net of applicable
deferred taxes, to the aggregate of the present value of future net revenues attributable to proved natural gas, oil and NGL reserves
discounted at 10% (standardized measure). Any costs in excess of the ceiling are written off as a non-cash expense. The expense
may not be reversed in future periods, even though higher natural gas, oil and NGL prices may subsequently increase the ceiling. Companies
using the full cost method are required to use the average quoted price from the first day of each month from the previous 12 months,
including the impact of derivatives designated for hedge accounting, to calculate the ceiling value of their reserves. The Company had
no hedge positions that were designated for hedge accounting as of September 30, 2024. Prices used to calculate the ceiling value
of reserves were as follows:
| |
September 30, 2024 | | |
September 30, 2023 | |
Natural gas (per MMBtu) | |
$ | 2.21 | | |
$ | 3.42 | |
Oil (per Bbl) | |
$ | 78.64 | | |
$ | 78.54 | |
NGLs (per Bbl) | |
$ | 21.40 | | |
$ | 22.24 | |
Using the average quoted
prices above, adjusted for market differentials, the Company’s net book value of its United States natural gas and oil properties
exceeded the ceiling amount at September 30, 2024, resulting in an impairment of $478 million. In the first half of 2024, the Company’s
net book value of its United States natural gas and oil properties exceeded the ceiling by approximately $2,724 million and resulted in
non-cash ceiling test impairments. Decreases in market prices as well as changes in production rates, levels of reserves, evaluation of
costs excluded from amortization, future development costs and production costs could result in future non-cash ceiling test impairments
to the Company’s natural gas and oil properties.
In June 2023, the Company
sold non-core natural gas and oil properties in Appalachia for approximately $123 million in cash. The cash proceeds were used to pay
down the Company’s revolving credit facility and were recorded as a reduction to its natural gas and oil properties.
(5) EARNINGS PER SHARE
Basic earnings per common
share is computed by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding
during the reportable period. The diluted earnings per share calculation adds to the weighted average number of common shares outstanding:
the incremental shares that would have been outstanding assuming the exercise of dilutive stock options, the vesting of unvested restricted
shares of common stock, restricted stock units and performance units. An antidilutive impact is an increase in earnings per share
or a reduction in net loss per share resulting from the conversion, exercise or contingent issuance of certain securities.
The following table presents
the computation of earnings per share for the three and nine months ended September 30, 2024 and 2023:
| |
For the three months ended September 30, | | |
For the nine months ended September 30, | |
(in millions, except share/per share amounts) | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Net income (loss) | |
$ | (280 | ) | |
$ | 45 | | |
$ | (2,423 | ) | |
$ | 2,215 | |
| |
| | | |
| | | |
| | | |
| | |
Number of common shares: | |
| | | |
| | | |
| | | |
| | |
Weighted average outstanding | |
| 1,102,844,908 | | |
| 1,101,231,113 | | |
| 1,102,470,380 | | |
| 1,100,895,642 | |
Effect of issuance of non-vested restricted common stock | |
| — | | |
| 932,868 | | |
| — | | |
| 839,031 | |
Effect of issuance of non-vested restricted units | |
| — | | |
| 1,689,617 | | |
| — | | |
| 1,133,002 | |
Effect of issuance of non-vested performance units | |
| — | | |
| 174,036 | | |
| — | | |
| — | |
Weighted average and dilutive outstanding | |
| 1,102,844,908 | | |
| 1,104,027,634 | | |
| 1,102,470,380 | | |
| 1,102,867,675 | |
| |
| | | |
| | | |
| | | |
| | |
Earnings (loss) per common share | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.25 | ) | |
$ | 0.04 | | |
$ | (2.20 | ) | |
$ | 2.01 | |
Diluted | |
$ | (0.25 | ) | |
$ | 0.04 | | |
$ | (2.20 | ) | |
$ | 2.01 | |
The following table presents
the common stock shares equivalent excluded from the calculation of diluted earnings per share for the three and nine months ended September 30,
2024 and 2023, as they would have had an antidilutive effect:
| |
For the three months ended September 30, | | |
For the nine months ended September 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Unexercised stock options | |
| — | | |
| 820,138 | | |
| 152,653 | | |
| 835,362 | |
Unvested restricted common stock | |
| 979,158 | | |
| — | | |
| 1,004,979 | | |
| 54,989 | |
Restricted units | |
| 3,773,958 | | |
| 224,726 | | |
| 3,281,528 | | |
| 652,089 | |
Performance units | |
| 719,312 | | |
| — | | |
| 664,247 | | |
| 764,916 | |
Total | |
| 5,472,428 | | |
| 1,044,864 | | |
| 5,103,407 | | |
| 2,307,356 | |
(6) DERIVATIVES AND RISK MANAGEMENT
The Company is exposed to
volatility in market prices and basis differentials for natural gas, oil and NGLs which impacts the predictability of its cash flows related
to the sale of those commodities. These risks are managed by the Company’s use of certain derivative financial instruments. As
of September 30, 2024 and September 30, 2023, the Company’s derivative financial instruments consisted of fixed price
swaps, two-way costless collars, three-way costless collars, basis swaps, and options (calls and puts). A description of the Company’s
derivative financial instruments is provided below:
Fixed price swaps |
If the Company sells a fixed price swap, the Company receives a fixed price for the contract, and pays a floating market price to the counterparty. If the Company purchases a fixed price swap, the Company receives a floating market price for the contract and pays a fixed price to the counterparty. |
|
|
Two-way costless collars |
Arrangements that contain a fixed floor price (“purchased put option”) and a fixed ceiling price (“sold call option”) based on an index price which, in aggregate, have no net cost. At the contract settlement date, (1) if the index price is higher than the ceiling price, the Company pays the counterparty the difference between the index price and ceiling price, (2) if the index price is between the floor and ceiling prices, no payments are due from either party, and (3) if the index price is below the floor price, the Company will receive the difference between the floor price and the index price. |
|
|
Three-way costless collars |
Arrangements that contain a purchased put option, a sold call option and a sold put option based on an index price that, in aggregate, have no net cost. At the contract settlement date, (1) if the index price is higher than the sold call strike price, the Company pays the counterparty the difference between the index price and sold call strike price, (2) if the index price is between the purchased put strike price and the sold call strike price, no payments are due from either party, (3) if the index price is between the sold put strike price and the purchased put strike price, the Company will receive the difference between the purchased put strike price and the index price, and (4) if the index price is below the sold put strike price, the Company will receive the difference between the purchased put strike price and the sold put strike price. |
|
|
Basis swaps |
Arrangements that guarantee a price differential for natural gas from a specified delivery point. If the Company sells a basis swap, 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. If the Company purchases a basis swap, the Company pays the counterparty if the price differential is greater than the stated terms of the contract and receives a payment from the counterparty if the price differential is less than the stated terms of the contract. |
|
|
Options (Calls and Puts) |
The Company purchases and sells options in exchange for premiums. If the Company purchases a call option, the Company receives from the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party. If the Company sells a call option, the Company pays the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party. If the Company purchases a put option, the Company receives from the counterparty the excess (if any) of the strike price over the market price of the put option at the time of settlement, but if the market price is above the put’s strike price, no payment is due from either party. If the Company sells a put option, the Company pays the counterparty the excess (if any) of the strike price over the market price of the put option at the time of settlement, but if the market price is above the put’s strike price, no payment is due from either party. |
The Company chooses counterparties for its derivative instruments that it believes are creditworthy
at the time the transactions are entered into, and the Company actively monitors the credit ratings and credit default swap rates of
these counterparties where applicable. However, there can be no assurance that a counterparty will be able to meet its obligations
to the Company. The Company presents its derivative positions on a gross basis and does not net the asset and liability positions.
The following tables provide
information about the Company’s financial instruments that are sensitive to changes in commodity prices and that are used to protect
the Company’s exposure. None of the financial instruments below are designated for hedge accounting treatment. The tables present
the notional amount, the weighted average contract prices and the fair value by expected maturity dates as of September 30, 2024:
Financial Protection on Production |
| |
| | |
Weighted Average Price per MMBtu | | |
| |
| |
Volume
(Bcf) | | |
Swaps | | |
Sold Puts | | |
Purchased
Puts | | |
Sold Calls | | |
Basis
Differential | | |
Fair Value at September 30, 2024 (in millions) | |
Natural Gas | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
2024 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 134 | | |
$ | 3.60 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 86 | |
Two-way costless collars | |
| 11 | | |
| — | | |
| — | | |
| 3.07 | | |
| 3.53 | | |
| — | | |
| 2 | |
Three-way costless collars | |
| 21 | | |
| — | | |
| 2.50 | | |
| 3.25 | | |
| 4.24 | | |
| — | | |
| 8 | |
Total | |
| 166 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 96 | |
2025 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 128 | | |
$ | 3.54 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 20 | |
Two-way costless collars | |
| 73 | | |
| — | | |
| — | | |
| 3.50 | | |
| 5.40 | | |
| — | | |
| 36 | |
Three-way costless collars | |
| 161 | | |
| — | | |
| 2.59 | | |
| 3.66 | | |
| 5.88 | | |
| — | | |
| 71 | |
Total | |
| 362 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 127 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Basis Swaps | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
2024 | |
| 25 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | (0.72 | ) | |
$ | 3 | |
2025 | |
| 9 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (0.64 | ) | |
| 2 | |
Total | |
| 34 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 5 | |
| |
| | |
Weighted Average Strike Price per Bbl | | |
| |
| |
Volume (MBbls) | | |
Swaps | | |
Sold Puts | | |
Purchased
Puts | | |
Sold Calls | | |
Fair Value at September 30, 2024 (in millions) | |
Oil | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
2024 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 179 | | |
$ | 71.92 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 1 | |
Two-way costless collars | |
| 92 | | |
| — | | |
| — | | |
| 70.00 | | |
| 88.56 | | |
| — | |
Three-way costless collars | |
| 313 | | |
| — | | |
| 57.94 | | |
| 67.94 | | |
| 88.97 | | |
| 1 | |
Total | |
| 584 | | |
| | | |
| | | |
| | | |
| | | |
$ | 2 | |
2025 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 41 | | |
$ | 77.66 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Three-way costless collars | |
| 1,324 | | |
| — | | |
| 58.96 | | |
| 68.96 | | |
| 92.73 | | |
| 5 | |
Total | |
| 1,365 | | |
| | | |
| | | |
| | | |
| | | |
$ | 5 | |
2026 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Three-way costless collars | |
| 225 | | |
| — | | |
| 60.00 | | |
| 70.00 | | |
| 83.32 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ethane | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
2024 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 2,015 | | |
$ | 9.65 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 1 | |
2025 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 3,650 | | |
$ | 10.36 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 3 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Propane | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
2024 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 1,564 | | |
$ | 31.15 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 1 | |
2025 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 2,253 | | |
$ | 30.87 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 2 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Normal Butane | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
2024 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 359 | | |
$ | 39.42 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | (1 | ) |
2025 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 548 | | |
$ | 35.28 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | (1 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Natural Gasoline | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
2024 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 405 | | |
$ | 61.45 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
2025 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| 821 | | |
$ | 56.89 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | (1 | ) |
Other Derivative Contracts
| |
Volume (Bcf) | | |
Weighted Average
Strike Price per
MMBtu | | |
Fair Value at September 30, 2024 (in millions) | |
Call Options – Natural Gas (Net) | |
| | | |
| | | |
| | |
2024 | |
| 18 | | |
$ | 6.00 | | |
$ | — | |
2025 | |
| 73 | | |
| 7.00 | | |
| (4 | ) |
2026 | |
| 73 | | |
| 7.00 | | |
| (9 | ) |
Total | |
| 164 | | |
| | | |
$ | (13 | ) |
At September 30, 2024, the net fair value of the Company’s
financial instruments was a $226 million asset. See Note 8 for additional details regarding the Company’s fair value measurements
of its derivatives position.
As of September 30,
2024, the Company had no positions designated for hedge accounting treatment. Gains and losses on derivatives that are not designated
for hedge accounting treatment, or do not meet hedge accounting requirements, are recorded as a component of gain (loss) on derivatives
on the consolidated statements of operations. Accordingly, the gain (loss) on derivatives component of the statement of operations reflects
the gains and losses on both settled and unsettled derivatives. Only the settled gains and losses are included in the Company’s
realized commodity price calculations.
The balance sheet classification
of the assets and liabilities related to derivative financial instruments are summarized below as of September 30, 2024 and December 31,
2023:
Derivative Assets | |
| |
| | |
| |
| |
| |
Fair Value | |
(in millions) | |
Balance Sheet Classification | |
September 30, 2024 | | |
December 31, 2023 | |
Derivatives not designated as hedging instruments: | |
| |
| | | |
| | |
Fixed price swaps – natural gas | |
Derivative assets | |
$ | 121 | | |
$ | 466 | |
Fixed price swaps – oil | |
Derivative assets | |
| 1 | | |
| 1 | |
Fixed price swaps – ethane | |
Derivative assets | |
| 4 | | |
| 9 | |
Fixed price swaps – propane | |
Derivative assets | |
| 4 | | |
| 12 | |
Fixed price swaps – normal butane | |
Derivative assets | |
| — | | |
| 1 | |
Fixed price swaps – natural gasoline | |
Derivative assets | |
| 1 | | |
| 2 | |
Two-way costless collars – natural gas | |
Derivative assets | |
| 37 | | |
| 36 | |
Two-way costless collars – oil | |
Derivative assets | |
| — | | |
| 3 | |
Three-way costless collars – natural gas | |
Derivative assets | |
| 97 | | |
| 62 | |
Three-way costless collars – oil | |
Derivative assets | |
| 9 | | |
| 1 | |
Basis swaps – natural gas | |
Derivative assets | |
| 5 | | |
| 14 | |
Put options – natural gas | |
Derivative assets | |
| — | | |
| 8 | |
Fixed price swaps – natural gas | |
Other long-term assets | |
| 2 | | |
| — | |
Two-way costless collars – natural gas | |
Other long-term assets | |
| 10 | | |
| 46 | |
Two-way costless collars – oil | |
Other long-term assets | |
| — | | |
| — | |
Three-way costless collars – natural gas | |
Other long-term assets | |
| 26 | | |
| 116 | |
Three-way costless collars – oil | |
Other long-term assets | |
| 5 | | |
| 10 | |
Basis swaps – natural gas | |
Other long-term assets | |
| 1 | | |
| 4 | |
Total derivative assets | |
| |
$ | 323 | | |
$ | 791 | |
Derivative Liabilities
| |
| |
Fair Value | |
(in millions) | |
Balance Sheet Classification | |
September 30, 2024 | | |
December 31, 2023 | |
Derivatives not designated as hedging instruments: | |
| |
| | | |
| | |
Fixed price swaps – natural gas | |
Derivative liabilities | |
$ | 11 | | |
$ | 18 | |
Fixed price swaps – oil | |
Derivative liabilities | |
| — | | |
| 2 | |
Fixed price swaps – propane | |
Derivative liabilities | |
| 1 | | |
| 1 | |
Fixed price swaps – normal butane | |
Derivative liabilities | |
| 2 | | |
| — | |
Fixed price swaps – natural gasoline | |
Derivative liabilities | |
| 2 | | |
| — | |
Two-way costless collars – natural gas | |
Derivative liabilities | |
| 5 | | |
| 14 | |
Two-way costless collars – oil | |
Derivative liabilities | |
| — | | |
| 1 | |
Three-way costless collars – natural gas | |
Derivative liabilities | |
| 30 | | |
| 27 | |
Three-way costless collars – oil | |
Derivative liabilities | |
| 4 | | |
| 1 | |
Basis swaps – natural gas | |
Derivative liabilities | |
| 1 | | |
| 6 | |
Call options – natural gas | |
Derivative liabilities | |
| 1 | | |
| 1 | |
Put options – natural gas | |
Derivative liabilities | |
| — | | |
| 8 | |
Fixed price swaps – natural gas | |
Long-term derivative liabilities | |
| 6 | | |
| — | |
Two-way costless collars – natural gas | |
Long-term derivative liabilities | |
| 4 | | |
| 15 | |
Three-way costless collars – natural gas | |
Long-term derivative liabilities | |
| 14 | | |
| 60 | |
Three-way costless collars – oil | |
Long-term derivative liabilities | |
| 4 | | |
| 8 | |
Call options – natural gas | |
Long-term derivative liabilities | |
| 12 | | |
| 17 | |
Total derivative liabilities | |
| |
$ | 97 | | |
$ | 179 | |
Net Derivative Position
(in millions) | |
September 30, 2024 | | |
December 31, 2023 | |
Net current derivative asset | |
$ | 222 | | |
$ | 536 | |
Net long-term derivative asset | |
| 4 | | |
| 76 | |
Non-performance risk adjustment | |
| — | | |
| (2 | ) |
Net total derivative asset | |
$ | 226 | | |
$ | 610 | |
The following tables summarize the before-tax
effect of the Company’s derivative instruments on the consolidated statements of operations for the three and nine months ended
September 30, 2024 and 2023:
Unsettled Gain (Loss) on Derivatives Recognized in Earnings
| |
Consolidated Statement of
Operations Classification of Gain | |
For the three months
ended September 30, | | |
For the nine months
ended September 30, | |
Derivative Instrument | |
(Loss) on Derivatives, Unsettled | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| |
| | |
| | |
| | |
| |
| |
| |
(in millions) | |
Fixed price swaps – natural gas | |
Gain (Loss) on Derivatives | |
$ | (100 | ) | |
$ | 28 | | |
$ | (342 | ) | |
$ | 965 | |
Fixed price swaps – oil | |
Gain (Loss) on Derivatives | |
| 6 | | |
| (29 | ) | |
| 2 | | |
| (7 | ) |
Fixed price swaps – ethane | |
Gain (Loss) on Derivatives | |
| — | | |
| (5 | ) | |
| (5 | ) | |
| (5 | ) |
Fixed price swaps – propane | |
Gain (Loss) on Derivatives | |
| 20 | | |
| (37 | ) | |
| (8 | ) | |
| (8 | ) |
Fixed price swaps – normal butane | |
Gain (Loss) on Derivatives | |
| 1 | | |
| (6 | ) | |
| (3 | ) | |
| 1 | |
Fixed price swaps – natural gasoline | |
Gain (Loss) on Derivatives | |
| 8 | | |
| (9 | ) | |
| (3 | ) | |
| (2 | ) |
Two-way costless collars – natural gas | |
Gain (Loss) on Derivatives | |
| 1 | | |
| 3 | | |
| (15 | ) | |
| 233 | |
Two-way costless collars – oil | |
Gain (Loss) on Derivatives | |
| — | | |
| (4 | ) | |
| (2 | ) | |
| (3 | ) |
Three-way costless collars – natural gas | |
Gain (Loss) on Derivatives | |
| (2 | ) | |
| 20 | | |
| (12 | ) | |
| 310 | |
Three-way costless collars – oil | |
Gain (Loss) on Derivatives | |
| 7 | | |
| (1 | ) | |
| 4 | | |
| 20 | |
Basis swaps – natural gas | |
Gain (Loss) on Derivatives | |
| (11 | ) | |
| (43 | ) | |
| (7 | ) | |
| 25 | |
Call options – natural gas | |
Gain (Loss) on Derivatives | |
| 1 | | |
| 14 | | |
| 5 | | |
| 41 | |
Sold put options - natural gas | |
Gain (Loss) on Derivatives | |
| — | | |
| — | | |
| 8 | | |
| — | |
Purchased put options – natural gas | |
Gain (Loss) on Derivatives | |
| — | | |
| — | | |
| (8 | ) | |
| (4 | ) |
Total gain (loss) on unsettled derivatives | |
| |
$ | (69 | ) | |
$ | (69 | ) | |
$ | (386 | ) | |
$ | 1,566 | |
Settled Gain (Loss) on Derivatives Recognized in Earnings (1)
| |
Consolidated Statement of
Operations Classification of Gain | |
For the three months
ended September 30, | | |
For the nine months
ended September 30, | |
Derivative Instrument | |
(Loss) on Derivatives, Settled | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| |
| | |
| | |
| | |
| |
| |
| |
(in millions) | |
Fixed price swaps – natural gas | |
Gain (Loss) on Derivatives | |
$ | 193 | | |
$ | 112 | | |
$ | 565 | | |
$ | 227 | |
Fixed price swaps – oil | |
Gain (Loss) on Derivatives | |
| (1 | ) | |
| (11 | ) | |
| (9 | ) | |
| (18 | ) |
Fixed price swaps – ethane | |
Gain (Loss) on Derivatives | |
| 7 | | |
| (3 | ) | |
| 14 | | |
| 3 | |
Fixed price swaps – propane | |
Gain (Loss) on Derivatives | |
| 1 | | |
| 9 | | |
| (1 | ) | |
| 21 | |
Fixed price swaps – normal butane | |
Gain (Loss) on Derivatives | |
| (1 | ) | |
| 1 | | |
| (1 | ) | |
| 2 | |
Fixed price swaps – natural gasoline | |
Gain (Loss) on Derivatives | |
| — | | |
| — | | |
| (3 | ) | |
| 1 | |
Two-way costless collars – natural gas | |
Gain (Loss) on Derivatives | |
| 10 | | |
| 13 | | |
| 32 | | |
| 44 | |
Three-way costless collars – natural gas | |
Gain (Loss) on Derivatives | |
| 15 | | |
| 1 | | |
| 44 | | |
| (15 | ) |
Three-way costless collars – oil | |
Gain (Loss) on Derivatives | |
| — | | |
| (7 | ) | |
| — | | |
| (20 | ) |
Basis swaps – natural gas | |
Gain (Loss) on Derivatives | |
| (3 | ) | |
| 47 | | |
| (14 | ) | |
| 11 | |
Call options – natural gas | |
Gain (Loss) on Derivatives | |
| — | | |
| — | | |
| — | | |
| (7 | ) |
Sold put options - natural gas | |
Gain (Loss) on Derivatives | |
| — | | |
| — | | |
| (10 | ) | |
| — | |
Purchased put options – natural gas | |
Gain (Loss) on Derivatives | |
| — | | |
| — | | |
| 10 | | |
| — | |
Total gain on settled derivatives | |
| |
$ | 221 | | |
$ | 162 | | |
$ | 627 | | |
$ | 249 | |
| |
| |
| | | |
| | | |
| | | |
| | |
Total gain on derivatives (2) | |
| |
$ | 152 | | |
$ | 93 | | |
$ | 243 | | |
$ | 1,811 | |
| (1) | The Company calculates gain (loss) on derivatives, settled, as the summation of gains and losses on positions
that settled within the period. |
| (2) | Total gain on derivatives includes non-performance risk adjustments of $2 million in gains and $4 million
in losses for the nine months ended September 30, 2024 and September 30, 2023, respectively. There were no non-performance risk
adjustments made for the three months ended September 30, 2024 and September 30, 2023. |
Total Gain on Derivatives Recognized in Earnings
| |
For the three months ended September 30, | | |
For the nine months ended September 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| | |
| | |
| | |
| |
| |
(in millions) | |
Total gain (loss) on unsettled derivatives | |
$ | (69 | ) | |
$ | (69 | ) | |
$ | (386 | ) | |
$ | 1,566 | |
Total gain on settled derivatives | |
| 221 | | |
| 162 | | |
| 627 | | |
| 249 | |
Non-performance risk adjustment | |
| — | | |
| — | | |
| 2 | | |
| (4 | ) |
Total gain on derivatives | |
$ | 152 | | |
$ | 93 | | |
$ | 243 | | |
$ | 1,811 | |
(7) RECLASSIFICATIONS FROM ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
The following tables detail
the components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2024:
(in millions) | |
Other
Postretirement | | |
Foreign
Currency | | |
Total | |
Beginning balance December 31, 2023 | |
$ | 11 | | |
$ | (14 | ) | |
$ | (3 | ) |
Other comprehensive income before reclassifications | |
| — | | |
| — | | |
| — | |
Amounts reclassified from other comprehensive income (1) | |
| 2 | | |
| — | | |
| 2 | |
Net current-period other comprehensive income | |
| 2 | | |
| — | | |
| 2 | |
Ending balance September 30, 2024 | |
$ | 13 | | |
$ | (14 | ) | |
$ | (1 | ) |
| (1) | Includes a $2 million actuarial gain related to the other postretirement plan. |
(8) FAIR VALUE MEASUREMENTS
The carrying amounts and
estimated fair values of the Company’s financial instruments as of September 30, 2024 and December 31, 2023 were as follows:
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
(in millions) |
|
Carrying
Amount |
|
|
Fair
Value |
|
|
Carrying Amount |
|
|
Fair Value |
|
Cash and cash equivalents |
|
$ |
126 |
|
|
$ |
126 |
|
|
$ |
21 |
|
|
$ |
21 |
|
2022 revolving credit facility due April 2027 |
|
|
583 |
|
|
|
583 |
|
|
|
220 |
|
|
|
220 |
|
Senior notes (1) |
|
|
3,743 |
|
|
|
3,699 |
|
|
|
3,743 |
|
|
|
3,626 |
|
Derivative instruments, net |
|
|
226 |
|
|
|
226 |
|
|
|
610 |
|
|
|
610 |
|
| (1) | Excludes unamortized debt issuance costs and debt discounts. |
The fair value hierarchy
prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists
of three broad levels:
Level 1 valuations
- Consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority.
Level 2 valuations - Consist
of quoted market information for the calculation of fair market value.
Level 3 valuations - Consist
of internal estimates and have the lowest priority.
The carrying values of cash
and cash equivalents, including marketable securities, accounts receivable, other current assets, accounts payable and other current liabilities
on the consolidated balance sheets approximate fair value because of their short-term nature. For debt and derivative instruments,
the following methods and assumptions were used to estimate fair value:
Debt: The fair values
of the Company’s senior notes are based on the market value of the Company’s publicly traded debt as determined based on
the market prices of the Company’s senior notes. The fair values of the Company’s senior notes are considered to be a Level
1 measurement as these are actively traded in the market. The carrying value of the borrowings under the Company’s 2022 credit
facility (as defined in Note 9 below), to the extent utilized, approximates fair value because the interest rates are variable
and reflective of market rates. The Company considers the fair value of its 2022 credit facility to be a Level 1 measurement on
the fair value hierarchy.
Derivative Instruments:
The Company measures the fair value of its derivative instruments based upon a pricing model that utilizes market-based inputs, including,
but not limited to, the contractual price of the underlying position, current market prices, natural gas and liquids forward curves, discount
rates for a similar duration of each outstanding position, volatility factors and non-performance risk. Non-performance risk considers
the effect of the Company’s credit standing on the fair value of derivative liabilities and the effect of counterparty credit standing
on the fair value of derivative assets. Both inputs to the model are based on published credit default swap rates and the duration of
each outstanding derivative position. The Company’s net derivative position was a net asset as of September 30, 2024 and as
of December 31, 2023. As of December 31, 2023, the impact of the non-performance risk on the fair value of the Company’s
net derivative position resulted in a reduction to the net asset of $2 million.
The Company has classified
its derivative instruments into levels depending upon the data utilized to determine their fair values. The Company’s fixed
price swaps (Level 2) are estimated using third-party discounted cash flow calculations using the New York Mercantile Exchange (“NYMEX”)
futures index for natural gas and oil derivatives and Oil Price Information Service (“OPIS”) for ethane and propane derivatives.
The Company’s call
and put options, two-way costless collars and three-way costless collars (Level 2) are valued using the Black-Scholes model, an industry
standard option valuation model that takes into account inputs such as contract terms, including maturity, and market parameters, including
assumptions of the NYMEX and OPIS futures index, interest rates, volatility and credit worthiness. Inputs to the Black-Scholes
model, including the volatility input, are obtained from a third-party pricing source, with independent verification of the most significant
inputs on a monthly basis. An increase (decrease) in volatility would result in an increase (decrease) in fair value measurement,
respectively.
The Company’s basis
swaps (Level 2) are estimated using third-party calculations based upon forward commodity price curves.
Assets and liabilities measured
at fair value on a recurring basis are summarized below:
| |
September 30, 2024 | |
| |
Fair Value Measurements Using: | | |
| |
(in millions) | |
Quoted Prices in
Active Markets
(Level 1) | | |
Significant Other
Observable Inputs
(Level 2) | | |
Significant
Unobservable Inputs
(Level 3) | | |
Assets
(Liabilities) at
Fair Value | |
Assets | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
$ | — | | |
$ | 133 | | |
$ | — | | |
$ | 133 | |
Two-way costless collars | |
| — | | |
| 47 | | |
| — | | |
| 47 | |
Three-way costless collars | |
| — | | |
| 137 | | |
| — | | |
| 137 | |
Basis swaps | |
| — | | |
| 6 | | |
| — | | |
| 6 | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| — | | |
| (22 | ) | |
| — | | |
| (22 | ) |
Two-way costless collars | |
| — | | |
| (9 | ) | |
| — | | |
| (9 | ) |
Three-way costless collars | |
| — | | |
| (52 | ) | |
| — | | |
| (52 | ) |
Basis swaps | |
| — | | |
| (1 | ) | |
| — | | |
| (1 | ) |
Call options | |
| — | | |
| (13 | ) | |
| — | | |
| (13 | ) |
Total | |
$ | — | | |
$ | 226 | | |
$ | — | | |
$ | 226 | |
| |
December 31, 2023 | |
| |
Fair Value Measurements Using: | | |
| |
(in millions) | |
Quoted Prices in
Active Markets
(Level 1) | | |
Significant Other
Observable Inputs
(Level 2) | | |
Significant
Unobservable Inputs
(Level 3) | | |
Assets
(Liabilities) at
Fair Value | |
Assets | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
$ | — | | |
$ | 491 | | |
$ | — | | |
$ | 491 | |
Two-way costless collars | |
| — | | |
| 85 | | |
| — | | |
| 85 | |
Three-way costless collars | |
| — | | |
| 189 | | |
| — | | |
| 189 | |
Basis swaps | |
| — | | |
| 18 | | |
| — | | |
| 18 | |
Purchase Put - Natural Gas | |
| — | | |
| 8 | | |
| — | | |
| 8 | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Fixed price swaps | |
| — | | |
| (21 | ) | |
| — | | |
| (21 | ) |
Two-way costless collars | |
| — | | |
| (30 | ) | |
| — | | |
| (30 | ) |
Three-way costless collars | |
| — | | |
| (96 | ) | |
| — | | |
| (96 | ) |
Basis swaps | |
| — | | |
| (6 | ) | |
| — | | |
| (6 | ) |
Call options | |
| — | | |
| (18 | ) | |
| — | | |
| (18 | ) |
Put options | |
| — | | |
| (8 | ) | |
| — | | |
| (8 | ) |
Total (1) | |
$ | — | | |
$ | 612 | | |
$ | — | | |
$ | 612 | |
| (1) | Excludes a net reduction to the asset fair value of $2 million related to estimated non-performance risk. |
(9) DEBT
The components of debt as
of September 30, 2024 and December 31, 2023 consisted of the following:
| |
September 30, 2024 | |
(in millions) | |
Debt Instrument | | |
Unamortized
Issuance Expense | | |
Unamortized
Debt
Premium/Discount | | |
Total | |
Current portion of long-term debt: | |
| | | |
| | | |
| | | |
| | |
4.95% Senior Notes due January 2025 (1) | |
$ | 389 | | |
$ | — | | |
$ | — | | |
$ | 389 | |
Total current portion of long-term debt | |
$ | 389 | | |
$ | — | | |
$ | — | | |
$ | 389 | |
| |
| | | |
| | | |
| | | |
| | |
Long-term debt: | |
| | | |
| | | |
| | | |
| | |
Variable rate (6.94% at September 30, 2024) 2022 revolving credit facility, due April 2027 | |
$ | 583 | | |
$ | — | (2) | |
$ | — | | |
$ | 583 | |
8.375% Senior Notes due September 2028 | |
| 304 | | |
| (3 | ) | |
| — | | |
| 301 | |
5.375% Senior Notes due February 2029 | |
| 700 | | |
| (4 | ) | |
| 16 | | |
| 712 | |
5.375% Senior Notes due March 2030 | |
| 1,200 | | |
| (12 | ) | |
| — | | |
| 1,188 | |
4.75% Senior Notes due February 2032 | |
| 1,150 | | |
| (12 | ) | |
| — | | |
| 1,138 | |
Total long-term debt | |
$ | 3,937 | | |
$ | (31 | ) | |
$ | 16 | | |
$ | 3,922 | |
| |
| | | |
| | | |
| | | |
| | |
Total debt | |
$ | 4,326 | | |
$ | (31 | ) | |
$ | 16 | | |
$ | 4,311 | |
| |
December 31, 2023 | |
(in millions) | |
Debt Instrument | | |
Unamortized
Issuance Expense | | |
Unamortized
Debt
Premium/Discount | | |
Total | |
Variable rate (7.20% at December 31, 2023) 2022 revolving credit facility, due April 2027 | |
$ | 220 | | |
$ | — | (2) | |
$ | — | | |
$ | 220 | |
4.95% Senior Notes due January 2025 (1) | |
| 389 | | |
| — | | |
| — | | |
| 389 | |
8.375% Senior Notes due September 2028 | |
| 304 | | |
| (3 | ) | |
| — | | |
| 301 | |
5.375% Senior Notes due February 2029 | |
| 700 | | |
| (5 | ) | |
| 18 | | |
| 713 | |
5.375% Senior Notes due March 2030 | |
| 1,200 | | |
| (13 | ) | |
| — | | |
| 1,187 | |
4.75% Senior Notes due February 2032 | |
| 1,150 | | |
| (13 | ) | |
| — | | |
| 1,137 | |
Total debt | |
$ | 3,963 | | |
$ | (34 | ) | |
$ | 18 | | |
$ | 3,947 | |
| (1) | Effective in July 2018, the interest rate was 6.20% for the 2025 Notes, reflecting a net downgrade
in the Company’s bond ratings since their issuance. On April 7, 2020, S&P downgraded the Company’s bond rating to
BB-, which had the effect of increasing the interest rate on the 2025 Notes to 6.45% following the July 23, 2020 interest payment
due date. The first coupon payment to the bondholders at the higher interest rate was paid in January 2021. On September 1,
2021, S&P upgraded the Company’s bond rating to BB, and on January 6, 2022, S&P further upgraded the Company’s
bond rating to BB+, which decreased the interest rate on the 2025 Notes to 5.95% beginning with coupon payments paid after January 2022.
On May 31, 2022, Moody’s upgraded the Company’s bond rating to Ba1, which decreased the interest rate on the 2025 Notes
from 5.95% to 5.70% for coupon payments paid after July 2022. |
| (2) | At September 30, 2024 and December 31, 2023, unamortized issuance expense of $12 million and
$15 million, respectively, associated with the 2022 credit facility (as defined below) was classified as other long-term assets on the
consolidated balance sheets. |
The following is a summary
of scheduled debt maturities by year as of September 30, 2024:
(in millions) | |
| |
2024 | |
$ | — | |
2025 | |
| 389 | |
2026 | |
| — | |
2027 | |
| 583 | |
2028 | |
| 304 | |
Thereafter | |
| 3,050 | |
| |
$ | 4,326 | |
Credit Facilities
2022 Credit Facility
On April 8, 2022, the
Company entered into an Amended and Restated Credit Agreement that replaces its previous credit facility, that as amended, has a maturity
date of April 2027 (the “2022 credit facility”). As of September 30, 2024, the 2022 credit facility has an aggregate
maximum revolving credit amount and borrowing base of $3.5 billion and elected five-year revolving commitments of $2.0 billion (the “Five-Year
Tranche”). The borrowing base is subject to redetermination at least twice a year, which typically occurs in April and October,
and is secured by substantially all of the assets owned by the Company and its subsidiaries. On March 29, 2024, the Company’s
borrowing base was reaffirmed at $3.5 billion and the Five-Year Tranche was reaffirmed at $2.0 billion with a maturity date of April 8,
2027.
Effective August 4,
2022, the Company elected to temporarily increase commitments under the 2022 credit facility by $500 million (the “Short-Term Tranche”)
as a temporary working capital liquidity resource. The Company had no borrowings under the Short-Term Tranche which expired on April 30,
2023 and was not renewed.
The Company may utilize the
2022 credit facility in the form of loans and letters of credit. Loans under the Five-Year Tranche of the 2022 credit facility are subject
to varying rates of interest based on whether the loan is a Secured Overnight Financing Rate (“SOFR”) loan or an alternate
base rate loan. Term SOFR loans bear interest at term SOFR plus an applicable rate ranging from 1.75% to 2.75% based on the Company’s
utilization of the Five-Year Tranche of the 2022 credit facility, plus a 0.10% credit spread adjustment. Base rate loans bear interest
at a base rate per year equal to the greatest of: (i) the prime rate; (ii) the federal funds effective rate plus 0.50%; and
(iii) the adjusted term SOFR rate for a one-month interest period plus 1.00%, plus an applicable margin ranging from 0.75% to 1.75%,
depending on the percentage of the commitments utilized. Commitment fees on unused commitment amounts under the Five-Year Tranche of the
2022 credit facility range between 0.375% to 0.50%, depending on the percentage of the commitments utilized.
The 2022 credit facility
contains customary representations and warranties and covenants including, among others, the following:
| · | a prohibition against incurring debt, subject to permitted exceptions; |
| · | a restriction on creating liens on assets, subject to permitted exceptions; |
| · | restrictions on mergers and asset dispositions; |
| · | restrictions on use of proceeds, investments, declaring dividends, repurchasing junior debt, transactions
with affiliates, or change of principal business; and |
| · | maintenance of the following financial covenants, commencing with the fiscal quarter ended March 31,
2022: |
| 1. | Minimum current ratio of no less than 1.00 to 1.00, whereby current ratio is defined as the Company’s
consolidated current assets (including unused commitments under the credit agreement, but excluding non-cash derivative assets) to consolidated
current liabilities (excluding non-cash derivative obligations and current maturities of long-term debt). |
| 2. | Maximum total net leverage ratio of no greater than, with respect to the prior four fiscal quarters ending
on or after March 31, 2022, 4.00 to 1.00. Total net leverage ratio is defined as total debt less cash on hand (up to the
lesser of 10% of credit limit or $150 million) divided by consolidated EBITDAX for the last four consecutive quarters. Consolidated
EBITDAX, as defined in the credit agreement governing the Company’s 2022 credit facility, excludes the effects of interest expense,
depreciation, depletion and amortization, income tax, any non-cash impacts from impairments, certain non-cash hedging activities, stock-based
compensation expense, non-cash gains or losses on asset sales, unamortized issuance cost, unamortized debt discount and certain restructuring
costs. |
The 2022 credit facility
contains customary events of default that include, among other things, the failure to comply with the financial covenants described above,
non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency
events, material judgments and cross-defaults to material indebtedness. If an event of default occurs and is continuing, all amounts outstanding
under the 2022 credit facility may become immediately due and payable. As of September 30, 2024, the Company was in compliance with
all of the covenants of the credit agreement in all material respects.
As of September 30,
2024, the Company had no outstanding letters of credit and $583 million in borrowings outstanding under the 2022 credit facility. The
Company currently does not anticipate being required to supply a materially greater amount of letters of credit under its existing contracts.
Senior Notes
In January 2015, the
Company completed a public offering of $1.0 billion aggregate principal amount of its 4.95% Senior Notes due 2025 (the “2025 Notes”). The
interest rate on the 2025 Notes is determined based upon the public bond ratings from Moody’s and S&P. Downgrades on the
2025 Notes from either rating agency increase interest costs by 25 basis points per downgrade level and upgrades decrease interest costs
by 25 basis points per upgrade level, up to the stated coupon rate, on the following semi-annual bond interest payment. Effective
in July 2018, the interest rate for the 2025 Notes was 6.20%, reflecting a net downgrade in the Company’s bond ratings since
their issuance. On April 7, 2020, S&P downgraded the Company’s bond rating to BB-, which had the effect of increasing the
interest rate on the 2025 Notes to 6.45% following the July 23, 2020 interest payment due date. The first coupon payment to the 2025
Notes bondholders at the higher interest rate was paid in January 2021. On September 1, 2021, S&P upgraded the Company’s
bond rating to BB, and on January 6, 2022, S&P further upgraded the Company’s bond rating to BB+, which decreased the interest
rate on the 2025 Notes to 5.95% beginning with coupon payments paid after January 2022. On May 31, 2022, Moody’s upgraded
the Company’s bond rating to Ba1, which decreased the interest rate on the 2025 Notes from 5.95% to 5.70% for coupon payments paid
after July 2022.
On February 26, 2023,
the Company redeemed all of its 7.75% Senior Notes due October 2027 (the “2027 Notes”) at a redemption price equal to
103.875% of the principal amount thereof plus accrued and unpaid interest of $13 million for a total payment of $450 million. The Company
recognized a $19 million loss on the extinguishment of debt, which included the write-off of $3 million in related unamortized debt discounts
and debt issuance costs. The Company funded the redemption of the 2027 Notes using approximately $316 million of cash on hand and approximately
$134 million of borrowings under the 2022 credit facility.
(10) COMMITMENTS AND CONTINGENCIES
Operating Commitments and Contingencies
As of September 30,
2024, the Company’s contractual obligations for demand and similar charges under firm transportation and gathering agreements to
guarantee access capacity on natural gas and liquids pipelines and gathering systems totaled approximately $8.6 billion, $1.2 billion
of which related to access capacity on future pipeline and gathering infrastructure projects that still require the granting of regulatory
approvals and additional construction efforts. As of September 30, 2024, the Company also had guarantee obligations of up to
$929 million of that total amount. As of September 30, 2024, future payments under non-cancelable firm transportation and gathering
agreements are as follows:
| |
Payments Due by Period | |
(in millions) | |
Total | | |
Less than 1 Year | | |
1 to 3 Years | | |
3 to 5 Years | | |
5 to 8 Years | | |
More than 8 Years | |
Infrastructure currently in service | |
$ | 7,432 | | |
$ | 979 | | |
$ | 1,918 | | |
$ | 1,572 | | |
$ | 1,543 | | |
$ | 1,420 | |
Pending regulatory approval and/or construction (1) | |
| 1,155 | | |
| 85 | | |
| 173 | | |
| 185 | | |
| 269 | | |
| 443 | |
Total transportation charges | |
$ | 8,587 | | |
$ | 1,064 | | |
$ | 2,091 | | |
$ | 1,757 | | |
$ | 1,812 | | |
$ | 1,863 | |
| (1) | Based on estimated in-service dates as of September 30, 2024. |
Environmental Risk
The Company is subject to
laws and regulations relating to the protection of the environment. Environmental and cleanup related costs of a non-capital nature
are accrued when it is both probable that a liability has been incurred and when the amount can be reasonably estimated. Management
believes any future remediation or other compliance related costs will not have a material effect on the financial position, results of
operations or cash flows of the Company.
Litigation
The Company is subject to
various litigation, claims and proceedings, most of which have arisen in the ordinary course of business, such as for alleged breaches
of contract, miscalculation of royalties, employment matters, traffic accidents, pollution, contamination, encroachment on others’
property or nuisance. The Company accrues for litigation, claims and proceedings when a liability is both probable and the amount can
be reasonably estimated. As of September 30, 2024, the Company does not currently have any material amounts accrued related to litigation
matters, including the case discussed below. For any matters not accrued for, it is not possible at this time to estimate the amount of
any additional loss, or range of loss, that is reasonably possible, but, based on the nature of the claims, management believes that current
litigation, claims and proceedings, individually or in aggregate and after taking into account insurance, are not likely to have a material
adverse impact on the Company’s financial position, results of operations or cash flows, for the period in which the effect of that
outcome becomes reasonably estimable. Many of these matters are in early stages, so the allegations and the damage theories have not been
fully developed, and are all subject to inherent uncertainties; therefore, management’s view may change in the future.
Bryant Litigation
On September 1, 2021,
the Company completed a merger with Indigo Natural Resources LLC (“Indigo”) resulting in the assumption of Indigo’s
existing litigation.
On June 12, 2018, a
collection of 51 individuals and entities filed a lawsuit against fifteen oil and gas company defendants, including Indigo, in Louisiana
state court claiming damages arising out of current and historical exploration and production activity on certain acreage located in DeSoto
Parish, Louisiana. The plaintiffs, who claim to own the properties at issue, assert that Indigo’s actions and the actions of other
current operators conducting exploration and production activity, combined with the improper plugging and abandoning of legacy wells by
former operators, have caused environmental contamination to their properties. Among other things, the plaintiffs contend that the defendants’
conduct resulted in the migration of natural gas, along with oilfield contaminants, into the Carrizo-Wilcox aquifer system underlying
certain portions of DeSoto Parish. The plaintiffs assert claims based in tort, breach of contract and for violations of the Louisiana
Civil and Mineral Codes, and they seek injunctive relief and monetary damages, including punitive damages.
On September 13, 2018, Indigo
and other defendants filed a variety of exceptions in response to the plaintiffs’ petition in this matter. Since the initial filing,
supplemental petitions have been filed joining additional individuals and entities as plaintiffs in the matter. On September 29,
2020, plaintiffs filed their fourth supplemental and amending petition in response to the court’s order ruling that plaintiffs’
claims were improperly vague and failed to identify with reasonable specificity the defendants’ allegedly wrongful conduct. Indigo
and the majority of the other defendants filed several exceptions to plaintiffs’ fourth amended petition challenging the sufficiency
of plaintiffs’ allegations and seeking dismissal of certain claims. On February 18, 2021, plaintiffs filed a fifth supplemental
and amending petition, which seeks to augment the claims of select plaintiffs. On October 11, 2021, a sixth supplemental petition
was filed which seeks to add the Company as a party to the litigation which the Company has opposed. Plaintiffs later filed seventh and
eighth supplemental petitions naming additional defendants. On July 23, 2024, the parties finalized a settlement agreement resolving
the Plaintiffs’ claims, which did not have a material impact on the Company’s consolidated financial statements.
The presence of natural gas
in a localized area of the Carrizo-Wilcox aquifer system in DeSoto Parish is currently the subject of a regulatory investigation by the
Louisiana Office of Conservation (“Conservation”), and the Company is cooperating and coordinating with Conservation in that
investigation. The Conservation matter number is EMER18-003.
The Company does not currently
expect this matter to have a material impact on its financial position, results of operations, cash flows or liquidity.
Indemnifications
The Company has provided
certain indemnifications to various third parties, including in relation to asset and entity dispositions, securities offerings and other
financings. In the case of asset dispositions, these indemnifications typically relate to disputes, litigation or tax matters existing
at the date of disposition. The Company likewise obtains indemnification for future matters when it sells assets, although there is no
assurance the buyer will be capable of performing those obligations. In the case of equity offerings, these indemnifications typically
relate to claims asserted against underwriters in connection with an offering. No material liabilities have been recognized in connection
with these indemnifications.
(11) INCOME TAXES
The Company’s effective
tax rate was approximately 21% and 22% for the three and nine months ended September 30, 2024, respectively, and 33% and 1% for the
three and nine months ended September 30, 2023, respectively. The effective tax rate for the three and nine months ended September 30,
2023 was primarily the result of the partial release of the valuation allowances against the Company’s U.S. deferred tax assets
throughout 2023. A valuation allowance for deferred tax assets, including net operating losses (“NOLs”), is recognized when
it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. To assess that likelihood,
the Company uses estimates and judgment regarding future taxable income and considers the tax consequences in the jurisdiction where such
taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include current financial
position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities and tax planning strategies as well
as current and forecasted business economics of the oil and gas industry.
For the year ended December 31,
2022, the Company maintained a full valuation allowance against its deferred tax assets based on its conclusion, considering all available
evidence (both positive and negative), that it was more likely than not that the deferred tax assets would not be realized. A significant
item of objective negative evidence considered was the cumulative pre-tax loss incurred over the three-year period ended December 31,
2022, primarily due to impairments of proved oil and gas properties recognized in 2020. As of the first quarter of 2023, the Company sustained
a three-year cumulative level of profitability. Based on this factor and other positive evidence such as forecasted income, the Company
concluded that $512 million of its federal and state deferred tax assets were more likely than not to be realized and released this portion
of the valuation allowance throughout 2023. Accordingly, during the nine months ended September 30, 2023, the Company recognized
$520 million of deferred income tax expense related to recording its tax provision which was partially offset by $492 million
of tax benefit, including $14 million that was reclassified from OCI, attributable to the release of the valuation allowance. The remaining
valuation allowance was released during the fourth quarter of 2023. The Company maintains a valuation allowance of $52 million related
to NOLs in jurisdictions in which it no longer operates and against the portion of its federal and state deferred tax assets such as capital
losses and interest carryovers, which may expire before being fully utilized due to the application of the limitations under Section 382
and the ordering in which such attributes may be applied.
Due to the issuance of common
stock associated with the Indigo merger in September 2021, the Company incurred a cumulative ownership change and as such, the Company’s
NOLs prior to the acquisition are subject to an annual limitation under Internal Revenue Code Section 382 of approximately $48 million.
The ownership changes and resulting annual limitation will result in the expiration of NOLs or other tax attributes otherwise available.
At September 30, 2024, the Company had approximately $4 billion of federal NOL carryovers, of which approximately $3 billion expire
between 2035 and 2037 and $1 billion have an indefinite carryforward life. The Company currently estimates that approximately $2 billion
of these federal NOLs will expire before they are able to be used and accordingly, no value has been ascribed to these NOLs on the Company’s
balance sheet. If a subsequent ownership change were to occur as a result of future transactions in the Company’s common stock,
the Company’s use of remaining U.S. tax attributes may be further limited.
The Inflation Reduction Act
of 2022 (the “IRA”) was enacted on August 16, 2022 and may impact how the U.S. taxes certain large corporations. The
IRA imposes a 15% alternative minimum tax on the “adjusted financial statement income” of certain large corporations (generally,
corporations reporting at least $1 billion average adjusted pre-tax net income on their consolidated financial statements) for tax years
beginning after December 31, 2022. The Company was not impacted by the alternative minimum tax during 2023 and does not expect to
be impacted by this alternative minimum tax during 2024. The Company will continue to monitor updates to the IRA and the impact it will
have on the Company’s consolidated financial statements.
(12) LONG-TERM INCENTIVE COMPENSATION
The Company’s long-term
incentive compensation plans consist of a combination of stock-based awards that derive their value directly or indirectly from the Company’s
common stock price, and cash-based awards that are fixed in amount but subject to meeting annual performance thresholds.
Stock-Based Compensation
The Company’s stock-based
compensation is classified as either equity awards or liability awards in accordance with GAAP. The fair value of an equity-classified
award is determined at the grant date and is amortized to general and administrative expense on a straight-line basis over the vesting
period of the award. A portion of this general and administrative expense is capitalized into natural gas and oil properties, included
in property and equipment. The fair value of a liability-classified award is determined on a quarterly basis beginning at the grant date
until final vesting. Changes in the fair value of liability-classified awards are recorded to general and administrative expense
and capitalized expense over the vesting period of the award. Generally, stock options granted to employees and directors vest ratably
over three years from the grant date and expire 10 years from the date of grant. However, the Company has not granted stock options since
2017. The Company issues shares of restricted stock and restricted stock units to employees and directors which generally vest over three
years.
Restricted stock, restricted
stock units and stock options granted under the Southwestern Energy Company 2022 Incentive Plan (the “2022 Plan”) immediately
vest upon death, disability or retirement (subject to a minimum of three years of service). To the extent no provision is made in connection
with a “change in control” (as defined in the 2022 Plan) for the assumption of awards previously granted under the 2022 Plan
or there is no substitution of such awards for new awards, then (i) outstanding time-based awards will become fully vested, and (ii) each
outstanding performance-based award will vest with respect to the number of shares of common stock underlying such award or the amount
of cash underlying the award eligible to vest based on performance during the performance period that includes the date of the change
in control, prorated for the number of days which have elapsed during the performance period prior to the change in control. To the extent
an award is assumed or substituted in connection with the change in control, if a participant is terminated by the Company without “cause”
or the participant resigns for “good reason” (each as defined in the 2022 Plan) within 12 months following a change in control,
then (i) each time-based award will become fully vested, and (ii) each outstanding performance-based award will vest based on
performance during the performance period that includes the date of the change in control, prorated for the number of days which have
elapsed during the performance period prior to such termination.
The Company issues performance
unit awards to employees which historically have vested at or over three years. The performance units granted in 2021, 2022, and 2023
cliff-vest at the end of three years. There were no performance unit awards granted during the nine months ended September 30, 2024.
The Company recognized the
following amounts in total related to long-term incentive compensation costs for the three and nine months ended September 30, 2024
and 2023:
| |
For the three months ended September 30, | | |
For the nine months ended September 30, | |
(in millions) | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Long-term incentive compensation – expensed | |
$ | 5 | | |
$ | 7 | | |
$ | 25 | | |
$ | 18 | |
Long-term incentive compensation – capitalized | |
$ | 4 | | |
$ | 4 | | |
$ | 15 | | |
$ | 11 | |
Equity-Classified Awards
The Company recognized the
following amounts in employee equity-classified stock-based compensation costs for the three and nine months ended September 30,
2024 and 2023:
| |
For the three months ended September 30, | | |
For the nine months ended September 30, | |
(in millions) | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Equity-classified awards – expensed | |
$ | 2 | | |
$ | 2 | | |
$ | 14 | | |
$ | 7 | |
Equity-classified awards – capitalized | |
$ | — | | |
$ | 1 | | |
$ | 5 | | |
$ | 2 | |
Equity-Classified Stock Options
The following table summarizes
equity-classified stock option activity for the nine months ended September 30, 2024 and provides information for options outstanding
and options exercisable as of September 30, 2024:
| |
Number of Options | | |
Weighted Average Exercise Price | |
| |
(in thousands) | | |
| |
Outstanding at December 31, 2023 | |
| 820 | | |
$ | 8.59 | |
Granted | |
| — | | |
$ | — | |
Exercised | |
| — | | |
$ | — | |
Forfeited or expired | |
| (820 | ) | |
$ | 8.59 | |
Outstanding at September 30, 2024 | |
| — | | |
$ | — | |
Exercisable at September 30, 2024 | |
| — | | |
$ | — | |
Equity-Classified Restricted Stock
As of September 30,
2024, there was less than $1 million of total unrecognized compensation cost related to the Company’s unvested equity-classified
restricted stock grants. This cost is expected to be recognized over a weighted-average period of 0.6 years. The following table
summarizes equity-classified restricted stock activity for the nine months ended September 30, 2024 and provides information for
unvested shares as of September 30, 2024:
| |
Number of Shares | | |
Weighted Average Fair Value | |
| |
(in thousands) | | |
| |
Unvested shares at December 31, 2023 | |
| 169 | | |
$ | 5.09 | |
Granted | |
| 246 | | |
$ | 7.31 | |
Vested | |
| (333 | ) | |
$ | 6.18 | |
Forfeited | |
| — | | |
$ | — | |
Unvested shares at September 30, 2024 | |
| 82 | | |
$ | 7.31 | |
Equity-Classified Restricted Stock Units
As of September 30,
2024, there was $14 million of total unrecognized compensation cost related to the Company’s unvested equity-classified restricted
stock units. This cost is expected to be recognized over a weighted-average period of 2.2 years. The following table summarizes equity-classified
restricted stock units for the nine months ended September 30, 2024 and provides information for unvested units as of September 30,
2024.
| |
Number of Shares | | |
Weighted Average Fair Value | |
| |
(in thousands) | | |
| |
Unvested units at December 31, 2023 | |
| 2,706 | | |
$ | 4.74 | |
Granted | |
| 3,182 | | |
$ | 7.10 | |
Vested | |
| (1,084 | ) | |
$ | 4.69 | |
Forfeited | |
| — | | |
$ | — | |
Unvested units at September 30, 2024 | |
| 4,804 | | |
$ | 6.32 | |
Equity-Classified Performance Units
In each year from 2018 to
2023, the Company granted performance units that vest at the end of, or over, a three-year period and are payable in either cash or shares.
The performance units granted from 2020 through 2021 were accounted for as liability-classified awards as further described below. In
2022 and 2023, two types of performance units were granted. The first type of awards were liability-classified given the awards are payable
only in cash as prescribed under the compensation agreements. The second type of awards granted during 2022 and 2023 have been accounted
for as equity-classified awards given the intention to settle these awards in stock. The equity-classified awards were recognized at their
fair value as of the grant date and are amortized throughout the vesting period. The 2022 and 2023 performance unit awards include a market
condition based on relative TSR (as defined below). No performance units were granted during the nine months ended September 30,
2024. The fair values of the market conditions were calculated by Monte Carlo models as of the grant date. As of September 30, 2024,
there was $3 million of total unrecognized compensation costs related to the Company’s unvested equity-classified performance units.
This cost is expected to be recognized over a weighted-average period of 1.2 years.
| |
Number of Shares | | |
Weighted Average Fair Value | |
| |
(in thousands) | | |
| |
Unvested units at December 31, 2023 | |
| 1,757 | | |
$ | 6.08 | |
Granted | |
| — | | |
$ | — | |
Vested | |
| — | | |
$ | — | |
Forfeited | |
| — | | |
$ | — | |
Unvested units at September 30, 2024 | |
| 1,757 | | |
$ | 6.08 | |
Liability-Classified Awards
The Company recognized the
following amounts in employee liability-classified stock-based compensation costs for the three and nine months ended September 30,
2024:
| |
For the three months ended
September 30, | | |
For the nine months ended
September 30, | |
(in millions) | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Liability-classified stock-based compensation cost – expensed | |
$ | — | | |
$ | 2 | | |
$ | 2 | | |
$ | 3 | |
Liability-classified stock-based compensation cost – capitalized | |
$ | — | | |
$ | 1 | | |
$ | — | | |
$ | 2 | |
Liability-Classified Restricted Stock Units
In each year from 2018 to
2020, the Company granted restricted stock units that vest over a period of four years and are payable in either cash or shares at the
option of the Compensation Committee of the Company’s Board. The liability-classified awards granted in 2021 vest over a period
of three years. The Company has accounted for these as liability-classified awards, and accordingly changes in the market value of the
instruments will be recorded to general and administrative expense and capitalized expense over the vesting period of the award. As
of September 30, 2024, the liability-classified restricted stock units fully vested.
| |
Number of Units | | |
Weighted Average Fair Value | |
| |
(in thousands) | | |
| |
Unvested units at December 31, 2023 | |
| 1,741 | | |
$ | 4.67 | |
Granted | |
| — | | |
$ | — | |
Vested | |
| (1,741 | ) | |
$ | 6.93 | |
Forfeited | |
| — | | |
$ | — | |
Unvested units at September 30, 2024 | |
| — | | |
$ | — | |
Liability-Classified Performance Units
In each year from 2018 to
2023, the Company granted performance units that vest at the end of, or over, a three-year period and are payable in either cash or shares.
The performance units granted in 2020 vest over a three-year period and are payable in cash as prescribed under the compensation agreements
and have been accounted for as liability-classified awards. The Company granted two types of performance units in 2021 that vest over
a three-year period. One type is payable in cash as prescribed under the compensation agreements and the other type is payable in either
cash or stock at the option of the Compensation Committee of the Company’s Board. Both award types have been accounted for as liability-classified
awards. The Company granted two types of performance units in 2022 and 2023 that vest over a three-year period. For both 2022 and 2023,
one type of award is payable in cash as prescribed under the compensation agreements and has been liability-classified while the other
type is equity-classified as further discussed above. No performance units were granted during the nine months ended September 30,
2024. Changes in the fair market value of the instruments for liability-classified awards are recorded to general and administrative expense
and capitalized expense over the vesting period of the awards.
The performance units granted
in 2020 include a performance condition based on return on average capital employed and a market condition based on relative total shareholder
return (“TSR”). In 2021, of the two types of performance units granted, the first type of award includes a performance condition
based on return on capital employed and a performance condition based on reinvestment rate, and the second type of award includes one
market condition based on relative TSR. The liability-classified performance units granted in 2022 and 2023 include performance conditions
based on return on capital employed and reinvestment rate. The fair values of all market conditions discussed above are calculated by
Monte Carlo models on a quarterly basis.
As of September 30,
2024, there was $2 million of total unrecognized compensation cost related to liability-classified performance units. This cost is
expected to be recognized over a weighted-average period of 1.3 years. The amount of unrecognized compensation cost for liability-classified
awards will fluctuate over time as they are marked to market. The final value of the performance unit awards is contingent upon the Company’s
actual performance against these performance measures.
| |
Number of Units | | |
Weighted Average Fair Value | |
| |
(in thousands) | | |
| |
Unvested units at December 31, 2023 | |
| 12,152 | | |
$ | 0.94 | |
Granted | |
| — | | |
$ | — | |
Vested | |
| (3,365 | ) | |
$ | 1.59 | |
Forfeited | |
| — | | |
$ | — | |
Unvested units at September 30, 2024 | |
| 8,787 | | |
$ | 0.49 | |
Cash-Based Compensation
The Company recognized the
following amounts in performance cash award compensation costs for the three and nine months ended September 30, 2024 and 2023:
| |
For the three months ended
September 30, | | |
For the nine months ended
September 30, | |
(in millions) | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Performance cash awards – expensed | |
$ | 3 | | |
$ | 3 | | |
$ | 9 | | |
$ | 8 | |
Performance cash awards – capitalized | |
$ | 4 | | |
$ | 2 | | |
$ | 10 | | |
$ | 7 | |
Performance Cash Awards
From 2020 through 2022 the
Company granted performance cash awards that vest over a four-year period and are payable in cash on an annual basis. In 2023 and 2024,
the Company granted performance cash awards that vest over a three-year period and are payable in cash on an annual basis. The value of
each unit of the award equals one dollar. The Company recognizes the cost of these awards as general and administrative expense and capitalized
expense over the vesting period of the awards. The performance cash awards granted from 2020 through 2024 include a performance condition
determined annually by the Company. For all years, the performance measure is a targeted discretionary cash flow amount. If the Company,
in its sole discretion, determines that the threshold was not met, the amount for that vesting period will not vest and will be cancelled.
As of September 30, 2024, there was $40 million of total unrecognized compensation cost related to performance cash awards. This
cost is expected to be recognized over a weighted-average period of 1.9 years. The final value of the performance cash awards is contingent
upon the Company’s actual performance against these performance measures.
| |
Number of Units | | |
Weighted Average Fair Value | |
| |
(in thousands) | | |
| |
Unvested units at December 31, 2023 | |
| 49,678 | | |
$ | 1.00 | |
Granted | |
| 28,202 | | |
$ | 1.00 | |
Vested | |
| (20,590 | ) | |
$ | 1.00 | |
Forfeited | |
| (1,216 | ) | |
$ | 1.00 | |
Unvested units at September 30, 2024 | |
| 56,074 | | |
$ | 1.00 | |
(13) SEGMENT INFORMATION
The Company’s reportable
business segments have been identified based on the differences in products or services provided. The Company’s E&P segment
is comprised of gas and oil properties which are managed as a whole rather than through discrete operating segments. Operational information
for the Company’s E&P segment is tracked by geographic area; however, financial performance and allocation of resources are
assessed at the segment level without regard to geographic area. Revenues for the E&P segment are derived from the production
and sale of natural gas and liquids. The Marketing segment generates revenue through the marketing of both Company and third-party
produced natural gas and liquids volumes.
Summarized financial information
for the Company’s reportable segments is shown in the following table. The accounting policies of the segments are the
same as those described in Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of the 2023 Annual Report. Management
evaluates the performance of its segments based on operating income (loss), defined as operating revenues less operating costs. Income
before income taxes, for the purpose of reconciling the operating income (loss) amount shown below to consolidated income before income
taxes, is the sum of operating income (loss), interest expense, gain (loss) on derivatives, gain on early extinguishment of debt and other
income (loss). The “Other” column includes items not related to the Company’s reportable segments, including real
estate and corporate items. Corporate general and administrative costs, depreciation expense and taxes, other than income taxes, are allocated
to the segments.
| |
Exploration
and
Production | | |
Marketing | | |
Total
Reportable
Segments | | |
Other | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
| |
(in millions) | |
Three months ended September 30, 2024 | |
| |
Revenues from external customers | |
$ | 728 | | |
$ | 485 | | |
$ | 1,213 | | |
$ | — | | |
$ | 1,213 | |
Intersegment revenues | |
| (15 | ) | |
| 698 | | |
| 683 | | |
| — | | |
| 683 | |
Depreciation, depletion and amortization expense | |
| 207 | | |
| 1 | | |
| 208 | | |
| — | | |
| 208 | |
Impairments | |
| 478 | | |
| — | | |
| 478 | | |
| — | | |
| 478 | |
Operating income (loss) | |
| (478 | ) | |
| 11 | | |
| (467 | ) | |
| — | | |
| (467 | ) |
Interest expense (1) | |
| 41 | | |
| — | | |
| 41 | | |
| — | | |
| 41 | |
Gain on derivatives | |
| 152 | | |
| — | | |
| 152 | | |
| — | | |
| 152 | |
Other income, net | |
| 1 | | |
| — | | |
| 1 | | |
| — | | |
| 1 | |
Benefit for income taxes (1) | |
| (75 | ) | |
| — | | |
| (75 | ) | |
| — | | |
| (75 | ) |
Assets | |
| 8,826 | (2) | |
| 392 | | |
| 9,218 | | |
| 304 | | |
| 9,522 | |
Capital investments (3) | |
| 327 | | |
| — | | |
| 327 | | |
| 2 | | |
| 329 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Three months ended September 30, 2023 | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues from external customers | |
$ | 890 | | |
$ | 553 | | |
$ | 1,443 | | |
$ | — | | |
$ | 1,443 | |
Intersegment revenues | |
| (17 | ) | |
| 826 | | |
| 809 | | |
| — | | |
| 809 | |
Depreciation, depletion and amortization expense | |
| 337 | | |
| 1 | | |
| 338 | | |
| — | | |
| 338 | |
Operating income (loss) | |
| (18 | ) | |
| 25 | | |
| 7 | | |
| — | | |
| 7 | |
Interest expense (1) | |
| 36 | | |
| — | | |
| 36 | | |
| — | | |
| 36 | |
Gain on derivatives | |
| 93 | | |
| — | | |
| 93 | | |
| — | | |
| 93 | |
Other income, net | |
| 1 | | |
| — | | |
| 1 | | |
| 1 | | |
| 2 | |
Provision for income taxes (1) | |
| 21 | | |
| — | | |
| 21 | | |
| — | | |
| 21 | |
Assets | |
| 12,350 | (2) | |
| 483 | | |
| 12,833 | | |
| 140 | | |
| 12,973 | |
Capital investments (3) | |
| 452 | | |
| — | | |
| 452 | | |
| 2 | | |
| 454 | |
| |
Exploration
and
Production | | |
Marketing | | |
Total
Reportable
Segments | | |
Other | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
| |
(in millions) | |
Nine months ended September 30, 2024 | |
| |
Revenues from external customers | |
$ | 2,225 | | |
$ | 1,488 | | |
$ | 3,713 | | |
$ | — | | |
$ | 3,713 | |
Intersegment revenues | |
| (46 | ) | |
| 2,129 | | |
| 2,083 | | |
| — | | |
| 2,083 | |
Depreciation, depletion and amortization expense | |
| 692 | | |
| 4 | | |
| 696 | | |
| — | | |
| 696 | |
Impairments | |
| 3,202 | | |
| — | | |
| 3,202 | | |
| — | | |
| 3,202 | |
Operating income (loss) | |
| (3,254 | ) | |
| 21 | | |
| (3,233 | ) | |
| — | | |
| (3,233 | ) |
Interest expense (1) | |
| 113 | | |
| — | | |
| 113 | | |
| — | | |
| 113 | |
Gain on derivatives | |
| 243 | | |
| — | | |
| 243 | | |
| — | | |
| 243 | |
Other loss, net | |
| (1 | ) | |
| — | | |
| (1 | ) | |
| — | | |
| (1 | ) |
Benefit for income taxes (1) | |
| (681 | ) | |
| — | | |
| (681 | ) | |
| — | | |
| (681 | ) |
Assets | |
| 8,826 | (2) | |
| 392 | | |
| 9,218 | | |
| 304 | | |
| 9,522 | |
Capital investments (3) | |
| 1,293 | | |
| — | | |
| 1,293 | | |
| 4 | | |
| 1,297 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Nine months ended September 30, 2023 | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues from external customers | |
$ | 3,123 | | |
$ | 1,707 | | |
$ | 4,830 | | |
$ | — | | |
$ | 4,830 | |
Intersegment revenues | |
| (44 | ) | |
| 2,944 | | |
| 2,900 | | |
| — | | |
| 2,900 | |
Depreciation, depletion and amortization expense | |
| 975 | | |
| 4 | | |
| 979 | | |
| — | | |
| 979 | |
Operating income | |
| 490 | | |
| 66 | | |
| 556 | | |
| — | | |
| 556 | |
Interest expense (1) | |
| 106 | | |
| — | | |
| 106 | | |
| — | | |
| 106 | |
Gain on derivatives | |
| 1,811 | | |
| — | | |
| 1,811 | | |
| — | | |
| 1,811 | |
Loss on early extinguishment of debt | |
| — | | |
| — | | |
| — | | |
| (19 | ) | |
| (19 | ) |
Other income, net | |
| — | | |
| — | | |
| — | | |
| 1 | | |
| 1 | |
Provision for income taxes (1) | |
| 28 | | |
| — | | |
| 28 | | |
| — | | |
| 28 | |
Assets | |
| 12,350 | (2) | |
| 483 | | |
| 12,833 | | |
| 140 | | |
| 12,973 | |
Capital investments (3) | |
| 1,709 | | |
| — | | |
| 1,709 | | |
| 5 | | |
| 1,714 | |
| (1) | Interest expense and provision (benefit) for income taxes by segment is an allocation of corporate amounts
as they are incurred at the corporate level. |
| (2) | E&P assets includes office, technology, water infrastructure, drilling rigs and other ancillary equipment
not directly related to natural gas and oil properties. This also includes deferred tax assets which are an allocation of corporate amounts
as they are incurred at the corporate level. |
| (3) | Capital investments include decreases of $42 million and $94 million for the three months ended September 30,
2024 and September 30, 2023, respectively, and decreases of $59 million and $122 million for the nine months ended September 30,
2024 and September 30, 2023, respectively, relating to the change in accrued expenditures between periods. |
The following table presents
the breakout of other assets, which represent corporate assets not allocated to segments and assets for non-reportable segments as of
September 30, 2024 and 2023:
| |
As of September 30, | |
(in millions) | |
2024 | | |
2023 | |
Cash and cash equivalents | |
$ | 126 | | |
$ | 26 | |
Accounts receivable | |
| — | | |
| 1 | |
Prepayments | |
| 63 | | |
| 10 | |
Other current assets | |
| 1 | | |
| 2 | |
Property, plant and equipment | |
| 23 | | |
| 21 | |
Unamortized debt expense | |
| 12 | | |
| 16 | |
Right-of-use lease assets | |
| 45 | | |
| 51 | |
Non-qualified retirement plan | |
| 3 | | |
| 3 | |
Long-term deferred tax asset | |
| 4 | | |
| — | |
Other long-term assets (1) | |
| 27 | | |
| 10 | |
| |
$ | 304 | | |
$ | 140 | |
| (1) | Consists primarily of costs associated with the development of the Company’s enterprise resource
technology as of September 30, 2024 and residual assets associated with the Company’s pension plan as of September 30,
2023, respectively. |
(14) NEW ACCOUNTING PRONOUNCEMENTS
New Accounting Standards Implemented in
this Report
None.
New Accounting Standards Not Yet Adopted
in this Report
In November 2023, the
Financial Accounting Standards Board (the “FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable
Segment Disclosures. This update is to enhance disclosures on reportable segments and provide additional detailed information about significant
segment expenses. The guidance in ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods
within fiscal years beginning after December 15, 2024.
In December 2023, the
FASB issued ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This update is to enhance disclosures through
further disaggregated information on the effective tax rate reconciliation based on specified categories, as well as disaggregation of
incomes taxes paid by jurisdiction. The guidance in ASU 2023-09 is effective for fiscal years beginning after December 15, 2024.
(15) SUBSEQUENT EVENTS
We have evaluated subsequent events through October 29, 2024, the date at which the consolidated financial statements were available to
be issued.
Exhibit 99.4
UNAUDITED PRO
FORMA COMBINED FINANCIAL STATEMENTS
On
January 10, 2024, Chesapeake Energy Corporation ("Chesapeake") and Southwestern Energy Company ("Southwestern")
entered into an all-stock agreement and plan of merger (the “Merger Agreement”). On October 1, 2024, Chesapeake and
Southwestern completed the previously announced merger (the "Southwestern Merger" or the "Merger"). Subject to the
terms and conditions of the Merger Agreement, each share of Southwestern common stock, par value $0.01 per share, issued and outstanding
immediately prior to the close of the Merger (excluding certain shares held by Southwestern as treasury shares, or by Chesapeake, and
certain equity awards of Southwestern) was converted into the right to receive 0.0867 (the “Exchange Ratio”) of a share of
Chesapeake common stock, par value $0.01 per share (the “Merger Consideration”). No fractional shares of Chesapeake common
stock were issued in the Merger, and holders of shares of Southwestern common stock received cash in lieu of fractional shares of Chesapeake
common stock, if any, in accordance with the terms of the Merger Agreement.
After
the Southwestern Merger, Chesapeake changed its name to Expand Energy Corporation (“Expand Energy”). References to “us,”
“we,” “our,” “ours,” “Expand Energy” and the “Company” prior to October 1,
2024 refer to Chesapeake Energy Corporation and its consolidated subsidiaries prior to the Southwestern Merger and do not include Southwestern
and its subsidiaries, while such references on or after October 1, 2024 refer to the combined company as a result of the Southwestern
Merger, including Southwestern and its subsidiaries.
The
following unaudited pro forma condensed combined balance sheet (the "pro forma balance sheet") and unaudited pro forma condensed
combined statement of operations (the "pro forma statement of operations" and together with the pro forma balance sheet the
"pro forma condensed combined financial statements") are derived from the historical consolidated financial statements of Expand
Energy and Southwestern and have been adjusted to give effect to the Merger and the divestiture of our Eagle Ford assets (the “Eagle
Ford Divestitures”) described below:
| · | On
January 17, 2023, we entered into an agreement to sell a portion of our Eagle Ford assets
to WildFire Energy I LLC for approximately $1.425 billion, subject to post-closing adjustments.
This transaction closed on March 20, 2023 (with an effective date of October 1,
2022). |
| · | On
February 17, 2023, we entered into an agreement to sell a portion of our Eagle Ford
assets to INEOS Energy for approximately $1.4 billion, subject to post-closing adjustments.
This transaction closed on April 28, 2023 (with an effective date of October 1,
2022). |
| · | On
August 11, 2023, we entered into an agreement to sell the final portion of our Eagle
Ford assets to SilverBow Resources, Inc. (“SilverBow”) for approximately
$700 million, subject to post-closing adjustments. On July 30, 2024, Crescent Energy Company
(“Crescent”) acquired SilverBow. Subject to the satisfaction of certain commodity
price triggers, we may receive up to an additional $50 million cash consideration from Crescent
shortly following the first anniversary of the transaction close date. This transaction closed
on November 30, 2023 (with an effective date of February 1, 2023). |
The
pro forma balance sheet as of September 30, 2024 combines the historical balance sheets of Expand Energy and Southwestern as of
September 30, 2024, and gives effect to the Merger as if it had been completed on September 30, 2024. The pro forma balance
sheet is not adjusted for the Eagle Ford Divestitures as those had been completed and reflected in Expand Energy's historical balance
sheet as of September 30, 2024. The pro forma statements of operations for the nine months ended September 30, 2024 and the
year ended December 31, 2023, combine the historical consolidated statements of operations of Expand Energy (giving effect to the
Eagle Ford Divestitures) and Southwestern, with the effects of the Merger as if each transaction had been completed on January 1,
2023.
UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
The
unaudited pro forma condensed combined financial statements reflect the following pro forma adjustments related to the Merger, based
on available information and certain assumptions that management believes are reasonable.
| · | the
Merger will be accounted for using the acquisition method of accounting, with Expand Energy
identified as the accounting acquirer; |
| · | Certain
reclassification adjustments to conform Southwestern's historical financial presentation
to Expand Energy's financial statement presentation; |
| · | the
assumption of liabilities by Expand Energy for any remaining transaction-related expenses
to be incurred; and |
| · | the
estimated tax impact of pro forma adjustments. |
The
pro forma condensed combined financial statements have been developed from and should be read in conjunction with:
| · | the
accompanying notes to the unaudited pro forma condensed combined financial statements; |
| · | the
historical audited consolidated financial statements of Expand Energy as of and for the year
ended December 31, 2023, included in Expand Energy's Annual Report on Form 10-K
filed on February 21, 2024; |
| · | the
historical audited consolidated financial statements for Southwestern as of and for the year
ended December 31, 2023, included in Southwestern's Annual Report on Form 10-K
filed on February 22, 2024 and incorporated by reference into this document; |
| · | the
historical unaudited condensed consolidated financial statements of Expand Energy as of and
the for the nine months ended September 30, 2024, included in Expand Energy's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2024 filed on October 29,
2024; |
| · | the
historical unaudited condensed consolidated financial statements of Southwestern as of and
the for the nine months ended September 30, 2024, included in this document; |
| · | other
information relating to Expand Energy and Southwestern contained in or incorporated by reference
in this document. |
The
pro forma condensed combined financial statements are presented to reflect the Southwestern Merger and the Eagle Ford Divestitures for
illustrative purposes only, and they do not represent what Expand Energy’s results of operations would have been had the Merger
and the Eagle Ford Divestitures occurred on the date noted above, nor do they purport to project the future results of operations of
the combined company following the transactions. The pro forma condensed combined financial statements are intended to provide information
about the continuing impact of the transactions as if they had been consummated earlier. The pro forma adjustments are based on available
information and certain assumptions that management believes are factually supportable as of the date of preparation as further described
below. In the opinion of management, all adjustments necessary to present fairly the pro forma condensed combined financial statements
have been made.
Expand
Energy and Southwestern anticipate that certain non-recurring charges will be incurred in connection
with the Merger, the substantial majority of which consist of employee severance costs, employee retention costs, fees paid to financial,
legal and accounting advisors, integration costs and filing fees. Any such charge could affect the future results of the post-acquisition
company in the period in which such charges are incurred; however, these costs are not expected to be incurred in any period beyond twelve
months from the closing date of the Merger. Accordingly, the pro forma condensed combined financial statements reflect
an estimated accrual for the effects of these non-recurring charges, which are not included in the historical financial statements of
Expand Energy or Southwestern for the periods presented.
The
pro forma condensed combined financial statements do not include the realization of any cost savings from operating efficiencies, synergies
or other restructuring activities that might result from the Merger. Further, there may be additional charges related to the restructuring
or other integration activities resulting from the Merger, the timing, nature and amount of which management cannot identify as of the
date of this filing, and thus, such charges are not reflected in the pro forma condensed combined financial statements.
UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
As
of the date of this filing, Expand Energy has not completed the detailed valuation study necessary to arrive at the required final estimates
of the fair value of the acquired Southwestern assets and assumed liabilities and the related purchase price. As soon as practical, Expand
Energy will identify the assets acquired and liabilities assumed and make final determinations of their fair values using relevant information
available at that time. For purposes of the pro forma condensed combined financial statements, Expand Energy estimated the fair value
of Southwestern’s assets and liabilities based on reviews of Southwestern’s SEC filings, preliminary valuation studies, discussions
with Southwestern’s management and other due diligence procedures. The assumptions and estimates used to determine the preliminary
purchase price allocation and fair value adjustments are described in the notes accompanying the unaudited pro forma condensed combined
financial statements.
As
a result of the foregoing, the pro forma adjustments are preliminary and subject to change as additional information becomes available
and additional analysis is performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the pro
forma condensed combined financial statements presented herein. Any increases or decreases in the fair value of assets acquired and liabilities
assumed upon completion of the final valuation will result in adjustments to the pro forma balance sheet and if applicable, the pro forma
statements of operations. The final purchase price allocation may be materially different than that reflected in the preliminary purchase
price allocation presented herein.
UNAUDITED PRO
FORMA CONDENSED COMBINED BALANCE SHEETS
SEPTEMBER 30,
2024
($ IN MILLIONS)
| |
| | |
| | |
Transaction
Adjustments |
| |
|
| |
| |
Expand
Energy
Historical | | |
Southwestern
Historical | | |
Reclass
Adjustments
(Note 3) | |
| |
Pro
Forma
Adjustments
(Note 3) |
| |
|
Pro
Forma
Combined | |
Assets | |
| | | |
| | | |
| | |
| |
| |
| |
|
| | |
Current assets: | |
| | | |
| | | |
| | |
| |
| |
| |
|
| | |
Cash
and cash equivalents | |
$ | 1,044 | | |
$ | 126 | | |
$ | — | |
| |
$ | (585 |
) | (b) |
|
$ | 585 | |
Restricted
cash | |
| 76 | | |
| — | | |
| — | |
| |
| — |
| |
|
| 76 | |
Accounts
receivable, net | |
| 261 | | |
| 472 | | |
| — | |
| |
| — |
| |
|
| 733 | |
Derivative
assets | |
| 199 | | |
| 279 | | |
| (57 | ) |
(a) | |
| — |
| |
|
| 421 | |
Other
current assets | |
| 217 | | |
| 150 | | |
| — | |
| |
| 86 |
| (c) |
|
| 453 | |
Total
current assets | |
| 1,797 | | |
| 1,027 | | |
| (57 | ) |
| |
| (499 |
) | |
|
| 2,268 | |
Property and equipment: | |
| | | |
| | | |
| | |
| |
| |
| |
|
| | |
Natural
gas and oil properties, successful efforts method | |
| | | |
| | | |
| | |
| |
| |
| |
|
| | |
Proved
natural gas and oil properties | |
| 12,373 | | |
| — | | |
| 37,191 | |
(a) | |
| (25,656 |
) | (d) |
|
| 23,908 | |
Unproved
properties | |
| 1,806 | | |
| — | | |
| 1,881 | |
(a) | |
| 538 |
| (d) |
|
| 4,225 | |
Other
property and equipment | |
| 518 | | |
| — | | |
| 583 | |
(a) | |
| (394 |
) | (d) |
|
| 707 | |
Total
property and equipment | |
| 14,697 | | |
| — | | |
| 39,655 | |
| |
| (25,512 |
) | |
|
| 28,840 | |
Less:
accumulated depreciation, depletion and amortization | |
| (4,743 | ) | |
| — | | |
| (32,337 | ) |
(a) | |
| 32,337 |
| (d) |
|
| (4,743 | ) |
Total
property and equipment, net | |
| 9,954 | | |
| — | | |
| 7,318 | |
| |
| 6,825 |
| |
|
| 24,097 | |
Natural
gas and oil properties, using the full cost method, including $1,881 million as of September 30, 2024 excluded from amortization | |
| — | | |
| 39,072 | | |
| (39,072 | ) |
(a) | |
| — |
| |
|
| — | |
Other | |
| — | | |
| 583 | | |
| (583 | ) |
(a) | |
| — |
| |
|
| — | |
Less:
Accumulated depreciation, depletion and amortization | |
| — | | |
| (32,337 | ) | |
| 32,337 | |
(a) | |
| — |
| |
|
| — | |
Total
property and equipment, net | |
| — | | |
| 7,318 | | |
| (7,318 | ) |
| |
| — |
| |
|
| — | |
Operating
lease assets | |
| — | | |
| 126 | | |
| (126 | ) |
(a) | |
| — |
| |
|
| — | |
Long-term
derivative assets | |
| 15 | | |
| 44 | | |
| (31 | ) |
(a) | |
| — |
| |
|
| 28 | |
Deferred
income tax assets, net | |
| 1,038 | | |
| 924 | | |
| — | |
| |
| (1,388 |
) | (e) |
|
| 574 | |
Other
long-term assets | |
| 588 | | |
| 83 | | |
| 126 | |
(a) | |
| (12 |
) | (b) |
|
| 1,227 | |
| |
| | | |
| | | |
| | |
| |
| 442 |
| (c) |
|
| | |
Total assets | |
$ | 13,392 | | |
$ | 9,522 | | |
$ | (88 | ) |
| |
$ | 5,368 |
| |
|
$ | 28,194 | |
| |
| | | |
| | | |
| | |
| |
| |
| |
|
| | |
Liabilities and stockholders'
equity | |
| | | |
| | | |
| | |
| |
| |
| |
|
| | |
Current liabilities: | |
| | | |
| | | |
| | |
| |
| |
| |
|
| | |
Current
portion of long-term debt | |
$ | — | | |
$ | 389 | | |
$ | — | |
| |
$ | — |
| |
|
$ | 389 | |
Accounts
payable | |
| 264 | | |
| 1,143 | | |
| (700 | ) |
(a) | |
| — |
| |
|
| 707 | |
Taxes
payable | |
| — | | |
| 96 | | |
| (96 | ) |
(a) | |
| — |
| |
|
| | |
Interest
payable | |
| — | | |
| 26 | | |
| (26 | ) |
(a) | |
| — |
| |
|
| | |
Accrued
interest | |
| 41 | | |
| — | | |
| 26 | |
(a) | |
| (2 |
) | (b) |
|
| 65 | |
Derivative
liabilities | |
| 5 | | |
| 57 | | |
| (57 | ) |
(a) | |
| — |
| |
|
| 5 | |
Current
operating lease liabilities | |
| — | | |
| 39 | | |
| (39 | ) |
(a) | |
| — |
| |
|
| — | |
Other
current liabilities | |
| 589 | | |
| 29 | | |
| 135 | |
(a) | |
| 255 |
| (f) |
|
| 1,976 | |
| |
| | | |
| | | |
| 700 | |
(a) | |
| 268 |
| (c) |
|
| | |
Total
current liabilities | |
| 899 | | |
| 1,779 | | |
| (57 | ) |
| |
| 521 |
| |
|
| 3,142 | |
Long-term
debt, net | |
| 2,017 | | |
| 3,922 | | |
| — | |
| |
| (34 |
) | (d) |
|
| 5,322 | |
| |
| | | |
| | | |
| | |
| |
| (583 |
) | (b) |
|
| | |
Long-term
operating lease liabilities | |
| — | | |
| 87 | | |
| (87 | ) |
(a) | |
| — |
| |
|
| — | |
Long-term
derivative liabilities | |
| — | | |
| 40 | | |
| (31 | ) |
(a) | |
| — |
| |
|
| 9 | |
Asset
retirement obligations, net of current portion | |
| 271 | | |
| — | | |
| 121 | |
(a) | |
| — |
| |
|
| 392 | |
Long-term
contract liabilities | |
| — | | |
| — | | |
| — | |
| |
| 1,318 |
| (c) |
|
| 1,318 | |
Other
long-term liabilities | |
| 17 | | |
| 207 | | |
| 87 | |
(a) | |
| — |
| |
|
| 190 | |
| |
| | | |
| | | |
| (121 | ) |
(a) | |
| |
| |
|
| | |
Total
liabilities | |
| 3,204 | | |
| 6,035 | | |
| (88 | ) |
| |
| 1,222 |
| |
|
| 10,373 | |
Contingencies and commitments | |
| | | |
| | | |
| | |
| |
| |
| |
|
| | |
Stockholders' equity: | |
| | | |
| | | |
| | |
| |
| |
| |
|
| | |
Common
stock | |
| 1 | | |
| 12 | | |
| — | |
| |
| (12 |
) | (g) |
|
| 2 | |
| |
| | | |
| | | |
| | |
| |
| 1 |
| (h) |
|
| | |
Additional
paid-in capital | |
| 5,778 | | |
| 7,208 | | |
| — | |
| |
| (7,208 |
) | (g) |
|
| 13,691 | |
| |
| | | |
| | | |
| | |
| |
| 7,870 |
| (h) |
|
| | |
| |
| | | |
| | | |
| | |
| |
| 26 |
| (f) |
|
| | |
| |
| | | |
| | | |
| | |
| |
| 17 |
| (i) |
|
| | |
Retained
earnings (accumulated deficit) | |
| 4,409 | | |
| (3,405 | ) | |
| — | |
| |
| 3,405 |
| (g) |
|
| 4,128 | |
| |
| | | |
| | | |
| | |
| |
| (281 |
) | (f) |
|
| | |
Accumulated
other comprehensive loss | |
| — | | |
| (1 | ) | |
| — | |
| |
| 1 |
| (g) |
|
| — | |
Common
stock in treasury | |
| — | | |
| (327 | ) | |
| — | |
| |
| 327 |
| (g) |
|
| — | |
Total
stockholders' equity | |
| 10,188 | | |
| 3,487 | | |
| — | |
| |
| 4,146 |
| |
|
| 17,821 | |
Total liabilities and stockholders'
equity | |
$ | 13,392 | | |
$ | 9,522 | | |
$ | (88 | ) |
| |
$ | 5,368 |
| |
|
$ | 28,194 | |
UNAUDITED PRO
FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2024
($ IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
| |
| | |
| | |
Transaction
Adjustments |
| | |
| |
| |
Expand
Energy
Historical | | |
Southwestern
Historical | | |
Reclass
Adjustments
(Note 3) |
| | |
Pro
Forma
Adjustments
(Note 3) |
| | |
Pro
Forma
Combined | |
Revenues
and other: | |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Natural
gas, oil and NGL | |
$ | 1,374 | | |
$ | — | | |
$ | 2,227 |
| (a) | |
$ | — |
| | |
$ | 3,601 | |
| |
| | | |
| | | |
| 389 |
| (a) | |
| |
| | |
| 389 | |
Gas sales | |
| | | |
| 1,470 | | |
| (1,470 |
) | (a) | |
| — |
| | |
| — | |
Oil sales | |
| | | |
| 261 | | |
| (261 |
) | (a) | |
| — |
| | |
| — | |
NGL sales | |
| | | |
| 496 | | |
| (496 |
) | (a) | |
| — |
| | |
| — | |
Marketing | |
| 641 | | |
| 1,488 | | |
| (389 |
) | (a) | |
| — |
| | |
| 1,740 | |
Natural
gas and oil derivatives | |
| 207 | | |
| — | | |
| 243 |
| (a) | |
| — |
| | |
| 450 | |
Other | |
| — | | |
| (2 | ) | |
| 2 |
| (a) | |
| — |
| | |
| — | |
Gains
on sales of assets and other | |
| 12 | | |
| — | | |
| — |
| | |
| — |
| | |
| 12 | |
Total
revenues and other | |
| 2,234 | | |
| 3,713 | | |
| 245 |
| | |
| — |
| | |
| 6,192 | |
Operating
expenses: | |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Production | |
| 158 | | |
| — | | |
| 247 |
| (a) | |
| — |
| | |
| 405 | |
Operating
expenses | |
| — | | |
| 1,240 | | |
| (1,240 |
) | (a) | |
| — |
| | |
| — | |
Gathering,
processing and transportation | |
| 479 | | |
| — | | |
| 993 |
| (a) | |
| — |
| | |
| 1,724 | |
| |
| | | |
| | | |
| 389 |
| (a) | |
| (137 |
) | (j) | |
| | |
Severance
and ad valorem taxes | |
| 58 | | |
| — | | |
| 103 |
| (a) | |
| — |
| | |
| 161 | |
Exploration | |
| 7 | | |
| — | | |
| — |
| | |
| — |
| | |
| 7 | |
Marketing | |
| 656 | | |
| 1,509 | | |
| (389 |
) | (a) | |
| — |
| | |
| 1,776 | |
General
and administrative | |
| 133 | | |
| 150 | | |
| 7 |
| (a) | |
| — |
| | |
| 290 | |
Merger-related
expenses | |
| — | | |
| 39 | | |
| (39 |
) | (a) | |
| — |
| | |
| — | |
Separation
and other termination costs | |
| 23 | | |
| — | | |
| — |
| | |
| — |
| | |
| 23 | |
Depreciation,
depletion and amortization | |
| 1,082 | | |
| 696 | | |
| — |
| | |
| 509 |
| (t) | |
| 2,287 | |
Impairments | |
| — | | |
| 3,202 | | |
| — |
| | |
| (3,202 |
) | (u) | |
| — | |
Taxes,
other than income taxes | |
| — | | |
| 110 | | |
| (110 |
) | (a) | |
| — |
| | |
| — | |
Other
operating expense (income) | |
| 55 | | |
| — | | |
| 2 |
| (a) | |
| — |
| | |
| 96 | |
| |
| | | |
| | | |
| 39 |
| (a) | |
| |
| | |
| | |
Total
operating expenses | |
| 2,651 | | |
| 6,946 | | |
| 2 |
| | |
| (2,830 |
) | | |
| 6,769 | |
Income
(loss) from operations | |
| (417 | ) | |
| (3,233 | ) | |
| 243 |
| | |
| 2,830 |
| | |
| (577 | ) |
Other
income (expense): | |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Interest
expense | |
| (59 | ) | |
| (182 | ) | |
| 69 |
| (a) | |
| (18 |
) | (v) | |
| (190 | ) |
Losses
on purchases, exchanges or extinguishments of debt | |
| (2 | ) | |
| — | | |
| — |
| | |
| — |
| | |
| (2 | ) |
Other
interest charges | |
| — | | |
| (9 | ) | |
| 9 |
| (a) | |
| — |
| | |
| — | |
Interest
capitalized | |
| — | | |
| 78 | | |
| (78 |
) | (a) | |
| — |
| | |
| — | |
Gains
on Derivatives | |
| — | | |
| 243 | | |
| (243 |
) | (a) | |
| — |
| | |
| — | |
Other
income | |
| 58 | | |
| (1 | ) | |
| — |
| | |
| — |
| | |
| 57 | |
Total
other income (expense) | |
| (3 | ) | |
| 129 | | |
| (243 |
) | | |
| (18 |
) | | |
| (135 | ) |
Income
(loss) before income taxes | |
| (420 | ) | |
| (3,104 | ) | |
| — |
| | |
| 2,812 |
| | |
| (712 | ) |
Deferred | |
| — | | |
| (681 | ) | |
| 681 |
| (a) | |
| — |
| | |
| — | |
Income
tax expense (benefit) | |
| (105 | ) | |
| — | | |
| (681 |
) | (a) | |
| 647 |
| (x) | |
| (139 | ) |
Net
income (loss) | |
$ | (315 | ) | |
$ | (2,423 | ) | |
$ | — |
| | |
$ | 2,165 |
| | |
$ | (573 | ) |
| |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Earnings per common share: | |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Basic | |
$ | (2.39 | ) | |
| | | |
| |
| | |
| |
| | |
$ | (2.52 | ) |
Diluted | |
$ | (2.39 | ) | |
| | | |
| |
| | |
| |
| | |
$ | (2.52 | ) |
Weighted
average common and common equivalent shares outstanding (in thousands): | |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Basic | |
| 131,958 | | |
| | | |
| |
| | |
| 95,700 |
| (y) | |
| 227,658 | |
Diluted | |
| 131,958 | | |
| | | |
| |
| | |
| 95,700 |
| (y) | |
| 227,658 | |
UNAUDITED PRO
FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR
ENDED DECEMBER 31, 2023
($ IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
| |
| | |
|
| | |
|
| | |
|
| | |
| | |
| | |
Transaction
Adjustments |
| | |
| |
| |
Expand
Energy
Historical | | |
WildFire
Divestiture -
Pro Forma
Adjustments |
| | |
Ineos
Divestiture -
Pro Forma
Adjustments |
| | |
SilverBow
Divestiture -
Pro Forma
Adjustments |
| | |
Expand
Energy
Pro Forma | | |
Southwestern
Historical | | |
Reclass
Adjustments
(Note 3) |
| | |
Pro
Forma
Adjustments
(Note 3) |
| | |
Pro
Forma
Combined | |
Revenues and other: | |
| | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Natural
gas, oil and NGL | |
$ | 3,547 | | |
$ | (154 |
) | (k) | |
$ | (242 |
) | (k) | |
$ | (368 |
) | (k) | |
$ | 2,783 | | |
$ | — | | |
$ | 4,170 |
| (a) | |
$ | — |
| | |
$ | 6,953 | |
| |
| | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| 523 |
| (a) | |
| |
| | |
| 523 | |
Gas sales | |
| | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| 3,089 | | |
| (3,089 |
) | (a) | |
| — |
| | |
| — | |
Oil sales | |
| | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| 379 | | |
| (379 |
) | (a) | |
| — |
| | |
| — | |
NGL sales | |
| | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| 702 | | |
| (702 |
) | (a) | |
| — |
| | |
| — | |
Marketing | |
| 2,500 | | |
| (51 |
) | (l) | |
| (1,044 |
) | (l) | |
| (500 |
) | (l) | |
| 905 | | |
| 2,355 | | |
| (523 |
) | (a) | |
| — |
| | |
| 2,737 | |
Natural
gas and oil derivatives | |
| 1,728 | | |
| (43 |
) | (m) | |
| (53 |
) | (m) | |
| (30 |
) | (m) | |
| 1,602 | | |
| — | | |
| 2,433 |
| (a) | |
| — |
| | |
| 4,035 | |
Other | |
| — | | |
| — |
| | |
| — |
| | |
| — |
| | |
| — | | |
| (3 | ) | |
| 3 |
| (a) | |
| — |
| | |
| — | |
Gains
on sales of assets and other | |
| 946 | | |
| (337 |
) | (n) | |
| (470 |
) | (n) | |
| (140 |
) | (n) | |
| (1 | ) | |
| — | | |
| — |
| | |
| — |
| | |
| (1 | ) |
Total revenues
and other | |
| 8,721 | | |
| (585 |
) | | |
| (1,809 |
) | | |
| (1,038 |
) | | |
| 5,289 | | |
| 6,522 | | |
| 2,436 |
| | |
| — |
| | |
| 14,247 | |
Operating
expenses: | |
| | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Production | |
| 356 | | |
| (20 |
) | (o) | |
| (37 |
) | (o) | |
| (33 |
) | (o) | |
| 266 | | |
| — | | |
| 369 |
| (a) | |
| — |
| | |
| 635 | |
Operating
expenses | |
| — | | |
| |
| | |
| |
| | |
| |
| | |
| — | | |
| 1,717 | | |
| (1,717 |
) | (a) | |
| — |
| | |
| — | |
Gathering,
processing and transportation | |
| 853 | | |
| (3 |
) | (p) | |
| (68 |
) | (p) | |
| (86 |
) | (p) | |
| 696 | | |
| — | | |
| 1,348 |
| (a) | |
| — |
| | |
| 2,386 | |
| |
| | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| 523 |
| (a) | |
| (181 |
) | (j) | |
| | |
Severance
and ad valorem taxes | |
| 167 | | |
| (10 |
) | (q) | |
| (16 |
) | (q) | |
| (22 |
) | (q) | |
| 119 | | |
| — | | |
| 230 |
| (a) | |
| — |
| | |
| 349 | |
Exploration | |
| 27 | | |
| — |
| | |
| — |
| | |
| — |
| | |
| 27 | | |
| — | | |
| — |
| | |
| — |
| | |
| 27 | |
Marketing | |
| 2,499 | | |
| (51 |
) | (l) | |
| (1,044 |
) | (l) | |
| (500 |
) | (l) | |
| 904 | | |
| 2,331 | | |
| (523 |
) | (a) | |
| — |
| | |
| 2,712 | |
General
and administrative | |
| 127 | | |
| — |
| | |
| — |
| | |
| — |
| | |
| 127 | | |
| 187 | | |
| 14 |
| (a) | |
| — |
| | |
| 328 | |
Separation
and other termination costs | |
| 5 | | |
| — |
| | |
| — |
| | |
| — |
| | |
| 5 | | |
| — | | |
| — |
| | |
| — |
| | |
| 5 | |
Depreciation,
depletion and amortization | |
| 1,527 | | |
| — |
| | |
| (8 |
) | (r) | |
| (25 |
) | (r) | |
| 1,494 | | |
| 1,307 | | |
| — |
| | |
| 572 |
| (t) | |
| 3,373 | |
Impairments | |
| — | | |
| — |
| | |
| — |
| | |
| — |
| | |
| — | | |
| 1,710 | | |
| — |
| | |
| (1,710 |
) | (u) | |
| — | |
Taxes,
other than income taxes | |
| — | | |
| — |
| | |
| — |
| | |
| — |
| | |
| — | | |
| 244 | | |
| (244 |
) | (a) | |
| — |
| | |
| — | |
Other operating
expense (income) | |
| 18 | | |
| — |
| | |
| — |
| | |
| — |
| | |
| 18 | | |
| — | | |
| 3 |
| (a) | |
| 281 |
| (f) | |
| 302 | |
Total operating
expenses | |
| 5,579 | | |
| (84 |
) | | |
| (1,173 |
) | | |
| (666 |
) | | |
| 3,656 | | |
| 7,496 | | |
| 3 |
| | |
| (1,038 |
) | | |
| 10,117 | |
Income
(loss) from operations | |
| 3,142 | | |
| (501 |
) | | |
| (636 |
) | | |
| (372 |
) | | |
| 1,633 | | |
| (974 | ) | |
| 2,433 |
| | |
| 1,038 |
| | |
| 4,130 | |
Other
income (expense): | |
| | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Interest
expense | |
| (104 | ) | |
| — |
| | |
| — |
| | |
| — |
| | |
| (104 | ) | |
| (246 | ) | |
| 104 |
| (a) | |
| (33 |
) | (v) | |
| (279 | ) |
Other interest
charges | |
| — | | |
| — |
| | |
| — |
| | |
| — |
| | |
| — | | |
| (11 | ) | |
| 11 |
| (a) | |
| — |
| | |
| — | |
Interest
capitalized | |
| — | | |
| — |
| | |
| — |
| | |
| — |
| | |
| — | | |
| 115 | | |
| (115 |
) | (a) | |
| — |
| | |
| — | |
Losses
on purchases, exchanges or extinguishments of debt | |
| — | | |
| — |
| | |
| — |
| | |
| — |
| | |
| — | | |
| (19 | ) | |
| — |
| | |
| 19 |
| (w) | |
| — | |
Gains on
Derivatives | |
| — | | |
| — |
| | |
| — |
| | |
| — |
| | |
| — | | |
| 2,433 | | |
| (2,433 |
) | (a) | |
| — |
| | |
| — | |
Other income | |
| 79 | | |
| — |
| | |
| — |
| | |
| — |
| | |
| 79 | | |
| 2 | | |
| — |
| | |
| — |
| | |
| 81 | |
Total other
income (expense) | |
| (25 | ) | |
| — |
| | |
| — |
| | |
| — |
| | |
| (25 | ) | |
| 2,274 | | |
| (2,433 |
) | | |
| (14 |
) | | |
| (198 | ) |
Income
(loss) before income taxes | |
| 3,117 | | |
| (501 |
) | | |
| (636 |
) | | |
| (372 |
) | | |
| 1,608 | | |
| 1,300 | | |
| — |
| | |
| 1,024 |
| | |
| 3,932 | |
Current | |
| — | | |
| — |
| | |
| — |
| | |
| — |
| | |
| — | | |
| (5 | ) | |
| 5 |
| (a) | |
| — |
| | |
| — | |
Deferred | |
| — | | |
| — |
| | |
| — |
| | |
| — |
| | |
| — | | |
| (252 | ) | |
| 252 |
| (a) | |
| — |
| | |
| — | |
Income
tax expense (benefit) | |
| 698 | | |
| (115 |
) | (s) | |
| (146 |
) | (s) | |
| (86 |
) | (s) | |
| 351 | | |
| — | | |
| (257 |
) | (a) | |
| 236 |
| (x) | |
| 330 | |
Net income
(loss) | |
$ | 2,419 | | |
$ | (386 |
) | | |
$ | (490 |
) | | |
$ | (286 |
) | | |
$ | 1,257 | | |
$ | 1,557 | | |
$ | — |
| | |
$ | 788 |
| | |
$ | 3,602 | |
| |
| | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Earnings per common share: | |
| | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Basic | |
$ | 18.21 | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| |
| | |
| |
| | |
$ | 15.76 | |
Diluted | |
$ | 16.92 | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| |
| | |
| |
| | |
$ | 15.09 | |
Weighted
average common and common equivalent shares outstanding (in thousands): | |
| | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| |
| | |
| |
| | |
| | |
Basic | |
| 132,840 | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| |
| | |
| 95,700 |
| (y) | |
| 228,540 | |
Diluted | |
| 142,976 | | |
| |
| | |
| |
| | |
| |
| | |
| | | |
| | | |
| |
| | |
| 95,700 |
| (y) | |
| 238,676 | |
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
unaudited pro forma condensed combined financial information has been derived from the historical consolidated financial statements
of Expand Energy and Southwestern and gives pro forma effect to the events that are directly attributable to the Merger and the
Eagle Ford Divestitures and are factually supportable. Certain of Southwestern's historical amounts have been reclassified to
conform to Expand Energy's financial statement presentation. The unaudited pro forma condensed combined balance sheet as of
September 30, 2024 gives effect to the Merger as if the Merger had been completed on September 30, 2024. The unaudited pro
forma condensed combined statement of operations for the nine months ended September 30, 2024, and the year ended
December 31, 2023, give effect to the Merger and the Eagle Ford Divestitures as if these transactions had been completed on
January 1, 2023.
The
unaudited pro forma condensed combined financial statements reflect pro forma adjustments that are described in the accompanying notes
and are based on available information and certain assumptions that Expand Energy believes are reasonable; however, actual results may
differ from those reflected in these statements. In Expand Energy’s opinion, all adjustments that are necessary to present fairly
the pro forma information have been made. The following pro forma condensed combined financial statements do not purport to represent
what the combined company’s financial position or results of operations would have been if the transactions had actually occurred
on the dates indicated above, nor are they indicative of Expand Energy’s future financial position or results of operations. These
pro forma condensed combined financial statements and the accompanying notes should be read in conjunction with the previously filed
consolidated financial statements and related notes of Expand Energy and Southwestern for the periods presented.
The
unaudited pro forma condensed combined financial information includes adjustments to conform Southwestern’s accounting policies
to Expand Energy’s accounting policies, including adjusting Southwestern’s natural gas and oil properties to the successful
efforts method. Southwestern followed the full cost pool method of accounting for natural gas and oil properties, while Expand Energy
follows the successful efforts method of accounting for natural gas and oil properties. Certain costs that are expensed under the successful
efforts method are capitalized under the full cost method, including unsuccessful exploration drilling costs, geological and geophysical
costs, delay rentals on leases and general and administrative expenses directly related to exploration and development activities. Under
the full cost method of accounting, property acquisition costs, costs of wells, related equipment and facilities and future development
costs are all included in a single full cost pool, which is amortized on a units-of-production basis over total proved reserves. Under
the successful efforts method of accounting, property acquisition costs are amortized on a units-of-production basis over total proved
reserves, while costs of wells and related equipment and facilities are amortized on a units-of-production basis over proved developed
reserves.
| 2. | Unaudited
Pro Forma Condensed Combined Balance Sheet |
The
Merger will be accounted for using the acquisition method of accounting for business combinations. The allocation of the preliminary
estimated purchase price is based upon management’s estimates of and assumptions related to the fair value of assets to be acquired
and liabilities to be assumed as of September 30, 2024 using currently available information. Due to the fact that the unaudited
pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final purchase price allocation
and the resulting effect on Expand Energy’s financial position and results of operations may differ significantly from the pro
forma amounts included herein. Expand Energy expects to finalize its allocation of the purchase consideration within one year subsequent
to the closing date of the Merger.
The preliminary
purchase price allocation is subject to change due to several factors, including, but not limited to:
| · | changes
in the estimated fair value of Southwestern’s assets acquired and liabilities assumed
as of the closing date of the Merger, which could result from changes in reserve estimates
and other factors; and |
| · | the
tax bases of Southwestern’s assets and liabilities as of the closing date of the Merger. |
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
preliminary fair value assessment of the assets acquired and liabilities assumed expected to be recorded is as follows:
| |
Preliminary
Purchase
Price
Allocation | |
| |
| ($
in millions) | |
Consideration: | |
| | |
Cash(a) | |
$ | 585 | |
Fair
value of Expand Energy Common Stock issued(b) | |
| 7,871 | |
Restricted
stock unit and performance stock unit replacement awards | |
| 17 | |
Total
consideration | |
$ | 8,473 | |
Fair
Value of Assets Acquired: | |
| | |
Cash and
cash equivalents | |
$ | 126 | |
Other current
assets | |
| 930 | |
Proved natural
gas and oil properties | |
| 11,535 | |
Unproved
properties | |
| 2,419 | |
Other property
and equipment | |
| 189 | |
Other
long-term assets | |
| 652 | |
Amounts
attributable to assets acquired | |
| 15,851 | |
Fair
Value of Liabilities Assumed: | |
| | |
Current
liabilities | |
$ | 1,988 | |
Long-term
debt | |
| 3,305 | |
Deferred
tax liabilities | |
| 464 | |
Long-term
contract liabilities | |
| 1,318 | |
Other
long-term liabilities | |
| 303 | |
Amounts
attributable to liabilities assumed | |
| 7,378 | |
Total
identifiable net assets | |
$ | 8,473 | |
(a) Reflects
the repayment of $583 million outstanding on Southwestern's 2022 revolving credit facility including $2 million of accrued interest and
fees, as the facility was repaid and retired upon close of the Merger.
(b) Based
on 95,700,325 shares of Expand Energy common stock at $82.25 per share (closing price as of September 30, 2024).
Under
the Merger Agreement, Southwestern stockholders received 0.0867 shares of Expand Energy common stock for each share of Southwestern common
stock issued and outstanding immediately prior to the effective time of the Merger. In addition certain members of Southwestern's management team and other key employees with approximately 1,361,000 outstanding restricted stock units ("RSU")
and performance stock units ("PSU") received 0.0867 shares of Expand Energy common stock for each RSU and PSU outstanding under
existing change in control agreements. This results in Expand Energy issuing approximately 95.7 million shares of Expand Energy common
stock, or approximately $7.9 billion in value, (based on Expand Energy common stock closing price as of September 30, 2024 of $82.25)
as Merger Consideration.
NOTES TO UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
following adjustments have been made to the accompanying unaudited pro forma financial statements:
(a) The
following reclassifications conform Southwestern's historical financial information to Expand Energy's financial statement presentation:
Southwestern
Reclassification and Conforming Adjustments
Pro
Forma Condensed Combined Balance Sheet as of September 30, 2024
| · | Reclassification
of $57 million from derivative assets to derivative liabilities and $31 million of long-term
derivative assets to long-term derivative liabilities to conform Southwestern's presentation
of derivative positions to Expand Energy's presentation. |
| · | Reclassification
of approximately $39.1 billion of natural gas and oil properties, using the full cost method,
to proved and unproved natural gas and oil properties under the successful efforts method
of accounting of $37.2 billion and $1.9 billion, respectively. |
| · | Reclassification
of approximately $32.3 billion from accumulated depreciation, depletion and amortization
under the full cost method of accounting to accumulated depreciation, depletion and amortization
under the successful efforts method of accounting. |
| · | Reclassification
of $583 million from other to other property and equipment to conform Southwestern's presentation
to Expand Energy's presentation. |
| · | Reclassification
of $126 million from operating lease assets to other long-term assets to conform Southwestern's
presentation to Expand Energy's presentation. |
| · | Reclassification
of $700 million from accounts payable to other current liabilities to conform Southwestern's
presentation to Expand Energy's presentation. |
| · | Reclassification
of $96 million from taxes payable and $39 million of current operating lease liabilities,
respectively, to other current liabilities to conform Southwestern's presentation to Expand
Energy's presentation. |
| · | Reclassification
of $26 million from interest payable to accrued interest to conform Southwestern's presentation
to Expand Energy's presentation. |
| · | Reclassification
of $87 million from long-term operating lease liabilities to other long-term liabilities
to conform Southwestern's presentation to Expand Energy's presentation. |
| · | Reclassification
of $121 million from other long-term liabilities to asset retirement obligations, net of
current portion to conform Southwestern's presentation to Expand Energy's presentation. |
Pro
Forma Combined Statement of Operations for the Nine Months Ended September 30, 2024
| · | Reclassification
of $1,470 million of gas sales, $261 million of oil sales and $496 million of NGL sales to
natural gas, oil and NGL revenue, respectively, to conform to Expand Energy's presentation
of natural gas, oil and NGL revenue. |
| · | Reclassification
of $389 million of net transportation expense from gas and NGL sales to gathering, processing
and transportation expense and elimination of $389 million of net transportation expense
from marketing revenue and marketing expense to conform to Expand Energy's presentation of
gathering, processing and transportation. |
| · | Reclassification
of $243 million of gains on derivatives to natural gas and oil derivatives to conform to
Expand Energy's presentation of natural gas and oil derivatives. |
| · | Reclassification
of $2 million of other revenue to other operating expense (income) to conform to Expand Energy's
presentation of other operating expense (income). |
| · | Reclassification
of $39 million of merger-related expenses to other operating expense (income) to conform
to Expand Energy's presentation of other operating expense (income). |
| · | Reclassification
of $993 million and $247 million from operating expenses to gathering, processing and transportation
expense and production expense, respectively, to conform to Expand Energy's presentation
of gathering, processing and transportation expense and production expense. |
NOTES TO UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
| · | Reclassification
of $103 million and $7 million from taxes, other than income taxes to severance and ad valorem
taxes expense and general and administrative expense, respectively, to conform to Expand
Energy's presentation of severance and ad valorem taxes expense and general and administrative
expense. |
| · | Reclassification
of $9 million from other interest charges and $78 million of interest capitalized, respectively,
to interest expense to conform to Expand Energy's presentation of interest expense. |
| · | Reclassification
of $681 million of deferred income tax benefit to income tax expense (benefit) to conform
to Expand Energy's presentation of income tax expense (benefit). |
Pro
Forma Combined Statement of Operations for the Year Ended December 31, 2023
| · | Reclassification
of $3,089 million of gas sales, $379 million of oil sales and $702 million of NGL sales to
natural gas, oil and NGL revenue, respectively, to conform to Expand Energy's presentation
of natural gas, oil and NGL revenue. |
| · | Reclassification
of $523 million of net transportation expense from gas and NGL sales to gathering, processing
and transportation expense and elimination of $523 million of net transportation expense
from marketing revenue and marketing expense to conform to Expand Energy's presentation of
gathering, processing and transportation. |
| · | Reclassification
of $2,433 million of gains on derivatives to natural gas and oil derivatives gas to conform
to Expand Energy's presentation of natural gas and oil derivatives. |
| · | Reclassification
of $3 million of other revenue to other operating expense (income) to conform to Expand Energy's
presentation of other operating expense (income). |
| · | Reclassification
of $1,348 million and $369 million from operating expenses to gathering, processing and transportation
expense and production expense, respectively, to conform to Expand Energy's presentation
of gathering, processing and transportation expense and production expense. |
| · | Reclassification
of $230 million and $14 million from taxes, other than income taxes to severance and ad valorem
taxes expense and general and administrative expense, respectively, to conform to Expand
Energy's presentation of severance and ad valorem taxes expense and general and administrative
expense. |
| · | Reclassification
of $11 million from other interest charges and $115 million of interest capitalized, respectively,
to interest expense to conform to Expand Energy's presentation of interest expense. |
| · | Reclassification
of $5 million of current tax benefit and $252 million of deferred income tax benefit to income
tax expense (benefit) to conform to Expand Energy's presentation of income tax expense (benefit). |
(b) Reflects
the repayment of $583 million outstanding on Southwestern's 2022 revolving credit facility including $2 million of accrued interest and
fees, as the facility was repaid and retired upon close of the Merger. Additionally, an adjustment was made to eliminate $12 million
of unamortized issuance expense associated with the 2022 revolving credit facility as an adjustment to other long-term assets.
(c) Reflects
estimated fair value of out-of-market portion of transportation contracts assumed from Southwestern where the terms are favorable or
unfavorable compared to current market terms.
(d) The
allocation of the estimated fair value of consideration transferred (based on the closing price of Expand Energy common stock as of September 30,
2024) to the estimated fair value of the assets acquired and liabilities assumed resulted in the following purchase price allocation
adjustments:
| · | Approximately
$6.3 billion increase in Southwestern's net book basis of proved natural gas and oil properties
and other property and equipment, consisting of approximately $25.6 billion decrease in the
gross book value of proved natural gas and oil properties, $394 million decrease in other
property and equipment and the elimination of approximately $32.3 billion of historical accumulated
depreciation to reflect the properties at fair value; |
| · | $538
million increase in Southwestern's unproved oil and natural gas properties to reflect fair
value; |
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
| · | The
following adjustments were made to reflect the pro forma changes to long-term debt, net: |
◦ $49
million downward adjustment to record Southwestern's senior notes at fair value;
◦ $15
million adjustment to write-off historical deferred unamortized issuance expense, premium and discount.
(e) The
following adjustments were made to reflect the pro forma changes to deferred tax assets, net:
◦ $464
million adjustment to record the acquisition of a net deferred tax liability. This is primarily the result of the purchase price allocated
to the acquired properties in excess of their acquired tax basis;
◦ $924
million adjustment to eliminate Southwestern's historical deferred tax asset.
(f) The
following adjustments were made to reflect nonrecurring transaction and severance costs:
◦ estimated
nonrecurring severance costs of $178 million, $125 million for payments made to certain former employees of Southwestern and Expand Energy,
$23 million associated with the accelerated vesting of certain Southwestern RSUs and PSUs, $3 million associated with the accelerated
vesting of certain Expand Energy RSUs and PSUs and $27 million for payments made to certain executives of Southwestern and Expand Energy;
◦ estimated
non-recurring transaction costs of $103 million related to the Merger, including underwriting, banking, legal, consulting and accounting
fees that are not capitalized as part of the transaction.
(g) Reflects
the elimination of Southwestern's historical equity balances in accordance with the acquisition method of accounting.
(h) Reflects
the estimated increase in Expand Energy's common stock and additional paid-in capital resulting from the issuance of Expand Energy common
stock to Southwestern's stockholders to effect the transaction as follows (in millions, except share and per share amounts):
Shares of Expand
Energy common stock issued | |
| 95,700,325 | |
Closing price per share of Expand Energy common
stock on September 30, 2024 | |
$ | 82.25 | |
Total fair value of shares of
Expand Energy common stock issued | |
$ | 7,871 | |
Increase in Expand Energy common stock ($0.01
par value per share) as of September 30, 2024 | |
$ | 1 | |
Increase in Expand Energy additional
paid-in capital as of September 30, 2024 | |
$ | 7,870 | |
(i) Reflects
precombination service expense related to replacement awards issued to legacy Southwestern employees
(j) Reflects
non-cash amortization of net liability for out-of-market value associated with contracts assumed in the Merger.
(k) Adjustment
to reflect the reduction of natural gas, oil and NGL revenues attributable to the Eagle Ford assets divested to WildFire, INEOS
and SilverBow Resources.
(l) Adjustment
to reflect the reduction of marketing revenues and marketing expenses attributable to the Eagle Ford assets divested to WildFire, INEOS
and SilverBow Resources.
(m) Adjustment
to reflect the reduction of natural gas and oil derivatives attributable to the Eagle Ford assets divested to WildFire, INEOS and
SilverBow Resources.
(n) Adjustment
to reflect the reduction of gains on sales of assets attributable to the Eagle Ford assets divested to WildFire, INEOS and SilverBow
Resources.
(o) Adjustment
to reflect the reduction of production expenses attributable to the Eagle Ford assets divested to WildFire, INEOS and SilverBow
Resources.
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(p) Adjustment
to reflect the reduction of gathering, processing and transportation attributable to the Eagle Ford assets divested to WildFire, INEOS
and SilverBow Resources.
(q) Adjustment
to reflect the reduction of severance and ad valorem taxes attributable to the Eagle Ford assets divested to WildFire, INEOS and
SilverBow Resources.
(r) Adjustment
to reflect the reduction in depreciation, depletion and amortization ("DD&A") expense based on the production volumes attributable
to the Eagle Ford assets divested to WildFire, INEOS and SilverBow Resources, and the revision to the Company’s DD&A rate
reflecting the reserve volumes and net book value sold. DD&A is calculated using the unit of production method under the successful
efforts method of accounting.
(s) Reflects
an adjustment to income taxes to record the estimated income tax effects attributable to the Eagle Ford assets. The tax adjustment assumes
a forecasted blended Expand Energy statutory tax rate of 23%. The pro forma income tax adjustments included in the pro forma statement
of operations for the nine months ended September 30, 2024, and the year ended December 31, 2023, reflect the income tax effects
of the transaction accounting adjustments presented.
(t) Adjustment
to reflect the increase in DD&A calculated in accordance with the successful efforts method of accounting for natural gas and oil
properties, based on the preliminary purchase price allocation.
(u) Reflects
the elimination of Southwestern's historical impairment charges recorded under the ceiling test of the full cost method of accounting
to conform to Expand Energy’s successful efforts method of accounting for natural gas and oil properties.
(v) Reflects
the repayment and retirement of Southwestern’s 2022 revolving credit facility, the fair value adjustment of the unsecured senior
notes and the change in capitalized interest in accordance with the successful efforts method of accounting for natural gas and oil properties.
This resulted in the following adjustments:
◦ $18
million net increase in interest expense for the nine months ended September 30, 2024;
◦ $33
million net increase in interest expense for the year ended December 31, 2023.
(w) Adjustment
to eliminate loss related to the extinguishment of Southwestern's 7.75% Senior Notes due 2027.
(x) Reflects
an adjustment to income taxes to record the estimated income tax effects of combining Expand Energy’s and Southwestern’s
operations. The tax adjustment assumes a forecasted blended Expand Energy statutory tax rate of 23%. The pro forma income tax adjustments
included in the pro forma statement of operations for the nine months ended September 30, 2024, and the year ended December 31,
2023, reflect the income tax effects of the transaction accounting adjustments presented. Because the tax rates used for these pro forma
financial statements are an estimate, the blended rate will likely vary from the actual effective rate in periods subsequent to completion
of the Merger.
(y) Reflects
Expand Energy’s shares issued to Southwestern stockholders.
NOTES TO UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
| 4. | Supplemental
Pro Forma Oil and Natural Gas Reserves Information |
The
following tables present the estimated pro forma condensed combined net proved developed and undeveloped oil, natural gas and NGL reserves
as of December 31, 2023, along with a summary of changes in the quantities of net remaining proved reserves during the year ended
December 31, 2023. The pro forma reserve information set forth below gives effect to the Merger as if the Merger had been completed
on January 1, 2023. The supplemental pro forma oil and natural gas reserves information have been prepared from Expand Energy's
previously filed historical reserve information included in its audited financial statements as of and for the year ended December 31,
2023 and Southwestern's previously filed historical reserve information included in its audited financial statements as of and for the
year ended December 31, 2023.
| |
Oil
(mmbbls) | |
| |
Expand
Energy
Historical | | |
Southwestern
Historical | | |
Pro
Forma
Combined | |
As of December 31, 2022 | |
| 198.4 | | |
| 83.4 | | |
| 281.8 | |
Extensions,
discoveries and other additions | |
| — | | |
| 5.1 | | |
| 5.1 | |
Revisions
of previous estimates | |
| — | | |
| (4.8 | ) | |
| (4.8 | ) |
Production | |
| (7.7 | ) | |
| (5.6 | ) | |
| (13.3 | ) |
Sale of reserves-in-place | |
| (190.7 | ) | |
| — | | |
| (190.7 | ) |
Purchase
of reserves-in-place | |
| — | | |
| — | | |
| — | |
As of December 31,
2023 | |
| — | | |
| 78.1 | | |
| 78.1 | |
Proved developed reserves: | |
| | | |
| | | |
| | |
December 31,
2022 | |
| 157.2 | | |
| 41.1 | | |
| 198.3 | |
December 31,
2023 | |
| — | | |
| 38.6 | | |
| 38.6 | |
Proved undeveloped reserves: | |
| | | |
| | | |
| | |
December 31,
2022 | |
| 41.2 | | |
| 42.3 | | |
| 83.5 | |
December 31,
2023 | |
| — | | |
| 39.5 | | |
| 39.5 | |
| |
Natural
Gas (bcf) | |
| |
| Expand
Energy
Historical | | |
| Southwestern
Historical | | |
| Pro
Forma
Combined | |
As of December 31, 2022 | |
| 11,369 | | |
| 17,362 | | |
| 28,731 | |
Extensions,
discoveries and other additions | |
| 415 | | |
| 1,813 | | |
| 2,228 | |
Revisions
of previous estimates | |
| (325 | ) | |
| (2,196 | ) | |
| (2,521 | ) |
Production | |
| (1,266 | ) | |
| (1,438 | ) | |
| (2,704 | ) |
Sale of reserves-in-place | |
| (563 | ) | |
| (350 | ) | |
| (913 | ) |
Purchase
of reserves-in-place | |
| 58 | | |
| — | | |
| 58 | |
As of December 31,
2023 | |
| 9,688 | | |
| 15,191 | | |
| 24,879 | |
Proved developed reserves: | |
| | | |
| | | |
| | |
December 31,
2022 | |
| 7,385 | | |
| 9,793 | | |
| 17,178 | |
December 31,
2023 | |
| 6,363 | | |
| 9,196 | | |
| 15,559 | |
Proved undeveloped reserves: | |
| | | |
| | | |
| | |
December 31,
2022 | |
| 3,984 | | |
| 7,569 | | |
| 11,553 | |
December 31,
2023 | |
| 3,325 | | |
| 5,995 | | |
| 9,320 | |
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
| |
Natural
Gas Liquids (mmbbls) | |
| |
Expand
Energy
Historical | | |
Southwestern
Historical | | |
Pro
Forma
Combined | |
As of December 31,
2022 | |
| 73.9 | | |
| 627.1 | | |
| 701.0 | |
Extensions,
discoveries and other additions | |
| — | | |
| 30.5 | | |
| 30.5 | |
Revisions
of previous estimates | |
| — | | |
| 42.1 | | |
| 42.1 | |
Production | |
| (3.8 | ) | |
| (32.9 | ) | |
| (36.7 | ) |
Sale of reserves-in-place | |
| (70.1 | ) | |
| — | | |
| (70.1 | ) |
Purchase
of reserves-in-place | |
| — | | |
| — | | |
| — | |
As of
December 31, 2023 | |
| — | | |
| 666.8 | | |
| 666.8 | |
Proved developed
reserves: | |
| | | |
| | | |
| | |
December 31,
2022 | |
| 58.9 | | |
| 350.8 | | |
| 409.7 | |
December 31,
2023 | |
| — | | |
| 363.0 | | |
| 363.0 | |
Proved undeveloped
reserves: | |
| | | |
| | | |
| | |
December 31,
2022 | |
| 15.0 | | |
| 276.3 | | |
| 291.3 | |
December 31,
2023 | |
| — | | |
| 303.8 | | |
| 303.8 | |
| |
Total
Reserves (bcfe) (a) | |
| |
Expand
Energy
Historical | | |
Southwestern
Historical | | |
Pro
Forma
Combined | |
As of December 31,
2022 | |
| 13,002 | | |
| 21,625 | | |
| 34,627 | |
Extensions,
discoveries and other additions | |
| 415 | | |
| 2,026 | | |
| 2,441 | |
Revisions
of previous estimates | |
| (325 | ) | |
| (1,972 | ) | |
| (2,297 | ) |
Production | |
| (1,335 | ) | |
| (1,669 | ) | |
| (3,004 | ) |
Sale of reserves-in-place | |
| (2,127 | ) | |
| (350 | ) | |
| (2,477 | ) |
Purchase
of reserves-in-place | |
| 58 | | |
| — | | |
| 58 | |
As of
December 31, 2023 | |
| 9,688 | | |
| 19,660 | | |
| 29,348 | |
Proved developed
reserves: | |
| | | |
| | | |
| | |
December 31,
2022 | |
| 8,681 | | |
| 12,145 | | |
| 20,826 | |
December 31,
2023 | |
| 6,363 | | |
| 11,605 | | |
| 17,968 | |
Proved undeveloped
reserves: | |
| | | |
| | | |
| | |
December 31,
2022 | |
| 4,321 | | |
| 9,480 | | |
| 13,801 | |
December 31,
2023 | |
| 3,325 | | |
| 8,055 | | |
| 11,380 | |
(a) Oil and NGLs
are converted to one billion cubic feet of natural gas equivalent. Natural gas equivalent determined using the ratio of one barrel of
oil or natural gas liquids to six thousand cubic feet of natural gas.
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
pro forma standardized measure of discounted future net cash flows relating to proved oil, natural gas and NGL reserves as of December 31,
2023 is as follows (in millions):
| |
As
of December 31, 2023 | |
| |
Expand
Energy
Historical | | |
Southwestern
Historical | | |
Pro
Forma
Combined | |
Future cash inflows | |
$ | 14,659 | | |
$ | 50,499 | | |
$ | 65,158 | |
Future production costs | |
| (3,326 | ) | |
| (26,147 | ) | |
| (29,473 | ) |
Future development costs | |
| (2,779 | ) | |
| (6,558 | ) | |
| (9,337 | ) |
Future
income tax expense | |
| (174 | ) | |
| (1,581 | ) | |
| (1,755 | ) |
Future
net cash flows | |
| 8,380 | | |
| 16,213 | | |
| 24,593 | |
Less effect
of a 10% discount factor | |
| (3,903 | ) | |
| (8,900 | ) | |
| (12,803 | ) |
Standardized
measure of discounted future net cash flows | |
$ | 4,477 | | |
$ | 7,313 | | |
$ | 11,790 | |
The
changes in the pro forma standardized measure of discounted future net cash flows relating to proved oil, natural gas and NGL reserves
for the year ended December 31, 2023 are as follows (in millions):
| |
Expand
Energy
Historical | | |
Southwestern
Historical | | |
Pro
Forma
Combined | |
Standardized measure, as of December 31,
2022 | |
$ | 26,305 | | |
$ | 37,588 | | |
$ | 63,893 | |
Sales of oil and natural gas
produced, net of production costs and gathering, processing and transportation | |
| (2,171 | ) | |
| (2,123 | ) | |
| (4,294 | ) |
Net changes in prices and production
costs | |
| (23,535 | ) | |
| (36,514 | ) | |
| (60,049 | ) |
Extensions and discoveries,
net of production and development costs | |
| 182 | | |
| 63 | | |
| 245 | |
Changes in estimated future
development costs | |
| 346 | | |
| 1,005 | | |
| 1,351 | |
Previously estimated development
costs incurred during the period | |
| 818 | | |
| 1,336 | | |
| 2,154 | |
Revisions of previous quantity
estimates | |
| (205 | ) | |
| (1,174 | ) | |
| (1,379 | ) |
Purchase of reserves-in-place | |
| 77 | | |
| — | | |
| 77 | |
Sales of reserves-in-place | |
| (7,158 | ) | |
| (710 | ) | |
| (7,868 | ) |
Accretion of discount | |
| 3,270 | | |
| 4,643 | | |
| 7,913 | |
Net changes in income taxes | |
| 6,301 | | |
| 8,364 | | |
| 14,665 | |
Changes
in production rates and other | |
| 247 | | |
| (5,165 | ) | |
| (4,918 | ) |
Standardized measure, as
of December 31, 2023 | |
$ | 4,477 | | |
$ | 7,313 | | |
$ | 11,790 | |
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