CONTINENTAL RESOURCES, INC. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report and our historical consolidated financial statements and notes included in our Form 10-K for the year endedDecember 31, 2021 . The following discussion and analysis includes forward-looking statements and should be read in conjunction with the risk factors described in Part II, Item 1A. Risk Factors included in this report and in our Form 10-K for the year endedDecember 31, 2021 , along with Cautionary Statement for the Purpose of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 at the beginning of this report, for information about the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements.
Overview
We are an independent crude oil and natural gas company engaged in the exploration, development, management, and production of crude oil and natural gas and associated products with properties primarily located in four leading basins inthe United States - the Bakken field ofNorth Dakota andMontana , theAnadarko Basin ofOklahoma , thePermian Basin ofTexas , and thePowder River Basin ofWyoming . Additionally, we pursue the acquisition and management of perpetually owned minerals located in certain of our key operating areas. We derive the majority of our operating income and cash flows from the sale of crude oil, natural gas, and natural gas liquids and expect this to continue in the future. Our common stock trades on theNew York Stock Exchange under the symbol "CLR" and our corporate internet website is www.clr.com.
Recent developments
OnJune 14, 2022 , our Board of Directors (the "Board") received a non-binding proposal fromHarold G. Hamm , on behalf of himself, theHarold G. Hamm Trust and certain trusts established for the benefit ofMr. Hamm's family members (collectively, the "Hamm Family") to acquire for cash all of the outstanding shares of common stock of the Company, other than shares owned by the Hamm Family and shares underlying unvested equity awards issued pursuant to the Company's long-term incentive plans, for a purchase price of$70.00 per share. The Board has formed a special committee of independent directors to evaluate and consider the Hamm Family's proposal. The special committee has hired independent legal and financial advisors to assist it in this process, and such evaluation is ongoing. The Hamm Family's proposal constitutes only an indication of interest by the Hamm Family and does not constitute a binding commitment with respect to the proposed transaction or any other transaction. No agreement, arrangement or understanding between the Company and the Hamm Family relating to any proposed transaction will be created unless definitive documentation is executed and delivered by the Hamm Family, the Company, and all other appropriate parties. No assurance can be given that the Hamm Family's proposal will result in a transaction occurring, its timing, or ultimate terms. The Company does not intend to provide any updates with respect to the potential transaction until a definitive agreement is entered into or such transaction is abandoned, except as required by applicable law.
Second Quarter 2022 Highlights
Financial and operating highlights for the second quarter of 2022 are summarized below.
•Generated
•Production averaged 400,168 Boe per day for the 2022 second quarter, a 7% sequential increase from the 2022 first quarter and 18% higher than the 2021 second quarter.
•Completed strategic leasehold acquisition to further expand our operations in
the
•Increased our quarterly fixed dividend by 22% to
•Reduced outstanding debt by
•Exited the second quarter with$2.55 billion of liquidity, representing$553 million of cash and$2.0 billion of borrowing capacity on our undrawn credit facility. 21
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Financial and Operating Metrics
Commodity prices have increased significantly in 2022 compared to 2021 levels resulting from the ongoing rebalancing of crude oil and natural gas supply and demand fundamentals coupled with the disruption of global hydrocarbon markets prompted by the outbreak of military conflict betweenRussia andUkraine . The increase in commodity prices contributed to improved operating results and cash flows for the three and six month periods endedJune 30, 2022 compared to the comparable 2021 periods. Additionally, our property acquisitions in thePermian Basin andPowder River Basin over the past year contributed to increased production, revenues, and cash flows in 2022 compared to the 2021 periods. Commodity prices remain volatile and unpredictable and our operating results for the first half of 2022 may not be indicative of future results. Given the uncertainty surrounding theRussia /Ukraine conflict and ongoing volatility in commodity prices, we are unable to predict the extent to which the conflict or other factors will have on the Company's performance during the remainder of 2022 and beyond.
The following table contains financial and operating metrics for the periods presented. Average net sales prices exclude any effect of derivative transactions. Per-unit expenses have been calculated using sales volumes.
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Average daily production:
Crude oil (Bbl per day) 198,313 166,765 196,550 159,350
Natural gas (Mcf per day) (1) 1,211,125 1,031,603 1,143,068 984,334
Crude oil equivalents (Boe per day) 400,168 338,699 387,062 323,405
Average net sales prices (2):
Crude oil ($/Bbl) $ 106.41 $ 62.37 $ 98.70 $ 57.95
Natural gas ($/Mcf) (1) $ 7.75 $ 3.06 $ 7.09 $ 4.24
Crude oil equivalents ($/Boe) $ 76.02 $ 39.99 $ 70.96 $ 41.47
Crude oil net sales price discount to NYMEX
($/Bbl) $ (2.30)
$ 0.52 $ 0.23 $ 0.95 $ 1.48
Production expenses ($/Boe) $ 4.23 $ 3.14 $ 4.16 $ 3.24
Production and ad valorem taxes (% of net
crude oil and natural gas sales) 7.4 % 7.7 % 7.3 % 7.3 %
Depreciation, depletion, amortization and
accretion ($/Boe) $ 12.33 $ 15.33 $ 12.98 $ 16.76
Total general and administrative expenses
($/Boe) $ 1.73 $ 1.81 $ 1.97 $ 1.85
(1) Natural gas production volumes, sales volumes, and net sales prices
presented throughout management's discussion and analysis reflect the combined
value for natural gas and natural gas liquids.
(2) See the subsequent section titled Non-GAAP Financial Measures for a
discussion and calculation of net sales prices, which are non-GAAP measures.
Three months ended
Results of Operations
The following table presents selected financial and operating information for the periods presented.
22
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Three months ended June 30,
In thousands 2022 2021
Crude oil, natural gas, and natural gas liquids sales $ 2,829,173 $ 1,282,914
Loss on derivative instruments, net (195,744) (62,178)
Crude oil and natural gas service operations 17,045 14,389
Total revenues 2,650,474 1,235,125
Operating costs and expenses (973,957) (789,957)
Other expenses, net (71,399) (60,747)
Income before income taxes 1,605,118 384,421
Provision for income taxes (389,271) (94,947)
Income before equity in net loss of affiliate 1,215,847 289,474
Equity in net loss of affiliate (76) -
Net income 1,215,771 289,474
Net income attributable to noncontrolling interests 7,024 149
Net income attributable to Continental Resources $ 1,208,747 $ 289,325
Production volumes:
Crude oil (MBbl) 18,047 15,176
Natural gas (MMcf) 110,212 93,876
Crude oil equivalents (MBoe) 36,415 30,822
Sales volumes:
Crude oil (MBbl) 17,844 15,127
Natural gas (MMcf) 110,212 93,876
Crude oil equivalents (MBoe) 36,213 30,773
Production
The following table summarizes the changes in our average daily Boe production
by major operating area for the second quarter period.
Boe production per day 2Q 2022 2Q 2021 % Change
Bakken 162,840 174,637 (7 %)
Anadarko Basin 160,583 151,813 6 %
Powder River Basin 27,211 6,002 353 %
Permian Basin 43,527 - - %
All other 6,007 6,247 (4 %)
Total 400,168 338,699 18 %
The following table summarizes the changes in our production by product for the
second quarter period.
Three months ended June 30, Volume
2022 2021 Volume percent
Volume Percent Volume Percent increase increase
Crude oil (MBbl) 18,047 50 % 15,176 49 % 2,871 19 %
Natural gas (MMcf) 110,212 50 % 93,876 51 % 16,336 17 %
Total (MBoe) 36,415 100 % 30,822 100 % 5,593 18 %
The 19% increase in crude oil production in the 2022 second quarter was
primarily driven by our property acquisitions in the Permian Basin and Powder
River Basin over the past year, which increased our 2022 second quarter
production by 3,066 MBbls and 1,115 MBbls, respectively, compared to the 2021
second quarter. These increases were partially offset by an 827 MBbls, or 8%,
decrease in Bakken crude oil production due to the effects of severe winter
weather in April 2022 that resulted in the curtailment of a portion of our
production, delays in drilling and completion of wells, and other operational
constraints. Additionally, crude oil production in the Anadarko Basin decreased
456 MBbls, or 13%, due to a change in allocation of capital from oil-weighted
projects to gas-weighted projects in the play over the past year and the timing
of well completions.
23
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The 17% increase in natural gas production in the 2022 second quarter was due in
part to the previously described property acquisitions over the past year.
Properties acquired in the Permian Basin increased our 2022 second quarter
production by 5,370 MMcf while properties acquired in the Powder River Basin
increased our production by 4,890 MMcf compared to the 2021 second quarter.
Additionally, natural gas production in the Anadarko Basin increased 7,523 MMcf,
or 12%, over the 2021 second quarter due to new well completions over the past
year. These increases were partially offset by a 1,477 MMcf, or 5%, decrease in
Bakken natural gas production due to the previously described weather-related
production curtailments and operational constraints in April 2022 .
Revenues
Net crude oil, natural gas, and natural gas liquids sales and related net sales prices presented below are non-GAAP measures. See the subsequent section titled Non-GAAP Financial Measures for a discussion and calculation of these measures. Net crude oil, natural gas, and natural gas liquids sales. Net sales totaled$2.75 billion for the second quarter of 2022, a 124% increase compared to net sales of$1.23 billion for the 2021 second quarter due to significant increases in net sales prices and sales volumes as discussed below. Total sales volumes for the second quarter of 2022 increased 5,440 MBoe, or 18%, compared to the 2021 second quarter primarily due to new wells added from our property acquisitions over the past year. For the second quarter of 2022, our crude oil sales volumes increased 18% and our natural gas sales volumes increased 17% compared to the 2021 second quarter. Our crude oil net sales prices averaged$106.41 per barrel in the 2022 second quarter compared to$62.37 per barrel for the 2021 second quarter due to the previously described increase in market prices along with improved price differentials. The differential between NYMEX West Texas Intermediate calendar month prices and our realized crude oil net sales prices improved to an average of$2.30 per barrel for the 2022 second quarter compared to$3.83 per barrel for the 2021 second quarter, reflecting strong price realizations across our assets. Our natural gas net sales prices averaged$7.75 per Mcf for the 2022 second quarter compared to$3.06 per Mcf for the 2021 second quarter due to the previously described increase in market prices along with improved price differentials. The difference between our net sales prices and NYMEX Henry Hub calendar month natural gas prices improved to a premium of$0.52 per Mcf for the 2022 second quarter compared to a premium of$0.23 per Mcf for the 2021 second quarter, again reflecting strong price realizations across our assets. Derivatives. The continued improvement in commodity prices during the second quarter of 2022 had a significant unfavorable impact on the fair value of our derivatives, which resulted in negative revenue adjustments totaling$195.7 million for the period, representing$155.3 million of cash losses and$40.4 million of unsettled non-cash losses, compared to negative revenue adjustments totaling$62.2 million in the second quarter of 2021.
Operating Costs and Expenses
Production Expenses. Production expenses increased$56.7 million , or 59%, to$153.2 million for the second quarter of 2022 compared to$96.5 million for the second quarter of 2021 due to an increase in the number of producing wells from drilling activities and property acquisitions, cost inflation for services and materials, and higher workover-related activities aimed at enhancing production from producing properties prompted by the favorable commodity price environment. Production expenses on a per-Boe basis averaged$4.23 per Boe for the 2022 second quarter compared to$3.14 per Boe for the 2021 second quarter, the increase of which reflects higher workover-related activities, cost inflation, and the addition of oil-weighted production acquired in the Permian andPowder River basins over the past year which typically have higher per-unit operating costs compared to gas-weighted properties in theAnadarko Basin . Production and Ad Valorem Taxes. Production and ad valorem taxes increased$109.9 million , or 117%, to$204.2 million for the second quarter of 2022 compared to$94.3 million for the second quarter of 2021 due to the previously described increase in sales. Our production taxes as a percentage of net sales averaged 7.4% for the second quarter of 2022 compared to 7.7% for the second quarter of 2021. Depreciation, Depletion, Amortization and Accretion. Total DD&A decreased$25.3 million , or 5%, to$446.6 million for the second quarter of 2022 compared to$471.9 million for the second quarter of 2021 primarily due to a decrease in our DD&A rate per Boe as further discussed below, partially offset by the previously described 18% increase in total sales volumes. The following table shows the components of our DD&A on a unit of sales basis for the periods presented. 24 --------------------------------------------------------------------------------
Three months ended June 30,
$/Boe 2022 2021
Crude oil and natural gas $ 12.04 $ 15.03
Other equipment 0.20 0.21
Asset retirement obligation accretion 0.09 0.09
Depreciation, depletion, amortization and accretion $
12.33
Estimated proved reserves are a key component in our computation of DD&A expense. Proved reserves are determined using the unweighted arithmetic average of the first-day-of-the-month commodity prices for the preceding twelve months as required bySEC rules. Holding all other factors constant, if proved reserves are revised downward due to commodity price declines or other reasons, the rate at which we record DD&A expense increases. Conversely, if proved reserves are revised upward, the rate at which we record DD&A expense decreases. Our proved reserves have been revised upward over the past year prompted by significant increases in first-day-of-the-month commodity prices and other factors, which, when coupled with improvements in capital efficiency and strong well productivity, resulted in a decrease in our DD&A rate for crude oil and natural gas properties in the second quarter of 2022 compared to the second quarter of 2021 and helped offset the additional DD&A recognized in 2022 from increased sales volumes. Property Impairments. Total property impairments increased$4.2 million to$15.8 million for the second quarter of 2022 compared to$11.6 million for the second quarter of 2021, reflecting an increase in the amortization of undeveloped leasehold costs driven by an increase in our balance of unproved properties resulting from property acquisitions over the past year. There were no proved property impairments recognized in the second quarter periods of 2022 and 2021.
General and Administrative Expenses. Total G&A expenses increased
Total G&A expenses include non-cash charges for equity compensation of$14.8 million and$13.6 million for the second quarters of 2022 and 2021, respectively. G&A expenses other than equity compensation totaled$47.8 million for the 2022 second quarter, an increase of$5.8 million compared to$42.0 million for the 2021 second quarter primarily due to the growth of our operations and increases in payroll costs and employee benefits, partially offset by higher overhead recoveries from joint interest owners driven by increased drilling, completion, and production activities compared to the 2021 second quarter.
The following table shows the components of G&A expenses on a unit of sales basis for the periods presented.
Three months ended June 30 ,
$/Boe 2022 2021
General and administrative expenses $ 1.32$ 1.37 Non-cash equity compensation 0.41
0.44
Total general and administrative expenses $ 1.73
Interest Expense. Interest expense increased$11.3 million , or 19%, to$72.2 million for the second quarter of 2022 compared to$61.0 million for the second quarter of 2021 due to an increase in our weighted average outstanding debt balance from$4.9 billion for the second quarter of 2021 to$6.6 billion for the second quarter of 2022. This increase was driven by debt incurred in the fourth quarter of 2021 to fund a portion of ourDecember 2021 acquisition of properties in thePermian Basin . Income Taxes. For the second quarters of 2022 and 2021 we provided for income taxes at a combined federal and state tax rate of 24.5% of our pre-tax income. We recorded an income tax provision of$389.3 million for the 2022 second quarter and an income tax provision of$94.9 million for the 2021 second quarter, which resulted in effective tax rates of 24.3% and 24.7%, respectively, after taking into account statutory tax rates, permanent taxable differences, tax effects from equity compensation, changes in valuation allowances, and other items. See Notes to Unaudited Condensed Consolidated Financial Statements-Note 12. Income Taxes for a summary of the sources and tax effects of items comprising our effective tax rates. 25 --------------------------------------------------------------------------------
Six months ended
Results of Operations
The following table presents selected financial and operating information for
the periods presented.
Six months ended June 30,
In thousands 2022 2021
Crude oil, natural gas, and natural gas liquids sales
$ 2,530,447 Loss on derivative instruments, net (671,682)
(105,685)
Crude oil and natural gas service operations 34,960 26,178 Total revenues 4,466,712 2,450,940 Operating costs and expenses (1,923,978) (1,600,074) Other expenses, net (145,181) (125,642) Income before income taxes 2,397,553 725,224 Provision for income taxes (580,355) (175,475) Income before equity in net loss of affiliate 1,817,198
549,749
Equity in net loss of affiliate (76) - Net income 1,817,122
549,749
Net income attributable to noncontrolling interests 10,618 782 Net income attributable to Continental Resources$ 1,806,504 $ 548,967 Production volumes: Crude oil (MBbl) 35,576 28,842 Natural gas (MMcf) 206,895 178,165 Crude oil equivalents (MBoe) 70,058 58,536 Sales volumes: Crude oil (MBbl) 35,305 28,853 Natural gas (MMcf) 206,895 178,165 Crude oil equivalents (MBoe) 69,787 58,547 Production
The following table summarizes the changes in our average daily Boe production by major operating area for the year to date period.
Boe production per day YTD 6/30/2022 YTD 6/30/2021 % Change
Bakken 167,097 167,646 - %
Anadarko Basin 152,319 145,137 5 %
Powder River Basin 19,475 4,243 359 %
Permian Basin 41,896 - -
All other 6,275 6,379 (2 %)
Total 387,062 323,405 20 %
The following table summarizes the changes in our production by product for the
year to date period.
Six months ended June 30, Volume
2022 2021 Volume percent
Volume Percent Volume Percent increase increase
Crude oil (MBbl) 35,576 51 % 28,842 49 % 6,734 23 %
Natural gas (MMcf) 206,895 49 % 178,165 51 % 28,730 16 %
Total (MBoe) 70,058 100 % 58,536 100 % 11,522 20 %
26-------------------------------------------------------------------------------- The 23% increase in crude oil production for year to date 2022 compared to year to date 2021 was primarily driven by our property acquisitions in thePermian Basin andPowder River Basin over the past year, which increased our year to date 2022 production by 5,874 MBbls and 1,772 MBbls, respectively, compared to year to date 2021. These increases were partially offset by a 630 MBbls, or 9%, decrease inAnadarko Basin crude oil production due to a change in allocation of capital from oil-weighted projects to gas-weighted projects in the play over the past year and the timing of well completions. The 16% increase in natural gas production for year to date 2022 compared to year to date 2021 was due in part to the previously described property acquisitions over the past year. Properties acquired in thePermian Basin increased our year to date 2022 production by 10,258 MMcf while properties acquired in thePowder River Basin increased our production by 5,912 MMcf compared to year to date 2021. Additionally, natural gas production in theAnadarko Basin increased 11,579 MMcf, or 10%, compared to year to date 2021 due to new well completions over the past year.
Revenues
Net crude oil, natural gas, and natural gas liquids sales and related net sales prices presented below are non-GAAP measures. See the subsequent section titled Non-GAAP Financial Measures for a discussion and calculation of these measures. Net crude oil, natural gas, and natural gas liquids sales. Net sales for year to date 2022 totaled$4.95 billion , an increase of 104% compared to net sales of$2.43 billion for the comparable 2021 period due to significant increases in net sales prices and sales volumes as discussed below. Total sales volumes for year to date 2022 increased 11,240 MBoe, or 19%, compared to year to date 2021 primarily due to new wells added from our property acquisitions over the past year. For year to date 2022, our crude oil sales volumes increased 22% and our natural gas sales volumes increased 16% compared to year to date 2021. Our crude oil net sales prices averaged$98.70 per barrel for year to date 2022 compared to$57.95 per barrel for year to date 2021 due to the previously described increase in market prices along with improved price differentials. The differential between NYMEX WTI calendar month prices and our realized crude oil net sales prices improved to an average of$2.88 per barrel for year to date 2022 compared to$4.16 per barrel for year to date 2021, reflecting strong price realizations across our assets. Our natural gas net sales prices averaged$7.09 per Mcf for year to date 2022 compared to$4.24 per Mcf for year to date 2021 due to the previously described increase in market prices. The difference between our net sales prices and NYMEXHenry Hub calendar month natural gas prices was a premium of$0.95 per Mcf for year to date 2022 compared to a premium of$1.48 per Mcf for year to date 2021. The decrease in premium was driven by price volatility and significant improvement inHenry Hub prices as compared to increases in NGL prices during the 2022 second quarter, causing the uplift in price realizations for our full gas stream relative toHenry Hub benchmark prices to be less significant in the current period.
Derivatives. The significant improvement in commodity prices during the six
months ended
Crude oil and natural gas service operations. Our crude oil and natural gas service operations consist primarily of revenues associated with water gathering, recycling, and disposal activities, which are impacted by our production volumes and the timing and extent of our drilling and completion projects. Revenues associated with such activities increased$8.8 million , or 34%, from$26.2 million for year to date 2021 to$35.0 million for year to date 2022 primarily due to increased water handling resulting from increased drilling, completion, and production activities compared to the 2021 period, which also contributed to an increase in service-related operating expenses in the current period. Operating Costs and Expenses Production Expenses. Production expenses increased$100.9 million , or 53%, to$290.5 million for year to date 2022 compared to$189.6 million for year to date 2021 due to an increase in the number of producing wells from drilling activities and property acquisitions, cost inflation for services and materials, and higher workover-related activities aimed at enhancing production from producing properties prompted by the favorable commodity price environment. Production expenses on a per-Boe basis averaged$4.16 per Boe for year to date 2022 compared to$3.24 per Boe for year to date 2021, the increase of which reflects higher workover-related activities, cost inflation, and the addition of oil-weighted production acquired in the Permian andPowder River basins over the past year which typically have higher per-unit operating costs compared to gas-weighted properties in theAnadarko Basin . 27 -------------------------------------------------------------------------------- Production and Ad Valorem Taxes. Production and ad valorem taxes increased$184.3 million , or 103%, to$362.6 million for year to date 2022 compared to$178.3 million for year to date 2021 due to the previously described increase in sales. Our production taxes as a percentage of net sales averaged 7.3% for year to date 2022, consistent with 7.3% for year to date 2021. Exploration expenses. Exploration expenses, which consist primarily of exploratory geological and geophysical costs and dry hole costs that are expensed as incurred, increased$10.7 million to$17.7 million for year to date 2022 compared to$6.9 million for year to date 2021. The year to date 2022 period includes$12.1 million of dry hole costs associated with an unsuccessful exploratory well with no comparable dry hole costs incurred in the year to date 2021 period. Depreciation, Depletion, Amortization and Accretion. Total DD&A decreased$75.8 million , or 8%, to$905.7 million for year to date 2022 compared to$981.5 million for the comparable 2021 period due to the previously described decrease in our DD&A rate per Boe in 2022 partially offset by the 19% increase in our total sales volumes. The following table shows the components of our DD&A on a unit of sales basis for the periods presented. Six months ended June 30, $/Boe 2022 2021 Crude oil and natural gas$ 12.68 $ 16.46 Other equipment 0.21 0.21 Asset retirement obligation accretion 0.09 0.09 Depreciation, depletion, amortization and accretion $
12.98
Property Impairments. Total property impairments increased$17.0 million to$40.1 million for the year to date period of 2022 compared to$23.0 million for year to date 2021, primarily reflecting an$11.8 million proved property impairment recognized in the 2022 first quarter on a property in an emerging play with no proved property impairments being recognized in the prior year period. Additionally, impairments of unproved properties increased$5.2 million for year to date 2022 compared to year to date 2021, reflecting an increase in the amortization of undeveloped leasehold costs driven by an increase in our balance of unproved properties resulting from property acquisitions over the past year. General and Administrative Expenses. Total G&A expenses increased$29.0 million , or 27%, to$137.4 million for year to date 2022 compared to$108.4 million for year to date 2021. Total G&A expenses include non-cash charges for equity compensation of$44.1 million and$30.5 million for the year to date periods of 2022 and 2021, respectively. This increase was primarily driven by approximately$10 million of incremental expenses recognized on restricted stock awards whose vesting terms were modified and accelerated in the 2022 first quarter upon the retirement of certain management personnel from the Company. G&A expenses other than equity compensation totaled$93.3 million for year to date 2022, an increase of$15.4 million compared to$77.9 million for the comparable 2021 period primarily due to the growth of our operations and increases in payroll costs and employee benefits, partially offset by higher overhead recoveries from joint interest owners driven by increased drilling, completion, and production activities compared to the prior period.
The following table shows the components of G&A expenses on a unit of sales basis for the periods presented.
Six months ended June 30 ,
$/Boe 2022 2021
General and administrative expenses $ 1.34$ 1.33 Non-cash equity compensation 0.63
0.52
Total general and administrative expenses $ 1.97
Interest Expense. Interest expense increased$18.9 million , or 15%, to$144.8 million for year to date 2022 compared to$125.9 million for the comparable 2021 period due to an increase in our weighted average outstanding debt balance from$5.3 billion for year to date 2021 to$6.7 billion for year to date 2022. This increase was driven by debt incurred in the fourth quarter of 2021 to fund a portion of ourDecember 2021 acquisition of properties in thePermian Basin . Income Taxes. For the six months endedJune 30, 2022 and 2021 we provided for income taxes at a combined federal and state tax rate of 24.5% of our pre-tax income. We recorded an income tax provision of$580.4 million for the year to date period of 2022 and an income tax provision of$175.5 million for year to date 2021, which resulted in effective tax rates of 24.2% and 24.2%, respectively, after taking into account statutory tax rates, permanent taxable differences, tax effects from equity compensation, changes in valuation allowances, and other items. See Notes to Unaudited Condensed Consolidated Financial Statements-Note 12. Income Taxes for a summary of the sources and tax effects of items comprising our effective tax rates. 28 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our primary sources of liquidity have historically been cash flows generated from operating activities, financing provided by our credit facility and the issuance of debt securities. Additionally, asset dispositions and joint development arrangements have provided a source of cash flow for use in reducing debt and enhancing liquidity. We are committed to operating in a responsible manner to preserve financial flexibility, liquidity, and the strength of our balance sheet. AtJuly 28, 2022 , we had no outstanding borrowings and$2.0 billion of borrowing availability under our credit facility. Our credit facility, which is unsecured and has no borrowing base subject to redetermination, does not mature untilOctober 2026 .
Our credit facility has an accordion feature that allows us to increase lender
commitments from
Recent developments
As previously described, onJune 14, 2022 our Board received a non-binding proposal from the Hamm Family to acquire for cash all of the outstanding shares of common stock of Continental, other than shares owned by the Hamm Family and shares underlying unvested equity awards issued pursuant to Continental's long-term incentive plans, for a purchase price of$70.00 per share. The Hamm Family collectively holds approximately 83% of Continental's total outstanding shares as ofJune 30, 2022 . There are approximately 58 million shares of Continental's common stock that are not held by the Hamm Family. The aggregate market value of such shares is approximately$4.1 billion using the$70.00 per share price offered by the Hamm Family in its non-binding take-private proposal.
While no assurance can be given that the take-private transaction will ultimately be consummated, if such transaction does occur the purchase of outstanding shares not held by the Hamm Family is expected to be funded by Continental through a combination of funding sources, including the use of cash on hand, utilization of credit facility borrowing capacity, bank term loan facilities, and/or the issuance of debt securities.
Based on our planned capital spending, our forecasted cash flows, and projected levels of indebtedness, we expect to maintain compliance with the covenants under our credit facility and senior note indentures, including additional debt that may be incurred to fund the potential take-private transaction described above. Further, based on current market indications, we expect to meet our contractual cash commitments to third parties as ofJune 30, 2022 , including those subsequently described under the heading Future Capital Requirements, recognizing we may be required to meet such commitments even if our business plan assumptions were to change. We monitor our capital spending closely based on actual and projected cash flows and have the ability to reduce spending or dispose of assets if needed to preserve liquidity and financial flexibility to fund our operations. Cash Flows
Cash flows from operating activities
Net cash provided by operating activities increased$1.53 billion , or 89%, to$3.24 billion for year to date 2022 compared to$1.71 billion for year to date 2021 driven by a$2.6 billion increase in crude oil, natural gas, and NGL revenues due to the previously described increases in commodity prices and sales volumes in the current period. This increase was partially offset by a$132 million increase in realized cash losses on matured commodity derivatives, a$250 million increase in cash payments forU.S. federal income taxes, a$184 million increase in production and ad valorem taxes associated with higher revenues, and increases in certain other cash operating expenses primarily due to an increase in sales volumes and growth of our Company over the past year. Increased cash operating expenses included a$101 million increase in production expenses and a$49 million increase in transportation, gathering, processing, and compression expenses.
Cash flows from investing activities
Net cash used in investing activities increased$1.08 billion to$1.85 billion for year to date 2022 compared to$771 million for year to date 2021, reflecting our planned increase in budgeted spending and an increase in the magnitude of year to date property acquisitions. Non-acquisition capital expenditures attributable to us for full year 2022 are budgeted to be between$2.6 billion and$2.7 billion compared to$1.54 billion of non-acquisition capital spending for full year 2021. Our investing cash flows for year to date 2022 include$403 million paid to acquire properties in thePowder River Basin and$197 million paid to acquire properties in thePermian Basin as discussed in Note 3. Property Acquisitions as well as$63 million paid for the new strategic investment in an affiliate of Summit Carbon Solutions described in Note 13.Equity Investment in Notes to Unaudited Condensed Consolidated Financial Statements. 29 --------------------------------------------------------------------------------
Cash flows from financing activities
Net cash used in financing activities for year to date 2022 totaled$862 million , primarily consisting of$500 million of net repayments on our credit facility,$184 million of cash dividends paid on common stock,$100 million of cash used to repurchase shares of our common stock, and$32 million of cash used to repurchase senior notes.
Net cash used in financing activities for year to date 2021 totaled
Future Sources of Financing
Although we cannot provide any assurance, we believe funds from operating cash flows, our cash balance, and availability under our credit facility should be sufficient to meet our normal operating needs, debt service obligations, budgeted capital expenditures, cash payments for income taxes, and dividend payments for at least the next 12 months and to meet our contractual cash commitments to third parties beyond 12 months. Based on current market indications, our budgeted capital spending plans for 2022 are expected to be funded from operating cash flows. Any deficiencies in operating cash flows relative to budgeted spending are expected to be funded by borrowings under our credit facility. If cash flows are materially impacted by declines in commodity prices, we have the ability to reduce our capital expenditures or utilize the availability of our credit facility if needed to fund our operations and business plans. We may choose to access banking or capital markets for additional financing or capital to fund our operations or to finance business opportunities or developments that may arise. Further, we may sell assets or enter into strategic joint development opportunities in order to obtain funding if such transactions can be executed on satisfactory terms. However, no assurance can be given that such transactions will occur. Credit facility We have an unsecured credit facility, maturing inOctober 2026 , with aggregate lender commitments totaling$2.0 billion , which may be increased up to a total of$4.0 billion upon agreement between the Company and participating lenders. The commitments are from a syndicate of 12 banks and financial institutions. We believe each member of the current syndicate has the capability to fund its commitment. As ofJuly 28, 2022 , we had no outstanding borrowings and$2.0 billion of borrowing availability on our credit facility. The commitments under our credit facility are not dependent on a borrowing base calculation subject to periodic redetermination based on changes in commodity prices and proved reserves. Additionally, downgrades or other negative rating actions with respect to our credit rating do not trigger a reduction in our current credit facility commitments, nor do such actions trigger a security requirement or change in covenants. Downgrades of our credit rating will, however, trigger increases in our credit facility's interest rates and commitment fees paid on unused borrowing availability under certain circumstances. Our credit facility contains restrictive covenants that may limit our ability to, among other things, incur additional indebtedness, incur liens, engage in sale and leaseback transactions, or merge, consolidate or sell all or substantially all of our assets. Our credit facility also contains a requirement that we maintain a consolidated net debt to total capitalization ratio of no greater than 0.65 to 1.00. See Notes to Unaudited Condensed Consolidated Financial Statements-Note 8. Debt for a discussion of how this ratio is calculated pursuant to our credit agreement. We were in compliance with our credit facility covenants atJune 30, 2022 and expect to maintain such compliance. AtJune 30, 2022 , our consolidated net debt to total capitalization ratio was 0.36. We do not believe the credit facility covenants are reasonably likely to limit our ability to undertake additional debt financing if needed to support our business. Additionally, our credit facility covenants are not expected to limit our ability to incur debt if needed to finance the Hamm Family's proposed take-private transaction if such transaction is consummated. AtJune 30, 2022 , our total debt would have needed to independently increase by approximately$13.7 billion above the existing level at that date (with no corresponding increase in cash or reduction in refinanced debt) to reach the maximum covenant ratio of 0.65 to 1.00. Alternatively, our total shareholders' equity would have needed to independently decrease by approximately$7.4 billion (excluding the after-tax impact of any non-cash impairment charges) below the existing level atJune 30, 2022 to reach the maximum covenant ratio. 30 --------------------------------------------------------------------------------
Future Capital Requirements
Our material future cash requirements are summarized below. Based on current market indications, we expect to meet our contractual cash commitments to third parties as ofJune 30, 2022 , recognizing we may be required to meet such commitments even if our business plan assumptions were to change.
Senior notes
Our debt includes outstanding senior note obligations totaling$6.33 billion atJune 30, 2022 , exclusive of interest payment obligations thereon. Our senior notes are not subject to any mandatory redemption or sinking fund requirements. The earliest scheduled senior note maturity is our$636 million of 2023 Notes due inApril 2023 , which is reflected as a current liability in the caption "Current portion of long-term debt" in the condensed consolidated balance sheets as ofJune 30, 2022 . We expect to be able to generate or obtain sufficient funds necessary to fully redeem our 2023 Notes by the maturity date. For further information on the face values, maturity dates, semi-annual interest payment dates, optional redemption periods and covenant restrictions related to our senior notes, refer to Note 8. Debt in Notes to Unaudited Condensed Consolidated Financial Statements. We were in compliance with our senior note covenants atJune 30, 2022 and expect to maintain such compliance. We do not believe the senior note covenants will materially limit our ability to undertake additional debt financing if needed to support our business. Additionally, our senior note covenants are not expected to limit our ability to incur debt if needed to finance the Hamm Family's proposed take-private transaction if such transaction is consummated.
Downgrades or other negative rating actions with respect to the credit ratings assigned to our senior unsecured debt do not trigger additional senior note covenants.
Transportation, gathering, and processing commitments
We have entered into transportation, gathering, and processing commitments to guarantee capacity on crude oil and natural gas pipelines and natural gas processing facilities that require us to pay per-unit charges regardless of the amount of capacity used. Future commitments remaining as ofJune 30, 2022 under the arrangements amount to approximately$1.19 billion . See Note 9. Commitments and Contingencies in Notes to Unaudited Condensed Consolidated Financial Statements for additional information.
Capital expenditures
Our capital expenditures budget for 2022 is expected to be$2.6 billion to$2.7 billion . Costs of acquisitions and investments, such as those described in Note 3. Property Acquisitions and Note 13.Equity Investment in Notes to Unaudited Condensed Consolidated Financial Statements, are not budgeted, with the exception of planned levels of spending for mineral acquisitions. For the six months endedJune 30, 2022 , we invested$1.17 billion in our capital program excluding$662.3 million of unbudgeted acquisitions, excluding$3.7 million of mineral acquisitions attributable to Franco-Nevada, and including$50.3 million of capital costs associated with increased accruals for capital expenditures as compared toDecember 31, 2021 . Our 2022 year to date capital expenditures were allocated as shown in the table below. In millions 1Q 2022 2Q 2022 YTD 2022 Exploration and development drilling$ 426.2 $ 504.7 $ 930.9 Land costs 24.3 31.2 55.5 Mineral acquisitions attributable to Continental 0.5 0.4 0.9
Capital facilities, workovers, water infrastructure, and other corporate assets
72.3 110.9 183.2
Seismic 0.6 1.3 1.9
Capital expenditures attributable to Continental, excluding
unbudgeted acquisitions 523.9 648.5 1,172.4
Unbudgeted acquisitions 443.1 219.2 662.3
Total capital expenditures attributable to Continental $ 967.0 $ 867.7 $ 1,834.7
Mineral acquisitions attributable to Franco-Nevada 1.9 1.8 3.7
Total capital expenditures $ 968.9 $ 869.5 $ 1,838.4
Our drilling and completion activities and the actual amount and timing of our
capital expenditures may differ materially from our budget as a result of, among
other things, available cash flows, unbudgeted acquisitions, actual drilling and
completion results, operational process improvements, the availability of
drilling and completion rigs and other services and equipment, cost inflation,
the availability of transportation, gathering and processing capacity, changes
in commodity prices, and
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regulatory, technological and competitive developments. We monitor our capital
spending closely based on actual and projected cash flows and may adjust our
spending should commodity prices materially change from current levels. We
expect to continue participating as a buyer of properties when and if we have
the ability to increase our position in strategic plays at attractive terms.
See Note 13.Equity Investment in Notes to Unaudited Condensed Consolidated Financial Statements for discussion of future spending commitments associated with a new strategic investment made by the Company with Summit Carbon Solutions beginning in the first quarter of 2022.
Cash Payments for Income Taxes
InApril 2022 we made an estimated quarterly payment for 2022 U.S. federal income taxes of$125 million and made an additional estimated quarterly payment inJune 2022 of$125 million based on an estimate of federal taxable income for the year. Significant judgment is involved in estimating future taxable income as we are required to make assumptions about future commodity prices, projected production, development activities, capital spending, profitability, and general economic conditions, all of which are subject to material revision in future periods as better information becomes available. As ofJune 30, 2022 , the publicly available forward commodity strip prices for the remainder of 2022 averaged approximately$99.00 per barrel for crude oil and$5.70 per Mcf for natural gas. If commodity prices remain at these levels for the remainder of the year, we expect to utilize the full amount of our federal net operating loss carryforwards and certain state net operating loss carryforwards and generate significant taxable income in 2022, which would result in us continuing to make estimated cash payments for income taxes for the third and fourth quarters of 2022 that could approximate the$125 million quarterly payments made in April andJune 2022 . Because of the significant uncertainty inherent in numerous factors utilized in projecting taxable income, we cannot predict the amount of future income tax payments with certainty.
Dividend Declaration
OnJuly 27, 2022 , the Company declared a quarterly cash dividend of$0.28 per share on its outstanding common stock, which will be paid onAugust 22, 2022 to shareholders of record as ofAugust 8, 2022 .
Share repurchase program
InMay 2019 the Board approved the initiation of a share repurchase program to acquire up to$1 billion of our common stock beginning inJune 2019 . OnFebruary 8, 2022 , the Board approved an increase in the size of the share repurchase program to$1.5 billion . As of the date of this filing, we have repurchased and retired a cumulative total of approximately 18.81 million shares under the program at an aggregate cost of$540.9 million , leaving$959.1 million of authorized repurchasing capacity under the modified program. The timing and amount of the Company's share repurchases are subject to market conditions and management discretion. The share repurchase program does not require the Company to repurchase a specific number of shares and may be modified, suspended, or terminated by the Board at any time.
Senior note redemptions and repurchases
In recent periods we have redeemed or repurchased a portion of our outstanding senior notes. From time to time, we may execute additional redemptions or repurchases of our senior notes for cash in open market transactions, privately negotiated transactions, or otherwise. The timing and amount of any such redemptions or repurchases will depend on prevailing market conditions, our liquidity and prospects for future access to capital, and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material. Our$636 million of 2023 Notes is due inApril 2023 , which we plan to fully redeem by the maturity date.
Derivative Instruments
The fair value of our derivative instruments atJune 30, 2022 was a net liability of$459.8 million . See Note 6. Derivative Instruments in Notes to Unaudited Condensed Consolidated Financial Statements for further discussion of our hedging activities, including a summary of derivative contracts in place as ofJune 30, 2022 . The estimated fair value of our derivatives is highly sensitive to market price volatility and therefore subject to significant fluctuations from period to period. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information on how hypothetical changes in commodity prices would impact the fair value of our derivatives as ofJune 30, 2022 . 32 --------------------------------------------------------------------------------
Dakota Access Pipeline
In response to aJuly 2020 U.S. District Court decision vacating theU.S. Army Corps of Engineers ("Corps") grant of an easement to the Dakota Access Pipeline ("DAPL") and issuance of an order requiring the Corps to conduct an environmental impact statement for the pipeline, the Corps is currently conducting the court-ordered environmental review to determine whether DAPL poses a threat to the drinking water supply of theStanding Rock Sioux Reservation . DAPL currently remains in operation. The owners of DAPL appealed the District Court decision to theU.S. Supreme Court inSeptember 2021 , but the appeal was rejected onFebruary 22, 2022 . The Corps continues to conduct the review, which is estimated to be completed no later thanNovember 2022 . Once the review is completed, the Corps will determine whether DAPL is safe to operate or must be shut down. We are unable to determine the outcome or the impact of this matter on DAPL in the future. We utilize DAPL to transport a portion of our Bakken crude oil production to ultimate markets on theU.S. gulf coast . Our transportation commitment on the pipeline totals 30,000 barrels per day which will continue throughFebruary 2026 at which time the commitment decreases to 26,450 barrels per day throughJuly 2028 . If transportation capacity on DAPL becomes restricted or unavailable, we have the ability to utilize other third party pipelines or rail facilities to transport our Bakken crude oil production to market, although such alternatives may be more costly. A restriction of DAPL's takeaway capacity may have an impact on prices for Bakken-produced barrels and result in wider differentials relative to WTI benchmark prices in the future, the amount of which is uncertain.
Legislative and Regulatory Developments
The crude oil and natural gas industry inthe United States is subject to various types of regulation at the federal, state and local levels.President Biden , in pursuit of his regulatory agenda, has issued, and may continue to issue, executive orders that result in more stringent and costly requirements for the domestic crude oil and natural gas industry and there is the potential for the revision of existing laws and regulations or the adoption of new legislation that could adversely affect the oil and gas industry, including those pertaining to the taxation of oil and gas exploration and production activities. Such changes, if enacted, could have a material adverse effect on our results of operations and cash flows. See Part I, Item 1. Business-Regulation of the Crude Oil and Natural Gas Industry in our Form 10-K for the year endedDecember 31, 2021 for a discussion of significant laws and regulations that have been enacted or are currently being considered by regulatory bodies that may affect us in the areas in which we operate.
InMarch 2022 , theSEC proposed rule amendments that would create a wide range of new climate-related disclosure obligations for registrants. The proposed rules would require registrants to include certain climate-related information in registration statements and annual reports, including (i) climate-related risks and their actual or likely material impacts on the registrant's business, strategy, and outlook; (ii) the registrant's governance of climate-related risks and relevant risk management processes; (iii) information on the registrant's greenhouse gas emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance; (iv) certain climate-related financial statement metrics and related disclosures in a note to audited financial statements; and (v) information about climate-related targets, goals, and transition plans. The proposed rules have not been finalized and may be subject to challenges and litigation. Thus, the ultimate scope and impact of the proposed rules on our business remain uncertain. To the extent new rules, if finalized, impose additional reporting obligations on us, we could face increased costs. Inflation Certain drilling and completion costs and costs of oilfield services, equipment, and materials decreased in recent years as service providers reduced their costs in response to reduced demand arising from historically low crude oil prices. However, inflationary pressures returned in 2021 and continue to persist in 2022 in conjunction with the significant increase in commodity prices over the past year, labor shortages, and other factors. Additionally, supply chain disruptions stemming from the COVID-19 pandemic have led to shortages of certain materials and equipment and resulting increases in material and labor costs. Our capital spending budget for 2022 includes an estimate for the impact of cost inflation and, despite inflationary pressures, we expect to continue generating significant amounts of free cash flow at current commodity price levels.
Critical Accounting Policies and Estimates
There have been no changes in our critical accounting policies and estimates from those disclosed in our 2021 Form 10-K.
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--------------------------------------------------------------------------------Non-GAAP Financial Measures
Net crude oil, natural gas, and natural gas liquids sales and net sales prices
Revenues and transportation expenses associated with production from our operated properties are reported separately as discussed in Notes to Unaudited Condensed Consolidated Financial Statements-Note 5. Revenues. For non-operated properties, we receive a net payment from the operator for our share of sales proceeds which is net of costs incurred by the operator, if any. Such non-operated revenues are recognized at the net amount of proceeds received. As a result, the separate presentation of revenues and transportation expenses from our operated properties differs from the net presentation from non-operated properties. This impacts the comparability of certain operating metrics, such as per-unit sales prices, when such metrics are prepared in accordance withU.S. GAAP using gross presentation for some revenues and net presentation for others. In order to provide metrics prepared in a manner consistent with how management assesses the Company's operating results and to achieve comparability between operated and non-operated revenues, we have presented crude oil, natural gas, and natural gas liquids sales net of transportation expenses in Management's Discussion and Analysis of Financial Condition and Results of Operations, which we refer to as "net crude oil, natural gas, and natural gas liquids sales," a non-GAAP measure. Average sales prices calculated using net sales are referred to as "net sales prices," a non-GAAP measure, and are calculated by taking revenues less transportation expenses divided by sales volumes. Management believes presenting our revenues and sales prices net of transportation expenses is useful because it normalizes the presentation differences between operated and non-operated revenues and allows for a useful comparison of net realized prices to NYMEX benchmark prices on a Company-wide basis. The following tables present a reconciliation of crude oil, natural gas, and natural gas liquids sales (GAAP) to net crude oil, natural gas, and natural gas liquids sales and related net sales prices (non-GAAP) for the three and six months endedJune 30, 2022 and 2021. Three months ended June 30, 2022 Three months ended June 30, 2021 Natural gas Natural gas In thousands Crude oil and NGLs Total Crude oil and NGLs Total Crude oil, natural gas, and NGL sales (GAAP)$ 1,961,481 $ 867,692 $ 2,829,173 $ 987,269 $ 295,645 $
1,282,914
Less: Transportation expenses (62,714) (13,638) (76,352) (43,898) (8,547)
(52,445)
Net crude oil, natural gas, and NGL sales (non-GAAP)$ 1,898,767 $ 854,054 $ 2,752,821 $ 943,371 $ 287,098 $
1,230,469
Sales volumes (MBbl/MMcf/MBoe) 17,844 110,212 36,213 15,127 93,876 30,773 Net sales price (non-GAAP)$ 106.41 $ 7.75 $ 76.02 $ 62.37 $ 3.06 $ 39.99 Six months ended June 30, 2022 Six months ended June 30, 2021 Natural gas and Natural gas In thousands Crude oil NGLs Total Crude oil and NGLs
Total
Crude oil, natural gas, and NGL sales (GAAP)$ 3,605,329 $ 1,498,105
(120,601) (30,600) (151,201) (83,977) (18,724) (102,701)
Net crude oil, natural gas, and NGL sales (non-GAAP)$ 3,484,728 $ 1,467,505
35,305 206,895 69,787 28,853 178,165 58,547
Net sales price (non-GAAP) $ 98.70 $ 7.09 $ 70.96 $ 57.95 $ 4.24 $ 41.47
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