Vital Energy(US:VTLE)2023-08-07 16:00Glossary of Oil and Natural Gas Terms and Certain Other Terms Provides definitions for key terminology related to oil and natural gas operations and other relevant terms Cautionary Statement Regarding Forward-Looking Statements Highlights that forward-looking statements are subject to risks and uncertainties, potentially differing from actual results - Forward-looking statements are not guarantees of performance and are based on assumptions, subject to material differences from actual results25 - Key risk factors include inflationary pressures, changes in commodity supply/demand, price volatility, competition, acquisition integration, reserve replacement, transportation capacity, and regulatory changes2628 Part I Presents the company's unaudited consolidated financial statements and management's discussion and analysis Item 1. Consolidated Financial Statements (Unaudited) Presents Vital Energy, Inc.'s unaudited consolidated financial statements and accompanying notes for the periods ended June 30, 2023 Consolidated Balance Sheets Details the company's financial position, including assets, liabilities, and equity, as of June 30, 2023, and December 31, 2022 Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------- | :-------------- | :---------------- | :--------- | :--------- | | Total assets | $3,815,429 | $2,726,114 | $1,089,315 | 39.96% | | Total liabilities | $2,211,856 | $1,615,368 | $596,488 | 36.93% | | Total stockholders' equity | $1,603,573 | $1,110,746 | $492,827 | 44.37% | | Cash and cash equivalents | $71,696 | $44,435 | $27,261 | 61.35% | | Long-term debt, net | $1,619,599 | $1,113,023 | $506,576 | 45.51% | Consolidated Statements of Operations Reports the company's revenues, expenses, and net income for the three and six months ended June 30, 2023 and 2022 Consolidated Statements of Operations Highlights (Three Months Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Total revenues | $335,062 | $560,156 | $(225,094) | (40.18)% | | Total costs and expenses | $213,767 | $191,922 | $21,845 | 11.38% | | Operating income | $121,449 | $369,164 | $(247,715) | (67.09)% | | Net income | $294,811 | $262,546 | $32,265 | 12.29% | | Basic EPS | $16.35 | $15.60 | $0.75 | 4.81% | | Diluted EPS | $16.30 | $15.41 | $0.89 | 5.78% | Consolidated Statements of Operations Highlights (Six Months Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Total revenues | $667,569 | $1,092,551 | $(424,982) | (38.90)% | | Total costs and expenses | $423,754 | $453,566 | $(29,812) | (6.57)% | | Operating income | $244,206 | $639,655 | $(395,449) | (61.82)% | | Net income | $408,751 | $175,765 | $232,986 | 132.56% | | Basic EPS | $23.71 | $10.46 | $13.25 | 126.67% | | Diluted EPS | $23.60 | $10.31 | $13.29 | 128.90% | - Net income for the three and six months ended June 30, 2023, includes a significant non-cash deferred income tax benefit of $222.2 million due to the release of a valuation allowance115116 Consolidated Statements of Stockholders' Equity Outlines changes in stockholders' equity, including common stock and accumulated deficit, for the periods ended June 30, 2023 and 2022 Stockholders' Equity Changes (in thousands) | Metric | December 31, 2022 | June 30, 2023 | Change ($) | Change (%) | | :-------------------------- | :------------------ | :-------------- | :--------- | :--------- | | Common stock | $168 | $186 | $18 | 10.71% | | Additional paid-in capital | $2,754,085 | $2,838,143 | $84,058 | 3.05% | | Accumulated deficit | $(1,643,507) | $(1,234,756) | $408,751 | 24.87% | | Total stockholders' equity | $1,110,746 | $1,603,573 | $492,827 | 44.37% | - The company issued 1,578,948 shares of common stock valued at $80.07 million as part of the Driftwood Acquisition on April 3, 2023356269 Consolidated Statements of Cash Flows Presents the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change ($) | Change (%) | | :------------------------------------ | :------------------ | :------------------ | :--------- | :--------- | | Net cash provided by operating activities | $365,013 | $539,007 | $(173,994) | (32.28)% | | Net cash used in investing activities | $(838,820) | $(293,540) | $(545,280) | (185.76)% | | Net cash provided by (used in) financing activities | $501,068 | $(154,719) | $655,787 | 423.86% | | Net increase in cash and cash equivalents | $27,261 | $90,748 | $(63,487) | (69.96)% | | Cash and cash equivalents, end of period | $71,696 | $147,546 | $(75,850) | (51.41)% | - The significant increase in cash used in investing activities was primarily due to acquisitions of oil and natural gas properties (Driftwood and Forge Acquisitions) and increased capital expenditures166 - Net cash provided by financing activities increased substantially due to $595.0 million in borrowings on the Senior Secured Credit Facility, mainly to fund recent acquisitions173 Condensed Notes to the Consolidated Financial Statements Offers detailed explanations and disclosures for the consolidated financial statements, including accounting policies, acquisitions, and debt Note 1—Organization and Basis of Presentation Describes Vital Energy, Inc.'s business as an independent energy company and the basis for preparing its financial statements - Vital Energy, Inc. is an independent energy company focused on the acquisition, exploration, and development of oil and natural gas properties in the Permian Basin of West Texas, operating as a single exploration and production segment44 - The unaudited consolidated financial statements are prepared in accordance with GAAP, with all material intercompany transactions eliminated, and reflect management's necessary adjustments for fair presentation4546 Note 2—New Accounting Standards Addresses the impact of new accounting standard updates, confirming no material disclosures or adoptions for the period - The company determined there are no new accounting standard updates (ASUs) that are not yet adopted and meaningful to disclose as of June 30, 2023, and no new ASUs were adopted during the six months ended June 30, 202352 Note 3—Acquisitions and Divestiture Details the Forge and Driftwood acquisitions, including consideration, acquired assets, and accounting treatment - On June 30, 2023, Vital Energy closed the Forge Acquisition for $397.2 million (comprising $391.6 million cash and $5.7 million transaction costs), acquiring 70% interest in approximately 34,000 net acres of oil and natural gas properties in the Delaware Basin545556 - On April 3, 2023, the company completed the Driftwood Acquisition for $201.3 million, consisting of $117.3 million cash, 1,578,948 shares of common stock ($80.07 million value), and $3.9 million in transaction costs, adding approximately 11,200 net acres in the Midland Basin575862 - Both the Forge and Driftwood acquisitions were accounted for as asset acquisitions, with consideration allocated to acquired assets and assumed liabilities based on their relative fair values, and transaction costs capitalized5659 Note 4—Debt Provides information on the company's long-term debt, including senior unsecured notes and the Senior Secured Credit Facility Long-term Debt, Net (in thousands) | Debt Type | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :------------------------ | :-------------- | :---------------- | :--------- | :--------- | | January 2025 Notes | $453,221 | $452,331 | $890 | 0.20% | | January 2028 Notes | $297,186 | $296,831 | $355 | 0.12% | | July 2029 Notes | $294,192 | $293,861 | $331 | 0.11% | | Senior Secured Credit Facility | $575,000 | $70,000 | $505,000 | 721.43% | | Total Long-term debt, net | $1,619,599 | $1,113,023 | $506,576 | 45.51% | - As of June 30, 2023, the Senior Secured Credit Facility had a $1.3 billion borrowing base, $1.0 billion aggregate elected commitment, and $575.0 million outstanding at an interest rate of 7.978%, with the company in compliance with all covenants67 - No senior unsecured notes were repurchased during the six months ended June 30, 2023, compared to $32.03 million in principal repurchased in the same period of 2022, which resulted in a $0.8 million loss on extinguishment of debt in 202266 Note 5—Stockholders' Equity Details changes in stockholders' equity, including common stock issuance for acquisitions and the share repurchase program - On April 3, 2023, 1,578,948 shares of common stock were issued as part of the Driftwood Acquisition69 - The company's board authorized a $200.0 million share repurchase program in May 2022, with $162.7 million remaining available as of June 30, 2023. No shares were repurchased under this program during the six months ended June 30, 202371 Note 6—Equity Incentive Plan Outlines the company's equity incentive plan, including authorized shares and equity-based compensation expenses - The Equity Incentive Plan allows for the issuance of up to 2,432,500 shares, granting various incentive awards including restricted stock, stock options, and performance shares/units72 Equity-Based Compensation Expense (in thousands) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total share-settled equity-based compensation, net | $2,893 | $2,604 | $5,465 | $4,657 | | Total cash-settled equity-based compensation, net | $1,111 | $455 | $1,775 | $6,583 | | Total equity-based compensation, net | $4,004 | $3,059 | $7,240 | $11,240 | - As of June 30, 2023, total unrecognized cost related to equity-based compensation was $30.2 million, to be recognized over an average of 2.14 years, with $4.8 million attributable to cash-settled liability awards75 Note 7—Net Income Per Common Share Presents basic and diluted net income per common share calculations for the three and six months ended June 30 Net Income Per Common Share (Three Months Ended June 30) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------------ | :----- | :----- | :--------- | :--------- | | Net income (in thousands) | $294,811 | $262,546 | $32,265 | 12.29% | | Basic EPS | $16.35 | $15.60 | $0.75 | 4.81% | | Diluted EPS | $16.30 | $15.41 | $0.89 | 5.78% | | Weighted-average common shares outstanding (Basic) | 18,031 | 16,834 | 1,197 | 7.11% | | Weighted-average common shares outstanding (Diluted) | 18,085 | 17,039 | 1,046 | 6.14% | Net Income Per Common Share (Six Months Ended June 30) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------------ | :----- | :----- | :--------- | :--------- | | Net income (in thousands) | $408,751 | $175,765 | $232,986 | 132.56% | | Basic EPS | $23.71 | $10.46 | $13.25 | 126.67% | | Diluted EPS | $23.60 | $10.31 | $13.29 | 128.90% | | Weighted-average common shares outstanding (Basic) | 17,236 | 16,800 | 436 | 2.59% | | Weighted-average common shares outstanding (Diluted) | 17,319 | 17,040 | 279 | 1.64% | Note 8—Derivatives Discusses the company's use of commodity derivatives to hedge price risk and reports related gains or losses - The company uses commodity derivatives (puts, swaps, collars, basis swaps) to hedge price risk for oil, NGL, and natural gas, and previously used interest rate swaps, but these are not designated as hedges for accounting purposes8082 Gain (Loss) on Derivatives, Net (in thousands) | Derivative Type | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :---------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Commodity | $(16,190) | $(66,347) | $1,392 | $(396,071) | | Contingent consideration | $(1,854) | $419 | $1,054 | $4,314 | | Interest rate | $0 | $1 | $0 | $14 | | Total | $(18,044) | $(65,927) | $2,446 | $(391,743) | - As of June 30, 2023, the company had open commodity derivative positions for oil (WTI NYMEX swaps, collars, three-way collars, Argus WTI Midland basis swaps) and natural gas (Henry Hub NYMEX swaps, collars, three-way collars, Waha Inside FERC basis swaps) extending into 202484 Note 9—Fair Value Measurements Provides fair value measurements for derivative instruments and debt, categorized by the fair value hierarchy Net Derivative Asset Positions by Fair Value Hierarchy Level (June 30, 2023, in thousands) | Metric | Level 1 | Level 2 | Level 3 | Total Gross Fair Value | Net Fair Value on Balance Sheet | | :-------------------------- | :------ | :------ | :------ | :--------------------- | :------------------------------ | | Current Assets: Commodity | $0 | $32,558 | $0 | $32,558 | $10,017 | | Current Assets: Contingent consideration | $0 | $0 | $1,925 | $1,925 | $1,925 | | Noncurrent Assets: Commodity | $0 | $416 | $0 | $416 | $0 | | Noncurrent Assets: Contingent consideration | $0 | $0 | $24,314 | $24,314 | $24,314 | | Current Liabilities: Commodity | $0 | $(24,879) | $0 | $(24,879) | $(2,338) | | Noncurrent Liabilities: Commodity | $0 | $(3,441) | $0 | $(3,441) | $(3,025) | | Net derivative asset positions | $0 | $4,654 | $26,239 | $30,893 | $30,893 | - The Sixth Street Contingent Consideration, classified as Level 3, had a fair value of $26.2 million as of June 30, 2023, and $26.6 million as of December 31, 2022, with changes recognized in "Gain (loss) on derivatives, net"8591 Fair Values of Debt Instruments (in thousands) | Debt Type | Carrying Amount (June 30, 2023) | Fair Value (June 30, 2023) | Carrying Amount (Dec 31, 2022) | Fair Value (Dec 31, 2022) | | :------------------------ | :------------------------------ | :------------------------- | :------------------------------ | :------------------------- | | January 2025 Notes | $455,628 | $452,211 | $455,628 | $449,122 | | January 2028 Notes | $300,309 | $294,378 | $300,309 | $292,846 | | July 2029 Notes | $298,214 | $246,027 | $298,214 | $268,416 | | Senior Secured Credit Facility | $575,000 | $575,348 | $70,000 | $69,945 | | Total | $1,629,151 | $1,567,964 | $1,124,151 | $1,080,329 | Note 10—Commitments and Contingencies Outlines the company's legal proceedings, firm transportation commitments, and other contractual obligations - The company is subject to various legal proceedings in the ordinary course of business but believes that any adverse outcomes will not materially affect its business, financial position, results of operations, or liquidity9497 - The company has firm transportation commitments, including on the Gray Oak pipeline, and expensed $2.4 million and $3.5 million in firm transportation payments on excess capacity for the six months ended June 30, 2023 and 2022, respectively98 - As of June 30, 2023, future firm sale and transportation commitments totaled $138.5 million, which are expected to be satisfied and are not recorded as a liability98 Note 11—Supplemental Cash Flow and Non-Cash Information Presents additional cash flow details and non-cash investing and financing activities for the six months ended June 30 Supplemental Cash Flow and Non-Cash Information (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | | :-------------------------------------------------------------------- | :----- | :----- | | Cash paid for interest, net of capitalized interest | $55,987 | $67,995 | | Right-of-use assets obtained in exchange for operating lease liabilities | $124,868 | $33,985 | | Change in accrued capital expenditures | $18,110 | $14,173 | | Equity issued for acquisition of oil and natural gas properties | $80,068 | $0 | | Liabilities assumed in acquisitions of oil and natural gas properties | $11,152 | $0 | Note 12—Income Taxes Details the company's income tax position, including the release of a federal valuation allowance and net operating loss carryforwards - As of June 30, 2023, the company released a $222.2 million federal valuation allowance against its deferred tax assets, concluding that these assets are more likely than not realizable, while maintaining a full valuation allowance for Oklahoma deferred tax assets101102 - The company has federal net operating loss carryforwards totaling $1.2 billion ($727.4 million expiring in 2034, $425.9 million non-expiring but potentially limited) and state of Oklahoma NOLs of $34.4 million (expiring in 2032)102 Note 13—Related Parties Discloses transactions with related parties, specifically a lease agreement and capital expenditures with Halliburton - The company has a lease agreement with Halliburton (whose board chairman is also on Vital's board) for an electric fracture stimulation crew, resulting in a $73.2 million lease liability as of June 30, 2023105 Capital Expenditures for Oil and Natural Gas Properties Paid to Halliburton (Six Months Ended June 30, in thousands) | Year | Amount | | :--- | :----- | | 2023 | $69,911 | | 2022 | $56,620 | Note 14—Subsequent Events Reports significant events occurring after June 30, 2023, including credit facility borrowings and derivative updates - Subsequent to June 30, 2023, the company borrowed an additional $35.0 million and repaid $15.0 million on its Senior Secured Credit Facility, resulting in an outstanding balance of $595.0 million as of August 4, 2023109 - The company updated its open oil and natural gas derivative positions from June 30, 2023, through August 4, 2023, with no other derivative activity occurring after June 30, 2023110 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes Vital Energy, Inc.'s financial condition and results of operations for the three and six months ended June 30, 2023 and 2022 Executive Overview Provides a high-level summary of Vital Energy's business, recent operational achievements, and capital expenditure plans - Vital Energy is an independent energy company focused on oil and natural gas properties in the Permian Basin, having assembled 197,985 net acres as of June 30, 2023112 - The company achieved a record oil production of 44,360 Bbl/d in Q2 2023 and closed two accretive acquisitions in the Midland and Delaware basins, adding approximately 35,000 net acres and 130 high-value, oil-weighted locations113114 - Planned capital expenditures for full-year 2023 are projected between $665.0 million and $695.0 million, with activity levels subject to adjustment based on commodity prices and service costs114 Recent Developments Discusses current trends impacting the company, including elevated drilling costs, inflationary pressures, and higher interest rates - Drilling and completion costs, along with oilfield services, equipment, and materials, remain elevated due to inflationary pressures, labor tightening, and supply chain disruptions117 - Higher interest rates have increased borrowing costs on the Senior Secured Credit Facility and may limit access to debt capital markets, with potential for further increases117 Pricing and Reserves Examines commodity price volatility, hedging strategies, and the company's proved reserves and full cost ceiling compliance - Commodity prices remain volatile, influenced by global demand, supply constraints, and geopolitical factors, with the company using commodity derivatives to mitigate price risk119120 Realized Prices for Proved Reserves (as of June 30, 2023) | Commodity | Price ($) | | :---------- | :-------- | | Oil ($/Bbl) | $84.88 | | NGL ($/Bbl) | $19.88 | | Natural gas ($/Mcf) | $2.49 | - The unamortized cost of evaluated oil and natural gas properties did not exceed the full cost ceiling as of June 30, 2023, and no full cost ceiling impairments were recorded during the six months ended June 30, 2023121 Results of Operations Analyzes the company's financial performance, detailing changes in revenues, costs, expenses, and non-operating items Revenues Examines the drivers behind changes in oil, NGL, and natural gas sales revenues, including average sales prices and volumes Total Oil, NGL, and Natural Gas Sales Revenues (in thousands) | Period | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------------ | :--------- | :--------- | :--------- | :--------- | | Three months ended June 30 | $333,924 | $549,470 | $(215,546) | (39)% | | Six months ended June 30 | $651,735 | $1,000,657 | $(348,922) | (35)% | - The decrease in total oil, NGL, and natural gas sales revenues was primarily driven by a 41% decrease in average sales price per BOE for the three months ended June 30, 2023, and a 34% decrease for the six months ended June 30, 2023114116126130 Average Sales Prices (Excluding Derivatives) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Oil ($/Bbl) | $74.09 | $111.20 | $(37.11) | (33)% | | NGL ($/Bbl) | $12.63 | $34.52 | $(21.89) | (63)% | | Natural gas ($/Mcf) | $0.71 | $5.21 | $(4.50) | (86)% | | Average sales price ($/BOE) | $40.76 | $69.38 | $(28.62) | (41)% | Average Sales Prices (With Commodity Derivatives) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Oil ($/Bbl) | $74.43 | $74.72 | $(0.29) | (0)% | | NGL ($/Bbl) | $12.63 | $27.24 | $(14.61) | (54)% | | Natural gas ($/Mcf) | $1.45 | $3.33 | $(1.88) | (56)% | | Average sales price ($/BOE) | $42.07 | $47.41 | $(5.34) | (11)% | - Sales of purchased oil decreased by 96% for the three months and 84% for the six months ended June 30, 2023, primarily due to a larger portion of pipeline commitments being fulfilled by lease production and a decrease in sales price132 Costs and Expenses Analyzes changes in key operating expenses such as lease operating expenses, production taxes, G&A, and depletion Total Costs and Expenses (in thousands) | Period | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------------ | :--------- | :--------- | :--------- | :--------- | | Three months ended June 30 | $213,767 | $191,922 | $21,845 | 11% | | Six months ended June 30 | $423,754 | $453,566 | $(29,812) | (7)% | - Lease operating expenses (LOE) increased by 37% for the three months and 30% for the six months ended June 30, 2023, primarily due to a shift to high-value Howard County wells with higher water production and inflationary pressures134136137 - Production and ad valorem taxes decreased by 35% for the three months and 30% for the six months ended June 30, 2023, due to decreased oil, NGL, and natural gas sales revenues134136138 - General and administrative (G&A) expenses, excluding LTIP and transaction expenses, increased by 14% for the three months and 39% for the six months ended June 30, 2023, mainly due to higher bonuses and inflationary pressures on compensation134136142 - Depletion expense per BOE increased by 28% for the three months and 27% for the six months ended June 30, 2023, primarily due to an increase in future development costs and inflationary pressures145 Non-Operating Income (Expense) Reviews non-operating items, including derivative gains/losses and interest expense, and their impact on financial results Total Non-Operating Expense, Net (in thousands) | Period | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------------ | :--------- | :--------- | :--------- | :--------- | | Three months ended June 30 | $(48,469) | $(99,526) | $51,057 | 51% | | Six months ended June 30 | $(55,679) | $(457,675) | $401,996 | 88% | - The gain (loss) on derivatives, net, significantly improved, moving from a loss of $(65.9) million in Q2 2022 to a loss of $(18.0) million in Q2 2023, and from a loss of $(391.7) million in H1 2022 to a gain of $2.4 million in H1 2023, primarily due to changes in non-cash mark-to-market valuations and settlements146 - Interest expense decreased by 4% for the three months and 8% for the six months ended June 30, 2023, due to a reduction in senior unsecured notes principal from 2022 repurchases, partially offset by increased Senior Secured Credit Facility borrowings148 Income Tax Benefit (Expense) Details the company's income tax benefit or expense, highlighting the impact of deferred income tax adjustments Income Tax Benefit (Expense) (in thousands) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Current | $(503) | $(4,513) | $(1,834) | $(5,731) | | Deferred | $222,334 | $(2,579) | $222,058 | $(484) | | Total | $221,831 | $(7,092) | $220,224 | $(6,215) | - The significant income tax benefit in 2023 is primarily due to a $222.2 million non-cash deferred income tax benefit from the release of the federal valuation allowance, as the company determined its federal deferred tax assets are more likely than not realizable151152 Liquidity and Capital Resources Assesses the company's ability to meet its financial obligations, including cash flows, debt, and available credit Cash Requirements for Known Contractual and Other Obligations Outlines the company's short-term and long-term cash requirements for contractual obligations and expected funding sources Significant Cash Requirements for Contractual Obligations (as of June 30, 2023, in thousands) | Obligation Type | Short-term | Long-term | Total | | :-------------------------- | :--------- | :---------- | :---------- | | Senior unsecured notes | $96,803 | $1,346,174 | $1,442,977 | | Senior Secured Credit Facility | $0 | $575,000 | $575,000 | | Asset retirement obligations | $2,666 | $74,428 | $77,094 | | Firm transportation commitments | $17,604 | $48,289 | $65,893 | | Operating lease commitments | $57,246 | $87,191 | $144,437 | | Total | $174,319 | $2,131,082 | $2,305,401 | - The company expects to meet its short-term contractual and other obligations using cash flows from operations161 Cash Flows Analyzes cash flows from operating, investing, and financing activities, highlighting significant changes and their drivers Cash Flows from Operating Activities Examines the net cash generated or used by the company's core business operations for the six months ended June 30 - Net cash provided by operating activities decreased by 32% to $365.0 million for the six months ended June 30, 2023, compared to $539.0 million in the same period of 2022162163 - The decrease was primarily due to a $348.9 million decrease in total oil, NGL, and natural gas sales revenues (driven by lower average sales prices), partially offset by a $306.3 million increase from changes in net settlements for matured derivatives163 Cash Flows from Investing Activities Details cash used for acquisitions of oil and natural gas properties and capital expenditures for the six months ended June 30 - Net cash used in investing activities increased significantly by 186% to $838.8 million for the six months ended June 30, 2023, from $293.5 million in the prior year, mainly due to the Driftwood and Forge acquisitions and increased capital expenditures162166 Incurred Capital Expenditures for Oil and Natural Gas Properties (Six Months Ended June 30, in thousands) | Category | 2023 | 2022 | Change ($) | Change (%) | | :---------------------------------------------------- | :--------- | :--------- | :--------- | :--------- | | Property acquisition costs (Evaluated) | $405,986 | $4,780 | $401,206 | 8393.43% | | Property acquisition costs (Unevaluated) | $212,220 | $3,291 | $208,929 | 6348.49% | | Exploration costs | $15,780 | $14,357 | $1,423 | 9.91% | | Development costs | $312,684 | $289,507 | $23,177 | 8.00% | | Total oil and natural gas properties incurred capital expenditures | $946,670 | $311,935 | $634,735 | 203.48% | - Total incurred capital expenditures, excluding non-budgeted acquisition costs, increased by 9% to $336.2 million for the six months ended June 30, 2023, compared to $308.9 million in the same period of 2022169 Cash Flows from Financing Activities Reports cash flows related to debt, equity, and other financing transactions for the six months ended June 30 - Net cash provided by financing activities was $501.1 million for the six months ended June 30, 2023, a significant increase from net cash used of $154.7 million in the prior year, primarily driven by $595.0 million in borrowings on the Senior Secured Credit Facility to fund acquisitions162173 Sources of Liquidity Identifies the company's primary sources of liquidity, including cash, credit facilities, and outstanding notes Senior Secured Credit Facility Details the terms, borrowing base, and outstanding balance of the company's Senior Secured Credit Facility - As of June 30, 2023, the company had total liquidity of $496.7 million, comprising $71.7 million in cash and cash equivalents and $425.0 million in available capacity under its Senior Secured Credit Facility159 - The Senior Secured Credit Facility has a maximum credit amount of $2.0 billion, a borrowing base of $1.3 billion, and an aggregate elected commitment of $1.0 billion, with $575.0 million outstanding as of June 30, 2023174 January 2025 Notes, January 2028 Notes and July 2029 Notes Provides information on the principal amounts and interest rates of the company's outstanding senior unsecured notes Outstanding Senior Unsecured Notes (as of June 30, 2023, in millions) | Note Type | Principal | Interest Rate | | :---------------- | :-------- | :------------ | | January 2025 Notes | $455.6 | 9.500% | | January 2028 Notes | $300.3 | 10.125% | | July 2029 Notes | $298.2 | 7.750% | | Total | $1,054.1 | | Supplemental Guarantor Information Identifies the subsidiary that guarantees the company's senior unsecured notes and the ranking of these guarantees - Vital Midstream Services, LLC, a wholly-owned subsidiary, jointly and severally guarantees the company's senior unsecured notes, with guarantees ranking equally with other senior indebtedness177178 Critical Accounting Estimates Discusses accounting estimates requiring significant judgment, particularly regarding income taxes and deferred tax asset recoverability Income Taxes Explains the judgments involved in income tax accounting, including deferred tax asset valuation and allowance release - The company's income tax accounting involves estimating federal and state income taxes and assessing the recoverability of deferred tax assets, which requires significant judgment based on positive and negative evidence182183 - During Q2 2023, the company determined its federal net deferred tax assets were realizable, leading to the release of the federal valuation allowance, while the Oklahoma valuation allowance remains184 Item 3. Quantitative and Qualitative Disclosures About Market Risk Provides information on the company's exposure to market risks from commodity prices and interest rates, and risk management strategies Commodity Price Exposure Details the company's use of commodity derivatives to hedge price risk and presents a sensitivity analysis of these positions - The company uses commodity derivative transactions (puts, swaps, collars, basis swaps) to hedge price risk for a portion of anticipated sales volumes, aiming to mitigate cash flow variability from volatile oil, NGL, and natural gas prices187 Sensitivity Analysis of Commodity Derivative Asset Position (as of June 30, 2023, in thousands) | Metric | Amount | | :------------------------------------------ | :------- | | Commodity derivative asset position | $4,654 | | Impact of a 10% increase in forward commodity prices | $(54,735) | | Impact of a 10% decrease in forward commodity prices | $49,165 | Interest Rate Risk Discusses the company's exposure to interest rate fluctuations on its floating-rate debt, specifically the Senior Secured Credit Facility - The Senior Secured Credit Facility bears interest at a floating rate (7.978% as of June 30, 2023), while senior unsecured notes bear fixed rates, exposing the company to interest rate fluctuations on its floating-rate debt189 - The applicable margin on Senior Secured Credit Facility borrowings varies from 1.5% to 2.5% for alternate base rate and 2.5% to 3.5% for Term SOFR, depending on the utilization ratio, with the margin at 1.75% for alternate base rate and 2.75% for Term SOFR as of June 30, 2023189 Item 4. Controls and Procedures Evaluates the effectiveness of the company's disclosure controls and internal control over financial reporting Evaluation of Disclosure Controls and Procedures Confirms the effectiveness of Vital's disclosure controls and procedures as of June 30, 2023 - Vital's disclosure controls and procedures were evaluated and concluded to be effective as of June 30, 2023, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely190 Evaluation of Changes in Internal Control Over Financial Reporting Reports no material changes in the company's internal control over financial reporting during the quarter ended June 30, 2023 - There were no changes in the company's internal controls over financial reporting during the quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, these controls191 Part II Covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings States that the company is involved in various legal proceedings, none expected to have a material adverse effect - The company is involved in various legal proceedings but does not believe any, if decided adversely, will have a material adverse effect on its business, financial position, results of operations, or liquidity194 Item 1A. Risk Factors Refers to previously disclosed risk factors, confirming no material changes since the 2022 Annual Report on Form 10-K - There have been no material changes in the company's risk factors from those described in its 2022 Annual Report on Form 10-K195 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports on equity security transactions, including no unregistered sales and activity under the share repurchase program Unregistered Sales of Equity Securities Confirms that there were no unregistered sales of equity securities during the reporting period - There were no unregistered sales of equity securities during the period196 Issuer Repurchases of Equity Securities Details shares withheld for tax obligations and the remaining availability under the share repurchase program - During the three months ended June 30, 2023, the company withheld 8,551 shares to satisfy tax withholding obligations related to equity-based compensation awards, but no shares were repurchased under the $200 million share repurchase program197 - As of June 30, 2023, approximately $162.7 million remained available for future repurchases under the share repurchase program, which expires in May 2024197 Item 3. Defaults Upon Senior Securities States that no defaults occurred upon senior securities during the reporting period - There were no defaults upon senior securities during the period198 Item 4. Mine Safety Disclosures Provides information on the company's mine safety disclosures, specifically regarding its MSHA-regulated sand mine - The company's Howard County, Texas sand mine operations are subject to regulation by the Federal Mine Safety and Health Administration (MSHA) under the Mine Act199 - Information concerning mine safety violations and other regulatory matters is included in Exhibit 95.1 to this Quarterly Report200 Item 5. Other Information Presents other relevant information, including changes to Rule 10b5-1 trading arrangements for officers and directors Rule 10b5-1 Trading Arrangement Changes Details modifications and terminations of Rule 10b5-1 trading arrangements by company officers - Mark Denny adopted a new Rule 10b5-1 trading arrangement on May 22, 2023, for the sale of 5,496 securities, and terminated a previous arrangement on February 24, 2023201 - Jason Pigott terminated a Rule 10b5-1 trading arrangement on February 24, 2023, for the sale of 10,000 securities201 Item 6. Exhibits Lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including agreements and certifications Signatures Contains the required signatures for the Quarterly Report on Form 10-Q