# Permian Resources Corp (PR) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Permian Resources Corp's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1658566/000165856625000014/pr-20241231.htm
Accession: 0001658566-25-000014
Filing date: 2025-02-26
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/PR/
All MD&A years: /company/PR/mda/
Previous year: /company/PR/mda/fy2023/ (FY 2023)
Next year: /company/PR/mda/fy2025/ (FY 2025)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data” in this Annual Report. The following discussion and analysis contain forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, future market prices for oil, natural gas and NGLs, future production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, inflation, regulatory changes, and other uncertainties, as well as those factors discussed in “Cautionary Statement Concerning Forward-Looking Statements” and “Item 1A. Risk Factors” in this Annual Report, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may or may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Overview

We are an independent oil and natural gas company focused on the responsible acquisition, optimization and development of high-return oil and natural gas properties. Our assets are mainly located in the core of the Permian Basin. Our principal business objective is to increase shareholder value by efficiently developing our oil and natural gas assets in an environmentally and socially responsible way, with an overall objective of improving our rates of return and generating sustainable free cash flow.

Market Conditions

Our revenue, profitability and ability to return cash to stockholders can depend substantially on factors beyond our control, such as economic, political and regulatory developments. Prices for crude oil, natural gas and NGLs have experienced significant fluctuations in recent years and may continue to fluctuate widely in the future.

The Organization of Petroleum Exporting Countries and other oil producing countries (“OPEC+”) undertook a series of actions in an effort to support commodity prices throughout 2023 in response to global recession concerns, a high interest rate environment, lower than expected demand from China and a regional banking crisis in the U.S., among other events. In addition, both Saudi Arabia and Russia announced unilateral production curtailments at separate times during 2023. These actions, coupled with relatively strong global demand and rising tensions in the Middle East, caused crude oil prices to increase during 2023, with NYMEX WTI spot prices reaching a high of $93.68 per barrel on September 27, 2023. However, further concerns of global economic growth, inflation and increases in oil supply levels resulted in additional price deterioration at the end of 2023. Despite these events, in 2024 crude oil prices were largely supported by OPEC+’s decision to delay future production increases, in addition to higher global demand. More recently, oil demand fears around China, the potential for a global trade war and non-OPEC supply growth have caused the NYMEX WTI spot price to drop to an average of $70.28 in the fourth quarter of 2024.

Natural gas prices remained low for the majority of 2024 driven by an over-supply due to mild winter weather, liquefied natural gas project delays and higher than expected natural gas production. Market prices in the Permian Basin were further impacted by low demand as a result of current pipeline capacity constraints out of the basin and additional pipeline maintenance, which led to negative regional gas prices being realized at the Waha Hub in West Texas (“Waha”) during the second and third quarters of 2024. Increased demand from colder temperatures and additional long-haul pipeline takeaway resulted in positive realized prices at Waha for the fourth quarter of 2024. As a result of the events described above, the Waha Hub price of natural gas only averaged $0.05 per MMBtu for the year ended December 31, 2024.

The oil and natural gas industry is cyclical, and it is likely that commodity prices, as well as commodity price differentials, will continue to be volatile due to fluctuations in global supply and demand, inventory levels, geopolitical events, federal and state government regulations, weather conditions, the global transition to alternative energy sources, supply chain constraints and other factors. The following table highlights the quarterly average price trends for NYMEX WTI spot prices for crude oil and NYMEX Henry Hub index price for natural gas since the first quarter of 2022:

[[GREPCENT_TABLE]]
[["","2022","","2023","","2024"],["","Q1","","Q2","","Q3","","Q4","","Q1","","Q2","","Q3","","Q4","","Q1","","Q2","","Q3","","Q4"],["Crude Oil (per Bbl)","$","94.40","","","$","108.34","","","$","91.56","","","$","82.64","","","$","76.13","","","$","73.78","","","$","82.26","","","$","78.32","","","$","76.96","","","$","80.55","","","$","75.16","","","$","70.28"],["Natural Gas (per MMBtu)","$","4.60","","","$","7.39","","","$","7.96","","","$","5.55","","","$","2.67","","","$","2.12","","","$","2.58","","","$","2.74","","","$","2.41","","","$","2.04","","","$","2.08","","","$","2.42"]]
[[/GREPCENT_TABLE]]

Lower commodity prices and lower futures curves for oil and gas prices can result in impairments of our proved oil and natural gas properties or undeveloped acreage and may materially and adversely affect our operating cash flows, liquidity, financial condition, results of operations, future business and operations, and/or our ability to finance planned capital

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expenditures, which could in turn impact our ability to comply with covenants under our Credit Agreement and senior notes. Lower realized prices may also reduce the borrowing base under our Credit Agreement, which is determined at the discretion of the lenders and is based on the collateral value of our proved reserves that have been mortgaged to the lenders. Upon a redetermination, if any borrowings in excess of the revised borrowing capacity were outstanding, we could be forced to immediately repay a portion of the debt outstanding under the Credit Agreement.

Due to the cyclical nature of the oil and gas industry, fluctuating demand for oilfield goods and services can put pressure on the pricing structure within our industry. As commodity prices rise, costs of oilfield goods and services generally also increase; however, during periods of commodity price declines, oilfield costs typically lag and do not adjust downward as fast as oil prices do. In addition, the U.S. saw higher than normal inflation during 2023 and 2024. Inflationary pressures such as these may also result in increases to the costs of our oilfield goods, services and personnel, which can in turn cause our capital expenditures and operating costs to rise.

2024 Highlights and Future Considerations

Bolt-On Acquisition

On September 17, 2024, we completed an acquisition of oil and gas properties with certain affiliates of Occidental Petroleum Corporation for total cash consideration of $743.5 million, subject to customary post-closing purchase price adjustments (the “Bolt-On Acquisition”). The Bolt-On Acquisition included approximately 29,500 net leasehold acres and approximately 9,900 net royalty acres that are predominately located directly offsetting our existing assets in Reeves County, Texas, as well as Eddy County, New Mexico. Additionally, the acquired assets in Reeves County included a fully integrated midstream system, consisting of over 100 miles of operated oil and gas gathering systems, approximately 10,000 surface acres, and water infrastructure including saltwater disposal wells, a recycling facility, frac ponds and water wells. The results of operations from the Bolt-On Acquisition were included in our financial and operational data beginning on September 17, 2024.

2024 Asset Acquisitions

During the year ended December 31, 2024, we completed multiple other acquisitions of oil and natural gas properties for a cumulative adjusted purchase price of approximately $392.3 million. These acquisitions are part of our ongoing bolt-on and grassroots acquisition programs.

Return of Capital Program

During the third quarter of 2024, we announced an update to our return of capital strategy including an increase to our quarterly base dividend to $0.15 per share ($0.60 per share annually), representing a 150% increase to our prior base dividend and eliminating our previous formulaic variable return policy. Additionally, our Board of Directors authorized the New Repurchase Program of $1 billion, replacing our existing $500 million program. These strategic return changes reinforce our commitment to maximizing shareholder value and continued focus on delivering leading shareholder returns.

During the year ended December 31, 2024, we declared and paid quarterly base dividends totaling $0.32 per share of Class A Common Stock and distributions totaling $0.32 per share of Class C Common Stock (each of which has an underlying common unit of OpCo (“Common Units”)). Additionally, during the year ended December 31, 2024, we declared and paid variable dividends totaling $0.39 per share of Class A Common Stock and distributions totaling $0.39 per share of Class C Common Stock. The cash dividends and distributions paid totaled $560.9 million for the year ended December 31, 2024.

During the year ended 2024, we paid in aggregate $61.0 million to repurchase 3.8 million Common Units of OpCo resulting in an equal number of associated shares of Class C Common Stock simultaneously being canceled under our stock repurchase program.

Financing

On January 24, 2025, we redeemed $175 million of OpCo’s outstanding senior notes due 2031 (the “2031 Senior Notes”) at a redemption price equal to 109.875% of the principal amount redeemed plus accrued and unpaid interest up to, but excluding, the redemption date. Following the redemption, the remaining aggregate principal amount of the 2031 Senior Notes outstanding is $325 million.

In connection with the fall borrowing base redetermination in October 2024, we entered into the eighth amendment to our Credit Agreement (the “Eighth Amendment”). The Eighth Amendment, among other things, (i) extended the maturity date from February 2027 to February 2028; (ii) reaffirmed the borrowing base at $4.0 billion; (iii) reaffirmed the aggregate elected commitments at $2.5 billion; and (iv) adjusted the applicable margin calculation to a pricing grid based upon borrowing base utilization.

On August 5, 2024, we issued $1.0 billion of 6.25% senior notes due 2033 (the “2033 Senior Notes”) in a 144A private placement at par. We used the net proceeds from the 2033 Senior Notes to (i) fund the tender offer and remaining redemption of

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our $300 million 7.75% senior notes due 2026; (ii) fund a portion of the purchase price of the Bolt-On Acquisition; and (iii) repay a portion of borrowings outstanding under our credit facility.

On July 30, 2024, we completed an underwritten public offering of 26.5 million shares of our Class A Common Stock resulting in net cash proceeds of $402.2 million after underwriting discounts and commissions. The net proceeds from this equity offering were used to fund a portion of the aggregate purchase price of the Bolt-On Acquisition.

On April 5, 2024, we redeemed all of OpCo’s outstanding 6.875% senior notes due 2027 at a redemption price equal to 100% of the aggregate principal amount outstanding of $356.4 million plus accrued and unpaid interest up to, but excluding, the redemption date.

In connection with the spring borrowing base redetermination in April 2024, we entered into the seventh amendment to the Credit Agreement (the “Seventh Amendment”). The Seventh Amendment, among other things, increased the elected commitments under the Credit Agreement to $2.5 billion from $2.0 billion and reaffirmed the borrowing base at $4.0 billion.

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Results of Operations

For the Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023

During 2023, we completed the Earthstone Merger, and the results of operations of Earthstone were included in our financial and operational data beginning on November 1, 2023.

The following table provides the components of our net revenues and net production (net of all royalties, overriding royalties and production due to others) for the periods indicated, as well as each period’s average prices and average daily production volumes:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Increase/(Decrease)"],["","2024","","2023","","$","","%"],["Net revenues (in thousands):"],["Oil sales","$","4,362,965","","","$","2,696,777","","","$","1,666,188","","","62","%"],["Natural gas sales(1)","240","","","142,077","","","(141,837)","","","(100)","%"],["NGL sales(2)","637,529","","","282,039","","","355,490","","","126","%"],["Oil and gas sales","$","5,000,734","","","$","3,120,893","","","$","1,879,841","","","60","%"],["Average sales prices:"],["Oil (per Bbl)","$","74.87","","","$","75.84","","","$","(0.97)","","","(1)","%"],["Effect of derivative settlements on average price (per Bbl)","0.03","","","1.81","","","(1.78)","","","(99)","%"],["Oil including the effects of hedging (per Bbl)","$","74.90","","","$","77.65","","","$","(2.75)","","","(4)","%"],["Average NYMEX WTI price for oil (per Bbl)","$","75.72","","","$","77.62","","","$","(1.90)","","","(2)","%"],["Oil differential from NYMEX","(0.85)","","","(1.78)","","","0.93","","","52","%"],["Natural gas price excluding the effects of GP&T (per Mcf)(1)","$","0.47","","","$","1.60","","","$","(1.13)","","","(71)","%"],["Effect of derivative settlements on average price (per Mcf)","0.34","","","0.29","","","0.05","","","17","%"],["Natural gas including the effects of hedging (per Mcf)","$","0.81","","","$","1.89","","","$","(1.08)","","","(57)","%"],["Average NYMEX Henry Hub price for natural gas (per MMBtu)","$","2.24","","","$","2.53","","","$","(0.29)","","","(11)","%"],["Natural gas differential from NYMEX","(1.77)","","","(0.93)","","","(0.84)","","","(90)","%"],["NGL price excluding the effects of GP&T (per Bbl)(2)","$","23.75","","","$","22.83","","","$","0.92","","","4","%"],["Net production:"],["Oil (MBbls)","58,276","","","35,560","","","22,716","","","64","%"],["Natural gas (MMcf)","220,900","","","119,182","","","101,718","","","85","%"],["NGL (MBbls)","30,636","","","15,569","","","15,067","","","97","%"],["Total (MBoe)(3)","125,730","","","70,992","","","54,738","","","77","%"],["Average daily net production:"],["Oil (Bbls/d)","159,225","","","97,424","","","61,801","","","63","%"],["Natural gas (Mcf/d)","603,551","","","326,525","","","277,026","","","85","%"],["NGL (Bbls/d)","83,706","","","42,654","","","41,052","","","96","%"],["Total (Boe/d)(3)","343,523","","","194,499","","","149,024","","","77","%"]]
[[/GREPCENT_TABLE]]

(1)    Natural gas sales for the year ended December 31, 2024 include $104.1 million of GP&T costs that are reflected as a reduction to natural gas sales and $48.9 million for the year ended December 31, 2023. Natural gas average sales price, however, excludes $0.47 per Mcf of such GP&T charges for the year ended December 31, 2024 and $0.41 for the year ended December 31, 2023.

(2)    NGL sales for the year ended December 31, 2024 include $90.0 million of GP&T costs that are reflected as a reduction to NGL sales and $73.3 million for the year ended December 31, 2023. NGL average sales price, however, excludes $2.94 per Bbl of such GP&T charges for the year ended December 31, 2024 and $4.71 per Bbl for the year ended December 31, 2023.

(3)    Calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Boe.

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Oil, Natural Gas and NGL Sales Revenues. Total net revenues for the year ended December 31, 2024 increased by $1.9 billion, or 60%, compared to the year ended December 31, 2023. Revenues are a function of oil, natural gas and NGL volumes sold and average commodity prices realized.

Net production volumes for oil, natural gas, and NGLs increased 64%, 85% and 97%, respectively, between periods. The increase in oil production was a result of additional production added from (i) wells acquired in the Earthstone Merger, which generated production during the entire year ended December 31, 2024 compared to only two months of additional production for the year ended December 31, 2023 as a result of closing the Earthstone Merger on November 1, 2023, and (ii) placing new wells online since the fourth quarter of 2023 as a result of our continued development plan. These increases in oil volumes were partially offset by normal production declines across our existing wells.

Natural gas and NGLs are produced concurrently with our crude oil volumes, typically resulting in a high correlation between fluctuations in oil quantities sold and natural gas and NGL quantities sold driving the 85% and 97% increases in gas and NGL volumes, respectively, between periods. The higher increase in gas and NGL volumes between periods as compared to the 64% increase in oil volumes was mostly due to the producing wells acquired in the Earthstone Merger, which have a higher gas-to-oil ratio than our existing production base, and this has resulted in more volumes of gas and NGLs being added to our total production stream since the closing of the Earthstone Merger on November 1, 2023. NGL volumes were further positively impacted by processors of our raw gas operating in higher ethane-recovery during the year ended December 31, 2024 as compared to the year ended December 31, 2023 resulting in a higher percentage of NGLs being recovered from our wet gas stream between periods.

Total net revenues increases were also driven by higher average realized sales prices of NGLs, which increased 4% for the year ended December 31, 2024 compared to the same 2023 period as a result of higher average Mont Belvieu spot prices for plant products during the year ended December 31, 2024.

These increases were partially offset by lower average realized sale prices for oil and natural gas which decreased 1% and 71%, respectively, for the year ended December 31, 2024 compared to the same 2023 period. The 1% decrease in the average realized oil price was mainly the result of 2% lower NYMEX crude prices between periods, which was slightly offset by improved oil differentials. The average realized sales price of natural gas decreased 71% mainly due to wider gas differentials realized on our gas sales, which are primarily sold at Waha where the market price averaged $0.05 per MMBtu during the year ended December 31, 2024 compared to $1.52 for the same 2023 period due to location specific market constraints for the majority of the 2024 period as discussed under the “Market Conditions” section above.

Operating Expenses. The following table sets forth selected operating expense data for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Increase/(Decrease)"],["","2024","","2023","","Change","","%"],["Operating costs (in thousands):"],["Lease operating expenses","$","685,172","","","$","373,772","","","$","311,400","","","83","%"],["Severance and ad valorem taxes","377,731","","","240,762","","","136,969","","","57","%"],["Gathering, processing, and transportation expense","183,602","","","89,282","","","94,320","","","106","%"],["Operating cost metrics:"],["Lease operating expenses (per Boe)","$","5.45","","","$","5.26","","","$","0.19","","","4","%"],["Severance and ad valorem taxes (% of revenue)","7.6","%","","7.7","%","","(0.1)","%","","(1)","%"],["Gathering, processing, and transportation expense (per Boe)","1.46","","","1.26","","","0.20","","","16","%"]]
[[/GREPCENT_TABLE]]

Lease Operating Expenses. Lease operating expenses (“LOE”) for the year ended December 31, 2024 increased $311.4 million compared to the year ended December 31, 2023. This increase in LOE was primarily related to our significantly higher well count between periods due to (i) wells acquired in the Earthstone Merger on November 1, 2023 that operated for the entire year of 2024 compared to two months in 2023; and (ii) additional wells placed on production since December 31, 2023.

Severance and Ad Valorem Taxes. Severance and ad valorem taxes for the year ended December 31, 2024 increased $137.0 million compared to the year ended December 31, 2023. Severance taxes are based on the market value of our production at the wellhead, while ad valorem taxes are generally based on the assessed taxable value of our proved developed oil and gas properties and vary across the different counties in which we operate. Severance taxes for the year ended 2024 increased $120.4 million compared to the same 2023 period primarily due to higher operating revenues between periods. Ad valorem taxes between periods increased by $16.6 million, mainly due to incurring a full year of ad valorem taxes on the proved developed properties acquired in the Earthstone Merger compared to two months in 2023.

Gathering, Processing and Transportation Expenses. GP&T costs for the year ended December 31, 2024 increased $94.3 million compared to the year ended December 31, 2023. This increase in expense was mainly attributable to higher natural gas

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and NGL volumes sold between periods, which in turn resulted in a higher amount of plant processing fees and gathering costs being incurred. Additionally, GP&T increased on a per Boe basis from $1.26 for the year ended December 31, 2023 to $1.46 per Boe for the year ended December 31, 2024. This increase in rate was mainly attributable to a higher portion of our GP&T costs being recognized as expense as compared to a reduction to our gas and NGL revenues between periods primarily related to processing contracts assumed as part of the Earthstone Merger.

Depreciation, Depletion and Amortization. The following table summarizes our depreciation, depletion and amortization (“DD&A”) for the periods indicated: 

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands, except per Boe data)","2024","","2023"],["Depreciation, depletion and amortization","$","1,776,673","","","$","1,007,576"],["Depreciation, depletion and amortization per Boe","$","14.13","","","$","14.19"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2024, DD&A expense amounted to $1.8 billion, an increase of $769.1 million from 2023. The primary factor contributing to higher DD&A expense in 2024 was the increase in our overall production volumes between periods, which increased DD&A expense by $776.9 million period over period, while our lower DD&A rate of $14.13 per Boe decreased DD&A expense by $7.8 million between periods.

DD&A per Boe was $14.13 for the year ended December 31, 2024 compared to $14.19 for the same period in 2023. Our DD&A rate can fluctuate as a result of finding and development costs incurred, acquisitions, impairments, as well as changes in proved developed and proved undeveloped reserves.

General and Administrative Expenses. The following table summarizes our general and administrative (“G&A”) expenses for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands, except per Boe data)","2024","","2023"],["Cash general and administrative expenses","$","116,387","","","$","85,978"],["Stock-based compensation expense","58,243","","","75,877"],["General and administrative expenses","$","174,630","","","$","161,855"],["Cash general and administrative expenses per Boe","$","0.93","","","$","1.21"]]
[[/GREPCENT_TABLE]]

G&A expenses for the year ended December 31, 2024 were $174.6 million compared to $161.9 million for the year ended December 31, 2023. Higher G&A in 2024 was the result of a $30.4 million increase in cash G&A between periods. This increase was primarily due to (i) G&A headcount increasing from an average of 185 for the year ended December 31, 2023 to 256 for the year ended December 31, 2024 stemming primarily from additional employees added as a result of the Earthstone Merger, which led to higher payroll and employee related costs; (ii) higher professional service fees between periods; and (iii) higher software expenses between periods. These increases were partially offset by a $17.6 million decrease in total stock-based compensation expense between periods related to expenses incurred during 2023 for accelerated vestings of equity awards for employees terminated in connection with the Colgate Merger on September 1, 2022 that did not reoccur during 2024. Refer to Note 7—Stock-Based Compensation under Part II, Item 8 of this Annual Report for additional information regarding these award modifications.

While cash G&A increased between periods, on a per Boe basis our cash G&A rate decreased 23% from $1.21 per Boe during the year ended December 31, 2023 to $0.93 per Boe during the year ended December 31, 2024 as a result of improved operational execution and realization of cost synergies following the Earthstone Merger.

Merger and integration expense. Merger and integration expense for the year ended December 31, 2024 was $18.1 million and mainly related to cost incurred related to the Earthstone Merger that closed on November 1, 2023. These charges consisted of (i) $13.2 million in severance and related benefits incurred for employees that were terminated in connection with our corporate mergers; and (ii) $4.9 million in charges associated with software integration, consultancy and other professional fees.

Merger and integration expense for the year ended December 31, 2023 was $125.3 million. These charges consisted of (i) $63.4 million in bankers’ advisory, legal, consultancy and accounting fees associated with the Earthstone Merger; (ii) $43.5 million in severance and related benefits associated with employee terminations that occurred in 2023 in connection with the Earthstone Merger; and (iii) $18.4 million in costs incurred during 2023 related to the Colgate Merger primarily consisting of employee severance charges and integration and consulting expenses.

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Exploration and Other Expenses. The following table summarizes exploration and other expenses for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2024","","2023"],["Geological and geophysical costs","$","17,312","","","$","11,342"],["Stock-based compensation expense","2,156","","","2,541"],["Other expenses","11,323","","","5,454"],["Exploration and other expenses","$","30,791","","","$","19,337"]]
[[/GREPCENT_TABLE]]

Exploration and other expenses were $30.8 million for the year ended December 31, 2024 compared to $19.3 million for the year ended December 31, 2023. Exploration and other expenses mainly consist of topographical studies, geographical and geophysical (“G&G”) projects, salaries and expenses of G&G personnel and include other operating costs. The period over period increase was primarily related to (i) higher other operating expenses mainly related to a $7.6 million loss recognized during 2024 associated with charges that were in legal dispute and stemmed from a severe winter storm impacting the Permian Basin in February 2021 (refer to Note 14—Commitments and Contingencies under Part II, Item 8 of this Annual Report for additional information regarding this legal dispute); and (ii) higher G&G costs primarily associated with increased headcount as a result of corporate growth following the Earthstone Merger.

Other Income and Expense. 

Interest Expense. The following table summarizes interest expense for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2024","","2023"],["Credit Facility","$","16,062","","","$","30,049"],["5.375% Senior Notes due 2026","15,556","","","15,557"],["7.75% Senior Notes due 2026","14,016","","","23,250"],["6.875% Senior Notes due 2027","6,397","","","24,500"],["8.00% Senior Notes due 2027","44,000","","","7,333"],["3.25% Convertible Senior Notes due 2028","5,524","","","5,525"],["5.875% Senior Notes due 2029","41,124","","","41,125"],["9.875% Senior Notes due 2031","49,376","","","8,229"],["7.00% Senior Notes due 2032","70,000","","","12,347"],["6.25% Senior Notes due 2033","25,347","","","\u2014"],["Amortization of debt issuance costs, debt discount and debt premium","6,563","","","16,078"],["Interest capitalized","\u2014","","","(7,813)"],["Loss on extinguishment of debt","8,585","","","\u2014"],["Other interest expense","2,206","","","1,029"],["Total","$","304,756","","","$","177,209"]]
[[/GREPCENT_TABLE]]

Interest expense was $127.5 million higher for the year ended December 31, 2024 compared to the year ended December 31, 2023 mainly due to (i) $77.8 million in additional interest expense incurred for the senior notes assumed in the Earthstone Merger on November 1, 2023; (ii) $57.7 million in higher interest incurred on our senior notes due 2032 that were issued in September and December 2023; and (iii) $25.3 million in additional interest incurred on our 2033 Senior Notes that were issued in July 2024. These increases were partially offset by (i) the April 2024 redemption of our 6.875% senior notes due 2027 and the August 2024 redemption of our 7.75% senior notes due 2026 that resulted in $18.8 million less interest incurred period over period, inclusive of the loss on extinguishment associated with their redemptions (refer to Note 5—Long-Term Debt for additional information regarding the senior note redemptions); and (ii) less interest expense incurred on our Credit Agreement due to lower weighted average borrowings outstanding, which decreased from $357.0 million for the year ended December 31, 2023 to $102.1 million for the year ended December 31, 2024.

Net Gain (Loss) on Derivative Instruments. Net gains and losses are a function of (i) changes in derivative fair values associated with fluctuations in the forward price curves for the commodities underlying each of our hedge contracts outstanding and (ii) monthly cash settlements on any closed out hedge positions during the period.

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The following table presents gains and losses on our derivative instruments for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2024","","2023"],["Realized cash settlement gains (losses)","$","77,203","","","$","99,410"],["Non-cash mark-to-market derivative gain (loss)","17,783","","","14,606"],["Total","$","94,986","","","$","114,016"]]
[[/GREPCENT_TABLE]]

Income Tax Expense: The following table summarizes our pre-tax income and income tax expense for the periods indicated.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2024","","2023"],["Income before income taxes","$","1,550,851","","","$","1,035,648"],["Income tax expense","(300,342)","","","(155,945)"]]
[[/GREPCENT_TABLE]]

Our provision for income taxes for the years ended December 31, 2024 and 2023 differs from the amounts that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax book income primarily due to (i) the portion of pre-tax net income that is attributable to our non-controlling interest and which is therefore not taxable to the Company; (ii) other permanent differences; and (iii) state income taxes.

For the year ended December 31, 2024 we generated pre-tax net income of $1.6 billion and recorded income tax expense of $300.3 million. During the year ended December 31, 2023, generated pre-tax net income of $1.0 billion and recorded income tax expense of $155.9 million. The primary factor decreasing our income tax expense below the U.S. statutory rate for both periods was the portion of pre-tax income that was attributable to our non-controlling interest partners and not taxable to the Company.

For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2023 Annual Report on Form 10-K filed with the SEC for a discussion of the results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Liquidity and Capital Resources

Overview

Our drilling and completion activities require us to make significant capital expenditures. Historically, our primary sources of liquidity have been cash flows from operations, borrowings under our revolving credit facility, proceeds from offerings of debt or equity securities, or proceeds from the sale of oil and gas properties. Our future cash flows are subject to a number of variables, including oil and natural gas prices, which have been and will likely continue to be volatile. Lower commodity prices can negatively impact our cash flows and our ability to access debt or equity markets, and sustained low oil and natural gas prices could have a material and adverse effect on our liquidity position. To date, our primary uses of capital have been for drilling and development capital expenditures and the acquisition of oil and natural gas properties.

We continually evaluate our capital needs and compare them to our capital resources. Our total capital expenditures incurred for development during the year ended December 31, 2024 were $2.1 billion. We expect our total drilling, completion and facilities capital expenditures budget for 2025 to be between $1.9 billion to $2.1 billion. We funded our capital expenditures for 2024 entirely from cash flows from operations, and we expect to fund our 2025 capital expenditures budget entirely from cash flows from operations given our anticipated level of oil and gas production, current commodity prices and our commodity hedge positions in place.

We are the operator of a high percentage of our acreage and can control the amount and timing of our capital expenditures. Accordingly, we can choose to defer or accelerate a portion of our planned capital expenditures depending on a variety of factors, including but not limited to: (i) prevailing and anticipated prices for oil and natural gas; (ii) oil storage or transportation constraints; (iii) the success of our drilling activities; (iv) the availability of necessary equipment, infrastructure and capital; (v) the receipt and timing of required regulatory permits and approvals; (vi) seasonal conditions; (vii) property or land acquisition costs; and (viii) the level of participation by other working interest owners.

During the year ended December 31, 2024, we completed an underwritten public offering of 26.5 million shares of our Class A Common Stock resulting in net cash proceeds of $402.2 million after underwriting discounts and commissions. Additionally, we issued $1.0 billion of 6.25% senior notes due 2033 in a 144A private placement at par. We used the net proceeds from these offerings to (i) fund the tender offer and remaining redemption of our $300 million 7.75% senior notes due 2026; (ii) fund the $743.5 million purchase price of the Bolt-On Acquisition; (iii) repay borrowings outstanding under our credit facility; and (iv) fund other general corporate purposes.

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During the year ended December 31, 2024, we declared and paid quarterly base dividends totaling $0.32 per share of Class A Common Stock and distributions totaling $0.32 per share of Class C Common Stock (each of which has an underlying Common Unit of OpCo). In addition, during the year ended December 31, 2024, we declared and paid variable dividends totaling $0.39 per share of Class A Common Stock and distributions totaling $0.39 per share of Class C Common Stock. The cash dividends and distributions paid to common unitholders totaled $560.9 million for the year ended December 31, 2024. Additionally, we repurchased 3.8 million shares of Class C Common Stock for $61.0 million under our stock repurchase program during the year ended December 31, 2024. Going forward, we plan to return capital to shareholders primarily through our recently enhanced base dividend, in addition to opportunistic share repurchases.

On September 3, 2024, our Board of Directors approved the New Repurchase Program to allow for share repurchases of up to $1 billion on an indefinite basis, replacing our existing $500 million stock repurchase program. The stock repurchase program can be used to reduce our shares of common stock outstanding. Such repurchases would be made at terms and prices determined by us based upon prevailing market conditions, applicable legal requirements, available liquidity, compliance with our debt agreements and other factors. In addition, we may, from time to time, seek to retire or purchase our outstanding senior notes through cash purchases and/or exchanges for debt in open-market purchases, privately negotiated transactions or otherwise.

Although we cannot provide any assurance that cash flows from operations or other sources of needed capital will be available to us at acceptable terms, or at all, and noting that our ability to access the public or private debt or equity capital markets at economic terms in the future will be affected by general economic conditions, the domestic and global oil and financial markets, our operational and financial performance, the value and performance of our debt or equity securities, prevailing commodity prices and other macroeconomic factors outside of our control, we believe that based on our current expectations and projections, we will have sufficient capital available to fund our capital expenditure requirements through the 12-month period following the filing of this Annual Report and the long-term.

Analysis of Cash Flow Changes

The following table summarizes our cash flows for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2024","","2023","","2022"],["Net cash provided by operating activities","$","3,411,968","","","$","2,213,499","","","$","1,371,671"],["Net cash used in investing activities","(3,104,195)","","","(1,578,379)","","","(1,205,049)"],["Net cash (used in) provided by financing activities","97,706","","","(631,188)","","","(106,625)"]]
[[/GREPCENT_TABLE]]

Cash Flows from 2024 Compared to 2023. For the year ended December 31, 2024, we generated $3.4 billion of cash from operating activities, an increase of $1.2 billion from 2023. Cash provided by operating activities increased primarily due to higher production volumes and lower merger and integration expense for the year ended December 31, 2024 as compared to the same 2023 period. These increasing factors were partially offset by lower realized prices for oil and natural gas, higher costs including lease operating expenses, severance and ad valorem taxes, interest expense, GP&T expense, and cash G&A as well as the timing of our receivable collections for the year ended December 31, 2024 as compared to the same 2023 period. Refer to Results of Operations for more information on the impact of volumes and prices on revenues and on fluctuations in our operating expenses between periods.

For the year ended December 31, 2024, cash flows from operating activities, proceeds from the issuance of our 2033 Senior Notes and proceeds from an underwritten public offering of 26.5 million Class A shares were used to: (i) fund $2.1 billion of drilling and development cash expenditures; (ii) fund acquisitions of oil and gas properties of approximately $1.0 billion; (iii) redeem $656.4 million of our senior notes; (iv) pay $560.9 million in dividends and cash distributions to holders of our Common Units; and (v) repurchase $61.0 million of our common stock.

Cash Flows from 2023 Compared to 2022. For the year ended December 31, 2023, we generated $2.2 billion of cash from operating activities, an increase of $841.8 million from 2022. Cash provided by operating activities increased primarily due to higher production volumes, higher cash settlements on derivatives as well as the timing of our receivable collections for the year ended December 31, 2023 as compared to the same 2022 period. These increasing factors were partially offset by lower realized prices for all commodities, higher lease operating expenses, severance and ad valorem taxes, interest expense, merger and integration expense and cash G&A expense for the year ended December 31, 2023.

For the year ended December 31, 2023, cash flows from operating activities, cash on hand, $1.0 billion in proceeds from the issuance of our senior notes due 2032 and sales proceeds from divestitures together with contingent consideration of $175.4 million from the sale of oil and natural gas properties were used to (i) fund $1.5 billion of drilling and development cash expenditures; (ii) repay $830.0 million of borrowings outstanding from Earthstone’s credit facility that were assumed at closing of the Earthstone Merger; (iii) repay net borrowings of $385.0 million under our Credit Agreement; (iv) pay $236.0 million in

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dividends and cash distributions to holders of our Common Units; (v) fund acquisitions of oil and gas properties of $234.3 million; and (vi) repurchase $162.4 million of our common stock.

Credit Agreement

OpCo, our consolidated subsidiary, has a secured revolving Credit Agreement with a syndicate of banks maturing in February 2028 that, as of December 31, 2024, had a borrowing base of $4.0 billion and elected commitments of $2.5 billion. As of December 31, 2024, we had no borrowings outstanding and $2.5 billion in available borrowing capacity, which was net of $2.5 million in letters of credit outstanding.

In connection with the 2024 spring borrowing base redetermination, we entered into the Seventh Amendment to the Credit Agreement, which, among other things, increased the elected commitments under the Credit Agreement to $2.5 billion from $2.0 billion and reaffirmed the borrowing base at $4.0 billion. The elected commitments and borrowing base were reaffirmed during the fall 2024 borrowing base redetermination that also resulted in us entering into the Eighth Amendment, which, among other things, extended the maturity date from February 2027 to February 2028 and adjusted the applicable margin calculation to a pricing grid based upon borrowing base utilization.

The Credit Agreement contains restrictive covenants that limit our ability to, among other things: (i) incur additional indebtedness; (ii) make investments and loans; (iii) enter into mergers; (iv) make restricted payments; (v) repurchase or redeem junior debt; (vi) enter into commodity hedges exceeding a specified percentage of our expected production; (vii) enter into interest rate hedges exceeding a specified percentage of its outstanding indebtedness; (viii) incur liens; (ix) sell assets; and (x) engage in transactions with affiliates.

The Credit Agreement also requires OpCo to maintain compliance with the following financial ratios:

(i) a current ratio, which is the ratio of OpCo’s consolidated current assets (including an add back of unused commitments under the revolving credit facility and excluding non-cash derivative assets and certain restricted cash) to its consolidated current liabilities (excluding the current portion of long-term debt under the Credit Agreement and non-cash derivative liabilities), of not less than 1.0 to 1.0; and

(ii) a leverage ratio, which is the ratio of total funded debt to consolidated EBITDAX (with such terms defined within the Credit Agreement) for the most recent quarter annualized, of not greater than 3.5 to 1.0.

The Credit Agreement includes fall away covenants, lower interest rates and reduced collateral requirements that OpCo may elect if OpCo is assigned an Investment Grade Rating (as defined within the Credit Agreement). OpCo was in compliance with the covenants and financial ratios under the Amended Credit Agreement described above through the filing of this Annual Report. For further information on the Credit Agreement, refer to Note 5—Long-Term Debt under Item 8 of this Annual Report.

Convertible Senior Notes

On March 19, 2021, OpCo issued $150.0 million of 3.25% senior unsecured convertible notes due 2028 (the “Convertible Senior Notes”). On March 26, 2021, OpCo issued an additional $20.0 million of Convertible Senior Notes pursuant to the exercise of the underwriters’ over-allotment option to purchase additional notes. These issuances resulted in aggregate net proceeds to OpCo of $163.6 million.

The Convertible Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Company and each of OpCo’s current subsidiaries that guarantee OpCo’s outstanding Senior Unsecured Notes as defined below.

The Convertible Senior Notes bear interest at an annual rate of 3.25% and are due on April 1, 2028 unless earlier repurchased, redeemed or converted. The Convertible Senior Notes may become convertible prior to April 1, 2028, upon the occurrence of certain events or conditions being met as disclosed in Note 5—Long-Term Debt under Item 8 of this Annual Report. As of December 31, 2024, certain conditions have been met, and as a result, noteholders have the right to convert their Convertible Senior Notes. OpCo can settle the Convertible Senior Notes by paying or delivering cash, shares of the Class A Common Stock, or a combination of cash and Class A Common Stock, at OpCo’s election.

In connection with the Convertible Senior Notes issuance, OpCo entered into privately negotiated capped call spread transactions (the “Capped Call Transactions”), that are expected to reduce potential dilution to our Class A Common Stock upon a conversion and/or offset any cash payments OpCo is required to make in excess of the principal amount of the Convertible Senior Notes, subject to a cap. The Capped Call Transactions have an initial strike price of $6.28 per share of Class A Common Stock and an initial capped price of $8.4525 per share of Class A Common Stock (each subject to certain customary adjustments).

Senior Notes

On August 5, 2024, OpCo issued $1.0 billion of 6.25% senior notes due 2033 in a 144A private placement at par that resulted in net proceeds of $986.4 million, after deducting $13.6 million debt issuance costs.

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On November 1, 2023, in connection with the Earthstone Merger, OpCo entered into supplemental indentures whereby all of Earthstone’s outstanding senior notes were assumed and became the senior unsecured debt obligations of OpCo. The senior notes assumed by OpCo included $550 million of 8.00% senior notes due 2027 (the “2027 8.00% Senior Notes”) and $500 million of 9.875% senior notes due 2031. We recorded the acquired senior notes at their fair values as of the Earthstone Merger closing date, which were equal to 102.86% of par (a $15.7 million premium) for the 2027 8.00% Senior Notes and 107.37% of par (a $36.8 million premium) for the 2031 Senior Notes.

On September 12, 2023, OpCo issued $500 million of 7.00% senior notes due 2032 (the “Original 2032 Notes”) in a 144A private placement. On December 13, 2023, OpCo issued additional notes under the indenture dated September 12, 2023 that totaled an additional $500 million of 7.00% senior notes (together with the Original 2032 Notes, the “2032 Senior Notes”), which resulted in aggregate net proceeds of $982.5 million, after deducting the issuance discount of $2.5 million and debt issuance costs of $15.0 million. The 2032 Senior Notes are treated as a single series of securities and vote together as a single class, and have substantially identical terms, other than the issue date and issue price.

On September 1, 2022, in connection with the Colgate Merger, OpCo entered into supplemental indentures whereby all of Colgate’s outstanding senior notes were assumed at the Colgate Merger closing date and became the senior unsecured debt obligations of OpCo. The senior notes assumed by OpCo included $300 million of 7.75% senior notes due 2026 (the “2026 7.75% Senior Notes”) and $700 million of 5.875% senior notes due 2029 (the “2029 Senior Notes”). We recorded the acquired senior notes at their fair value as of the Colgate Merger closing, which were equal to 100% of par for the 2026 7.75% Senior Notes and 92.96% of par (a $49.3 million debt discount) for the 2029 Senior Notes. In August 2024, we redeemed $299.6 million of our outstanding 2026 7.75% Senior Notes through a cash tender offer and we irrevocably elected to redeem the remaining amount of the 2026 7.75% Senior Notes outstanding pursuant to the terms of the indenture governing the 2026 7.75% Senior Notes.

On November 30, 2017, OpCo issued $400.0 million of 5.375% senior notes due 2026 (the “2026 5.375% Senior Notes”) and on March 15, 2019, OpCo issued $500.0 million of 6.875% senior notes due 2027 (the “2027 6.875% Senior Notes” and, together with the 2027 8.00% Senior Notes, 2031 Senior Notes, 2032 Senior Notes, 2026 5.375% Senior Notes, 2029 Senior Notes and the 2026 7.75% Senior Notes, the “Senior Unsecured Notes”) in 144A private placements. In May 2020, $110.6 million aggregate principal amount of the 2026 5.375% Senior Notes and $143.7 million aggregate principal amount of the 2027 6.875% Senior Notes were validly tendered and exchanged by certain eligible bondholders for consideration consisting of $127.1 million aggregate principal amount of 8.00% second lien senior secured notes, which were fully redeemed at par in connection with the Convertible Senior Notes issuance during the second quarter of 2021. On April 5, 2024, we redeemed all of OpCo’s remaining outstanding 2027 6.875% Senior Notes at a redemption price equal to 100% of the aggregate principal amount outstanding of $356.4 million.

The Senior Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Company and each of OpCo’s current subsidiaries that guarantee borrowings under OpCo’s Credit Agreement.

The indentures governing the Senior Unsecured Notes contain covenants that, among other things and subject to certain exceptions and qualifications, limit OpCo’s ability and the ability of OpCo’s restricted subsidiaries to: (i) incur or guarantee additional indebtedness or issue certain types of preferred stock; (ii) pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; (iii) transfer or sell assets; (iv) make investments; (v) create certain liens; (vi) enter into agreements that restrict dividends or other payments from their subsidiaries to them; (vii) consolidate, merge or transfer all or substantially all of their assets; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. OpCo was in compliance with these covenants as of December 31, 2024 and through the filing of this Annual Report.

For further information on our Convertible Senior Notes and Senior Unsecured Notes, refer to Note 5—Long-Term Debt under Item 8 of this Annual Report.

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Obligations and Commitments

We routinely enter into or extend operating and transportation agreements, office and equipment leases, drilling rig contracts, among others, in the ordinary course of business. The following table summarizes our obligations and commitments as of December 31, 2024 to make future payments under long-term contracts for the time periods specified below.

[[GREPCENT_TABLE]]
[["(in thousands)","2025","","2026","","2027","","2028","","2029","","Thereafter","","Total"],["Operating leases(1)","$","60,242","","","$","46,007","","","$","13,317","","","$","3,561","","","$","2,333","","","$","4,087","","","$","129,547"],["Finance leases(2)","803","","","823","","","843","","","864","","","886","","","205,534","","","209,753"],["Purchase obligations(3)","57,578","","","56,757","","","15,251","","","13,233","","","724","","","\u2014","","","143,543"],["Development obligation(4)","20,000","","","20,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","40,000"],["Asset retirement obligations(5)","11,646","","","12,330","","","3,200","","","192","","","1,124","","","131,597","","","160,089"],["Long term debt obligations(6)","\u2014","","","289,448","","","550,000","","","170,000","","","700,000","","","2,500,000","","","4,209,448"],["Cash interest expense on long-term debt obligations(7)","297,495","","","282,586","","","250,771","","","225,652","","","202,552","","","411,918","","","1,670,974"],["Total","$","447,764","","","$","707,951","","","$","833,382","","","$","413,502","","","$","907,619","","","$","3,253,136","","","$","6,563,354"]]
[[/GREPCENT_TABLE]]

(1)    Operating leases consist of our office rental agreements, drilling rig contracts and other wellhead equipment. Please refer to Note 16—Leases under Part II, Item 8 of this Annual Report for details on our operating lease commitments.

(2)     Finance leases consist of our ground lease related to the office building we purchased in Midland, Texas. The lease term is ninety-nine years and as a result, the commitments above have been shown at their current present value. Please refer to Note 16—Leases under Part II, Item 8 of this Annual Report for details on our finance lease commitments.

(3) Consists of an energy purchase agreement to buy a minimum amount of electricity at a fixed price or pay for underutilization as well as a take-or-pay agreement to purchase a minimum volume of frac sand at a fixed price. The obligations reported above represent our remaining minimum financial commitments pursuant to the terms of these contracts as of December 31, 2024, however actual expenditures may exceed the minimum commitments presented above.

(4)    Consists of obligations that are tied to our future drilling, completion and water connection activity in Reeves County, Texas that will require repayment if certain performance obligations through September 2026 are not met.

(5)    Asset retirement obligations reflect the present value of the estimated future costs associated with the plugging and abandonment of oil and gas wells and the related land restoration in accordance with applicable laws and regulations.

(6)    Long-term debt consists of the principal amounts of our senior notes due as of December 31, 2024.

(7)    Cash interest expense on our senior notes is estimated assuming no principal repayment until the maturity of the instruments. Cash interest expense on the Credit Agreement includes unused commitment fees and assumes no additional principal borrowings, repayments or changes to commitments under the agreement through the instrument due date.

Recently Issued Accounting Standards

Refer to Note 1—Basis of Presentation and Summary of Significant Accounting Policies, in Part II, Item 8. Financial Statements and Supplementary Data in this annual report for a discussion of recently issued accounting standards and their anticipated effect on our business.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these statements requires us to make certain assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as, the disclosure of contingent assets, contingent liabilities and commitments as of the date of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, commodity prices, production performance, drilling results, mechanical problems, general business conditions and other factors. A summary of our significant accounting policies can be found in Note 1—Basis of Presentation and Summary of Significant Accounting Policies under Item 8 of this Annual Report.

We have outlined certain of our accounting policies below which require the application of significant judgment by our management.

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Oil and Natural Gas Reserve Quantities

We use the successful efforts method of accounting for our oil and gas producing activities. The successful efforts method inherently relies on the estimation of proved crude oil, natural gas and NGL reserves. Reserve quantities and the related estimates of future net cash flows are used as inputs to our calculation of depletion, evaluation of proved properties for impairment, assessment of the expected realizability of our deferred income tax assets, and the standardized measure of discounted future net cash flows computations.

The process of estimating quantities of proved reserves is inherently imprecise and relies on the following: i) interpretations and judgment of available geological, geophysical, engineering and production data; ii) certain economic assumptions, some of which are mandated by the SEC, such as commodity prices; and iii) assumptions and estimates of underlying inputs such as operating expenses, capital expenditures, plug and abandonment costs and taxes. All of these assumptions may differ substantially from actual results, which could result in a significant change in our estimated quantities of proved reserves and their future net cash flows. We continually make revisions to reserve estimates throughout the year as additional information becomes available, and we make changes to depletion rates in the same reporting period that changes to reserve estimates are made.

Business Combinations

From time to time, we may complete acquisitions that are accounted for as business combinations that require us to recognize the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their estimated fair values on the acquisition date. Determining fair value requires management’s judgment and involves the use of significant estimates and assumptions with respect to projections of future production volumes, forecasted development costs, pricing and cash flows, discount rates, expectations regarding customer contracts and relationships, reserve risk adjustment factors and other management estimates. The judgments made in the determination of the estimated fair value assigned to the assets acquired, liabilities assumed and any noncontrolling interest, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition. See Note 2—Business Combinations in Item 8 of this Annual Report on Form 10-K.

Impairment of Oil and Natural Gas Properties

We assess our proved properties for impairment when events or changes in circumstances indicate that the carrying value of such proved property assets may not be recoverable. For purposes of an impairment evaluation, our proved oil and natural gas properties must be grouped at the lowest level for which independent cash flows can be identified. If the sum of the undiscounted estimated cash flows from the use of the asset group and its eventual disposition is less than the carrying value of an asset group, the carrying value is written down to its estimated fair value. Fair value for the purpose of measuring impairment write-downs are calculated using the present value of expected future cash flows that are estimated to be generated from the asset group. Fair value estimates are based on projected financial information which we believe to be reasonably likely to occur, as of the date that the impairment write-down is being measured. However, such future cash flow estimates are based on numerous assumptions that can materially affect our estimates, and such assumptions are subject to change with variations in commodity prices, production performance, drilling results, operating and development costs, underlying oil and gas reserve quantities, and other internal or external factors.

Unproved properties consist of the costs we incur to acquire undeveloped leasehold acreage and unproved reserves. Unproved properties are periodically assessed for impairment based on remaining lease term, drilling results, reservoir performance, seismic interpretation or future plans to develop acreage. Changes in our assessment or these factors could result in additional impairment charges of our undeveloped leases.

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