PARSLEY ENERGY, INC. The following discussion and analysis should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains 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, market prices for oil and natural gas, lack of transportation and storage capacity, production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed above in "Cautionary Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q (this "Quarterly Report") and under the heading "Item 1A. Risk Factors" in this Quarterly Report, our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2020 and our Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "Annual Report"), all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. OrganizationParsley Energy, Inc. (either individually or together with its subsidiaries, as the context requires, "we," "us," "our" or the "Company") is an independent oil and natural gas company focused on the acquisition, development, exploration and production of unconventional oil and natural gas properties in thePermian Basin .The Permian Basin is located in westTexas and southeasternNew Mexico and is characterized by high oil and liquids-rich natural gas content, multiple vertical and horizontal target horizons, extensive production histories, long-lived reserves and historically high drilling success rates. Our properties are located in two sub areas of thePermian Basin , theMidland Basin andDelaware Basin , where, given the associated returns, we focus predominantly on horizontal development drilling. Our sole material asset as ofSeptember 30, 2020 consisted of 378,610,172 PE Units and, as the sole managing member, we hold a controlling equity interest inParsley Energy, LLC ("Parsley LLC ") and manage the business and affairs ofParsley LLC and its subsidiaries. We consolidate the financial and operating results ofParsley LLC and its subsidiaries and record noncontrolling interests for the economic interests inParsley LLC held by PE Unitholders (other than the Company). Outlook Pioneer Merger OnOctober 20, 2020 , we entered into a definitive merger agreement (the "Pioneer Merger Agreement" and the transactions contemplated therein, the "Pioneer Merger") with Pioneer Natural Resources Company, aDelaware corporation (NYSE: PXD) ("Pioneer") pursuant to which, and subject to the conditions of the Pioneer Merger Agreement, all outstanding shares of the Company will be acquired by Pioneer in an all-stock transaction. Under the terms of the Pioneer Merger Agreement, our stockholders will receive 0.1252 shares of Pioneer common stock for each share of Parsley Class A common stock, par value$0.01 per share ("Class A common stock"), as well as for each unit ofParsley LLC (each, a "PE Unit") issued and outstanding immediately prior to the effective time of the Pioneer Merger (the "Effective Time"). Each share of Parsley Class B common stock, par value$0.01 per share ("Class B common stock"), will automatically be canceled for no additional consideration as of the Effective Time, subject to certain appraisal rights in respect of the Class B common stock set forth in the Pioneer Merger Agreement. The transaction was approved by the boards of directors of both companies and is anticipated to close in the first quarter of 2021. The transaction is subject to the receipt of the required approvals from our stockholders and Pioneer's stockholders, regulatory approvals, and other customary closing conditions. See Item 1A. Risk Factors for a discussion of risks related to the Pioneer Merger. For additional information regarding the Pioneer Merger Agreement and our board of directors process and rationale for the Pioneer Merger, please see the proxy statement and other documents filed with theSEC when they become available. 43 -------------------------------------------------------------------------------- Table of Contents COVID-19 We anticipate that the current commodity price environment, largely a result of the ongoing global coronavirus 2019 ("COVID-19") pandemic, will continue to have a material impact on our business. For risks associated with these and other factors, see "Item 1A. Risk Factors" in our Quarterly Report for the three months endedMarch 31, 2020 . As a result of these market conditions, we continue to take actions necessary to protect our balance sheet to preserve long-term shareholder value, and are committed to allocating capital based on prevailing market conditions. During the first three quarters of 2020, the COVID-19 outbreak spread quickly across the globe. Federal, state and local governments mobilized to implement containment mechanisms and minimize impacts to their populations and economies. Various containment measures, which included the quarantining of cities, regions and countries, while aiding in the prevention of further outbreak, have resulted in a severe drop in general economic activity and a resulting decrease in energy demand. In addition, the global economy has experienced a significant disruption to global supply chains. Although the intensity of the COVID-19 outbreak has recently weakened in some areas of the world, leading to the relaxation of various containment measures and increased economic activity and energy demand, it has strengthened in other areas of the world; therefore, we expect global commodity price volatility will continue for the remainder of 2020 and into 2021. At the time of this filing, cases of COVID-19 inthe United States remain high in number, including inTexas , where we conduct all of our operations. As a producer of oil, natural gas and NGLs, we are recognized as an essential business under various federal, state and local regulations related to the COVID-19 pandemic. We have continued to operate as permitted under these regulations while taking steps to protect the health and safety of our workers. We have implemented protocols (including, for example, temperature checks, screening questionnaires, required mask zones and regular equipment sanitization) to reduce the risk of an outbreak within our field operations, and these protocols have to date not reduced production or efficiency in a significant manner. The risks associated with COVID-19 have also impacted our workforce and the way we meet our business objectives. During the three months endedSeptember 30, 2020 , for example, we restructured our workforce by aligning employee headcount and office space with our reduced activity levels resulting from the impact of COVID-19 on oil prices. Notwithstanding this, as ofSeptember 30, 2020 , we have been able to maintain a consistent level of effectiveness through these arrangements, including maintaining our day-to-day operations, our financial reporting systems and our internal control over financial reporting. Nature of Operations Our Properties AtSeptember 30, 2020 , we held 304,118 gross (238,976 net) leasehold acres. Our identified drilling locations are located inUpton ,Reagan ,Midland ,Howard ,Martin andGlasscock Counties,Texas , in theMidland Basin , andPecos andReeves ,Winkler andWard Counties,Texas , in theDelaware Basin . As ofSeptember 30, 2020 , we operated the following wells: Vertical Wells Horizontal Wells Total Area Gross Net Gross Net Gross Net Midland Basin 763 638.8 539 497.7 1,302 1,136.5 Delaware Basin 29 28.2 321 307.2 350 335.4 Total 792 667.0 860 804.9 1,652 1,471.9 As ofSeptember 30, 2020 , we held an interest in 2,205 gross (1,533.2 net) wells, including wells that we did not operate. The table below summarizes the horizontal wells placed on production during the periods indicated: 44
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Nine Months Ended
Three Months Ended September 30, 2020 September 30, 2020
Area Gross Net Gross Net
Midland Basin 15 11.8 56 49.2
Delaware Basin 11 11.0 28 27.8
Total 26 22.8 84 77.0
How We Evaluate Our Operations
We use a variety of financial and operational metrics to assess the performance
of our oil and natural gas operations, including:
•production volumes;
•realized prices on the sale of oil, natural gas, and NGLs, including the effect
of our commodity derivative contracts;
•lease operating expenses;
•capital expenditures;
•returns on capital invested; and
•certain unit costs.
Sources of Our Revenues
Our production revenues are derived from the sale of our oil and natural gas
production, as well as the sale of NGLs that are extracted from our natural gas
during processing, and do not include the effects of derivatives. Our production
revenues may vary significantly from period to period as a result of changes in
volumes of production sold or changes in commodity prices.
The following table presents the breakdown of our production revenues for the
periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Oil sales 86 % 92 % 89 % 90 %
Natural gas sales 4 % 2 % 3 % 2 %
Natural gas liquids sales 10 % 6 % 8 % 8 %
Other revenues include fees from third parties, including working interest
owners in our operated wells, and fees relating to our water midstream
operations, as well as easement and other surface use fees charged by our
subsidiary, Parsley Minerals, LLC , to third parties.
Production Volumes
The following table presents production volumes for our properties for the three
and nine months ended September 30, 2020 and 2019:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Oil (MBbls) 10,213 8,440 31,978 23,423
Natural gas (MMcf) 18,371 14,475 51,987 37,967
Natural gas liquids (MBbls) 3,581 2,983 10,807 8,120
Total (MBoe) 16,856 13,836 51,450 37,871
Average net production (Boe/d) 183,217 150,391 187,774 138,722
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Production Volumes Directly Impact Our Results of Operations
As reservoir pressures decline, production from a given well or formation
decreases. Growth in our future production and reserves will depend on our
ability to continue to add proved reserves in excess of our production.
Accordingly, we plan to continue adding reserves through the development of our
properties as well as through selective acquisitions. Our ability to add
reserves through development projects and acquisitions is dependent on many
factors, including our ability to raise capital, obtain regulatory approvals,
procure contract drilling rigs and personnel and successfully identify and
consummate acquisitions.
Realized Prices on the Sale of Oil, Natural Gas and NGLs
Historically, oil, natural gas and NGLs prices have been extremely volatile, and
we expect this volatility to continue. Because our production consists primarily
of oil, our production revenues are more sensitive to fluctuations in the price
of oil than they are to fluctuations in the price of natural gas or NGLs. During
2019, the low price for each of NYMEX WTI oil futures and NYMEX Henry Hub gas
futures was $45.41 per barrel and $2.07 per MMBtu, respectively. In contrast,
during the nine months ended September 30, 2020 , primarily as a result of the
global outbreak of COVID-19, prices for oil and natural gas declined
significantly, reaching lows of negative $40.32 per barrel for NYMEX WTI oil
futures and $1.43 per MMBtu for NYMEX Henry Hub gas futures. While an April 2020
agreement by OPEC Plus to cut production helped to stabilize commodity prices
during the latter half of the second quarter of 2020, oil prices have remained
depressed. Additionally, on July 15, 2020 , OPEC Plus agreed to increase
production by 1.6 million barrels per day starting in August 2020 . OPEC Plus is
scheduled to meet again in the fourth quarter of 2020 and it is possible further
production increases may be agreed upon, which would further negatively impact
the price of oil. The decreased demand for oil, as well as the uncertainty
around the extent and timing of an economic recovery, have resulted in continued
market volatility.
To achieve more predictable cash flow and to reduce our exposure to adverse
fluctuations in commodity prices, we enter into derivative arrangements for a
portion of our production, with an emphasis on our oil production. By removing a
portion of price volatility associated with our oil production, we believe we
will mitigate, but not eliminate, the potential negative effects of reductions
in oil prices on our cash flow from operations for the relevant periods. See
Item 3. Quantitative and Qualitative Disclosures About Market Risk-Commodity
Price Risk for information regarding our exposure to market risk, including
the effects of changes in commodity prices, and our commodity derivative
contracts.
We expect to use commodity derivative instruments to hedge our price risk in the
future, although our ability to do so economically may be limited in the current
commodities price environment as described in "Item 1A. Risk Factors-Some of our
commodity hedging transactions limit our potential gains or fail to fully
protect us from declines in commodity prices" in our Quarterly Report on Form
10-Q for the three months ended March 31, 2020 . Our hedging strategy and future
hedging transactions will be determined at our discretion and may differ from
our historical hedging strategy. We are not under an obligation to hedge a
specific portion of our oil, natural gas or NGLs production. See Note
4-Derivative Financial Instruments to our condensed consolidated financial
statements included elsewhere in this Quarterly Report for details regarding the
volumes and terms of our derivative instruments as of September 30, 2020 .
We will have recognized the following cumulative gains (losses) in the line item
Gain (loss) on derivatives on our condensed consolidated statements of
operations from net premiums received (paid) or deferred on options that will
settle during the following periods (in thousands):
Q4 2020 $ 7,157
Q1 2021 (2,320)
Q2 2021 (2,324)
Q3 2021 (1,077)
Q4 2021 (1,077)
Total $ 359
46-------------------------------------------------------------------------------- Table of Contents Impairment ofProved Oil and Natural Gas Properties Proved oil and natural gas properties are reviewed for impairment periodically or when events and circumstances indicate a possible decline in the recoverability of the carrying amount of such properties. We estimate the expected future cash flows of our oil and natural gas properties and compare the undiscounted cash flows to the carrying amount of the oil and natural gas properties, on a field by field basis, to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, we will write down the carrying amount of the oil and natural gas properties to estimated fair value. As discussed above, the commodity price volatility associated with the ongoing effects of COVID-19 have impacted, among other things, our operations, future development plans and expected future cash flows. As a result of these impacts, the carrying amount of certain of our proved oil and natural gas properties exceeded their expected undiscounted future cash flows as ofMarch 31, 2020 . The carrying amount of our proved oil and natural gas properties did not exceed their expected undiscounted future cash flows as ofSeptember 30, 2020 . The key assumptions used to determine our expected undiscounted future cash flows include, but are not limited to, future commodity prices, price differentials, future production estimates, estimated future capital expenditures and estimated future operating expenses. The significant decline in commodity prices and the ongoing effects of COVID-19 have resulted in business and operational changes impactful to each of the key assumptions mentioned above. We evaluate future commodity pricing for oil and NGLs based on five-year NYMEX WTI futures prices and future commodity pricing for natural gas based on five-year NYMEX Henry Hub futures prices, each of which decreased fromSeptember 30, 2019 toSeptember 30, 2020 . The estimated decrease in value of undiscounted future cash flows fromSeptember 30, 2019 toSeptember 30, 2020 is primarily due to decreased commodity prices. As part of our period end reserves estimation process for future periods, we expect changes in the key assumptions used, which could be significant, including updates to future pricing estimates and differentials, updates to future production estimates to align with our anticipated five-year drilling plan and changes in our capital costs and operating expense assumptions. There is a significant degree of uncertainty with respect to the assumptions used to estimate undiscounted future cash flows due to, but not limited to, the risk factors referred to in "Item 1A. Risk Factors" included in our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2020 and in the Annual Report. We estimated the fair value of the applicable asset group by discounting the estimated future cash flows using discount rates and other assumptions that market participants would use in their estimates of fair value. As a result, we recognized a non-cash charge against earnings of$4.4 billion during the nine months endedSeptember 30, 2020 . Of this amount,$3.1 billion and$1.3 billion were attributable to properties in ourMidland andDelaware Basin areas, respectively. No such charges were recorded during the three months endedSeptember 30, 2020 or the three and nine months endedSeptember 30, 2019 . AtSeptember 30, 2020 , following the recognition of impairment in our significant fields that comprise 100% of our carrying value, our expected undiscounted future cash flows exceeded the carrying value of our proved oil and natural gas properties by an average of 122% per field and, individually, by a minimum of 104%. As a result of the demand impacts associated with the global COVID-19 pandemic, we may experience additional proved and unproved impairments in the future if commodity prices decline from current levels or remain low for a prolonged period of time. In addition, negative changes in price differentials or increases in capital or operating costs could also negatively impact the estimated future undiscounted cash flows related to our proved oil and natural gas properties, which could result in additional future impairment. Reserve estimates and related impairments of proved and unproved properties are difficult to predict in a volatile price environment. However, a decrease of 10% in estimated future pricing of oil and natural gas commodities as ofSeptember 30, 2020 would not have resulted in the carrying value of our oil and natural gas properties exceeding the estimated future undiscounted cash flows. Factors Affecting the Comparability of Our Financial Condition and Results of Operations Our historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, for the following reasons: 47 -------------------------------------------------------------------------------- Table of Contents Capital Expenditures Our drilling, completions and infrastructure activities are capital intensive and require us to make substantial capital expenditures, which vary from year to year. For further information about our capital expenditures, see "-Capital Requirements and Sources of Liquidity." The following table sets forth our capital expenditures for drilling, completions and infrastructure for the periods indicated (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Capital expenditures$ 84,899 $ 318,293 $ 527,981 $ 1,096,611 Results of Operations Production Revenues The following table provides the components of our production revenues for the periods indicated, as well as each period's respective average prices and production volumes: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Production revenues (in thousands): Oil sales$ 379,804 $ 465,549 $ 1,089,423 $ 1,292,563 Natural gas sales 18,729 8,566 35,966 23,159 Natural gas liquids sales 46,095 33,041 96,894 115,138 Total production revenues$ 444,628 $ 507,156
Average realized prices(1): Oil, without realized derivatives (per$ 34.07 $ 55.18 Bbls)$ 37.19 $ 55.16 Oil, with realized derivatives (per Bbls) 35.73 54.12 39.21 53.12 Natural gas, without realized derivatives 0.69 0.61 (per Mcf) 1.02 0.59 Natural gas, with realized derivatives 0.70 0.70 (per Mcf) 0.92 0.64 Natural gas liquids (per Bbls) 12.87 11.08 8.97 14.18 Average price per Boe, without realized 23.76 37.78 derivatives 26.38 36.65 Average price per Boe, with realized 26.95 36.60 derivatives 25.38 36.07 Production: Oil (MBbls) 10,213 8,440 31,978 23,423 Natural gas (MMcf) 18,371 14,475 51,987 37,967 Natural gas liquids (MBbls) 3,581 2,983 10,807 8,120 Total (MBoe) 16,856 13,836 51,450 37,871 Average daily production volume: Oil (Bbls) 111,011 91,739 116,708 85,799 Natural gas (Mcf) 199,685 157,337 189,734 139,073 Natural gas liquids (Bbls) 38,924 32,424 39,442 29,744 Total (Boe) 183,217 150,391 187,774 138,722 48
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(1) Average prices shown in the table reflect prices both before and after the effects of
our realized commodity hedging transactions. Our calculation of such effects includes
both realized gains and losses on cash settlements for commodity derivative
transactions and premiums paid or received on options that settled during the period.
The table below shows, for the periods indicated, our average realized oil price as a percentage of the average NYMEX oil price, our average realized natural gas price as a percentage of the average NYMEX gas price, and our average realized NGLs price as a percentage of the average NYMEX oil price. Management uses the realized price to NYMEX margin analysis to analyze trends in our oil, natural gas and NGLs revenues. Our realized oil, natural gas and NGLs prices are generally the actual prices that we realize at or near the wellhead, adjusted for quality, transportation fees and costs, differentials, marketing premiums or deductions and other factors that affect the price received at the wellhead. During the three and nine months endedSeptember 30, 2020 , the majority of our oil production was sold at NYMEX WTI and the majority of our natural gas production was sold at Waha Hub prices; however, during the nine months endedSeptember 30, 2020 , we entered into certain short-term, fixed price agreements accounting for approximately 64% of our oil production inMay 2020 and approximately 76% of our oil production inJune 2020 . Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Average realized oil price ($/Bbl)$ 37.19 $ 55.16 $ 34.07 $ 55.18 Average NYMEX ($/Bbl)$ 40.94 $ 56.45 $ 38.30 $ 57.06 Differential to NYMEX$ (3.75) $ (1.29) $ (4.23) $ (1.88) Average realized oil price as a percentage of average NYMEX oil price 91 % 98 % 89 % 97 %
Average realized natural gas price ($/Mcf)
$ 0.69 $ 0.61 Average NYMEX ($/Mcf)$ 2.12 $ 2.33 $ 1.91 $ 2.57 Differential to NYMEX$ (1.10) $ (1.74) $ (1.22) $ (1.96) Average realized natural gas price as a percentage of average NYMEX gas price 48 % 25 % 36 % 24 % Average realized NGLs price ($/Bbl)$ 12.87 $ 11.08 $ 8.97 $ 14.18 Average NYMEX ($/Bbl)$ 40.94 $ 56.45 $ 38.30 $ 57.06 Differential to NYMEX$ (28.07) $ (45.37) $ (29.33) $ (42.88) Average realized NGLs price as a percentage of average NYMEX oil price 31 % 20 % 23 % 25 % As reflected in the table above, the price differentials between our average realized oil price and the average NYMEX oil price were wider during the three and nine months endedSeptember 30, 2020 than during the three and nine months endedSeptember 30, 2019 . Widened oil and natural gas basis differentials during the three and nine months endedSeptember 30, 2020 were largely due to entering into the fixed price agreements, described above, covering a portion of our oil production in May andJune 2020 , and concurrently terminating or restructuring certain derivative positions, as discussed in Note-4 Derivative Financial Instruments to our condensed consolidated financial statements included elsewhere in this Quarterly Report. Oil, natural gas and NGLs revenues. Our oil, natural gas and NGLs revenues decreased by$62.5 million , or 12%, to$444.6 million for the three months endedSeptember 30, 2020 from$507.2 million for the three months endedSeptember 30, 2019 . As shown in the following tables, from the three months endedSeptember 30, 2019 to the three months endedSeptember 30, 2020 , the net dollar effect of the increase in average realized natural gas and NGLs prices and decrease in average realized oil was$169.2 million and the net dollar effect of the increase in production volumes of oil, natural gas and NGLs was$106.7 million . 49
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Three months ended
Change in average September 30, 2020 Total net dollar effect
realized prices(1) production volumes(2) of change
Effect of change in average realized
prices: (in thousands) (in thousands)
Oil $ (17.97) 10,213 $ (183,543)
Natural gas 0.43 18,371 7,857
Natural gas liquids 1.79 3,581 6,430
Total revenues due to change in
average realized prices $ (169,256)
Three months
ended
September 30,
2019 average
Change in production realized Total net dollar effect
volumes(2) prices(1) of change
Effect of change in production volumes: (in thousands) (in thousands)
Oil 1,773 $ 55.16 $ 97,798
Natural gas 3,896 0.59 2,306
Natural gas liquids 598 11.08 6,624
Total revenues due to change in
production volumes $ 106,728
(1) Oil and NGLs average realized prices are shown per Bbl and natural gas
prices are shown per Mcf.
(2) Oil and NGLs production volumes are shown in MBbls and natural gas
production volumes are shown in MMcf.
Our oil, natural gas and NGLs revenues decreased by $208.6 million , or 15%, to
$1,222.3 million for the nine months ended September 30, 2020 from $1,430.9
million for the nine months ended September 30, 2019 .
As shown in the following tables, from the nine months ended September 30, 2019
to the nine months ended September 30, 2020 , the net dollar effect of the
decrease in average realized oil and NGLs prices and increase in average
realized natural gas prices was $727.3 million and the net dollar effect of the
increase in production volumes of oil, natural gas and NGLs was $518.7 million .
Nine months ended
Change in average September 30, 2020 Total net dollar effect
realized prices(1) production volumes(2) of change
Effect of change in average realized
prices: (in thousands) (in thousands)
Oil $ (21.11) 31,978 $ (675,235)
Natural gas 0.08 51,987 4,256
Natural gas liquids (5.21) 10,807 (56,344)
Total revenues due to change in
average realized prices $ (727,323)
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Nine months ended
September 30,
2019 average
Change in production realized Total net dollar effect
volumes(2) prices(1) of change
Effect of change in production volumes: (in thousands) (in thousands)
Oil 8,555 $ 55.18 $ 472,095
Natural gas 14,020 0.61 8,551
Natural gas liquids 2,687 14.18 38,100
Total revenues due to change in
production volumes $ 518,746
(1) Oil and NGLs average realized prices are shown per Bbl and natural gas
prices are shown per Mcf.
(2) Oil and NGLs production volumes are shown in MBbls and natural gas
production volumes are shown in MMcf.
Other revenues
Other revenues decreased by $0.2 million to $2.8 million for the three months
ended September 30, 2020 from $3.0 million for the three months ended
September 30, 2019 . The decrease is predominantly associated with decreased
income from our water midstream operations.
Other revenues increased by $4.6 million to $10.1 million for the nine months
ended September 30, 2020 from $5.5 million for the nine months ended September
30, 2019 . The increase is also predominantly associated with increased income
from our water midstream operations.
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Operating expenses
The following table summarizes our operating expenses for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Operating expenses (in thousands):
Lease operating expenses $ 53,696 $ 45,719 $ 188,853 $ 129,587
Transportation and processing costs 22,182 12,052 50,942 26,917
Production and ad valorem taxes 31,709 38,235 92,254 96,386
Depreciation, depletion and amortization 128,045 211,737 530,190 584,023
General and administrative expenses(1) 33,282 36,718 106,052 109,662
Exploration and abandonment costs 7,983 11,988 571,616 35,054
Impairment - - 4,374,253 -
Acquisition costs 278 - 15,296 -
Accretion of asset retirement obligations 497 373 1,414 1,071
Rig termination costs (202) - 14,904 -
Loss (gain) on sale of property 357 (1,887) 332 (1,887)
Restructuring and other termination costs(2) 8,134 - 45,431 1,562
Other operating expenses 5,202 2,175 16,802 3,563
Total operating expenses $ 291,163 $ 357,110 $ 6,008,339 $ 985,938
Expense per Boe:
Lease operating expenses $ 3.19 $ 3.30 $ 3.67 $ 3.42
Transportation and processing costs 1.32 0.87 0.99 0.71
Production and ad valorem taxes 1.88 2.76 1.79 2.55
Depreciation, depletion and amortization 7.60 15.30 10.30 15.42
General and administrative expenses 1.97 2.65 2.06 2.90
Exploration and abandonment costs 0.47 0.87 11.11 0.93
Impairment - - 85.02 -
Acquisition costs 0.02 - 0.30 -
Accretion of asset retirement obligations 0.03 0.03 0.03 0.03
Rig termination costs (0.01) - 0.29 -
Loss (gain) on sale of property 0.02 (0.14) 0.01 (0.05)
Restructuring and other termination costs 0.48 - 0.88 0.04
Other operating expenses 0.31 0.16 0.33 0.09
Total operating expenses per Boe $ 17.28 $ 25.80 $ 116.78 $ 26.04
(1) General and administrative expenses include stock-based compensation expense
of $6.6 million and $19.6 million for the three and nine months ended
September 30, 2020 , respectively, and $5.2 million and $15.5 million for the
three and nine months ended September 30, 2019 , respectively.
(2) Restructuring and other termination costs include stock-based compensation
expense of $4.8 million for the nine months ended September 30, 2020 related to
accelerated vesting, which occurred as a result of our acquisition of Jagged
Peak Energy Inc. ("Jagged Peak") in January 2020 (the "Jagged Peak
Acquisition"). There was no such activity for the three months ended
September 30, 2020 or the three and nine months ended September 30, 2019 .
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Lease operating expenses. Lease operating expenses were $53.7 million and $188.9
million for the three and nine months ended September 30, 2020 , respectively,
and $45.7 million and $129.6 million for the three and nine months ended
September 30, 2019 , respectively. These period-over-period increases are
primarily due to an increase in the size of our asset base, the majority of
which is associated with the Jagged Peak Acquisition.
On a per Boe basis, lease operating expenses decreased $0.11 per Boe, or 3%, to
$3.19 for the three months ended September 30, 2020 from $3.30 for the three
months ended September 30, 2019 . The decrease in lease operating expense per Boe
is primarily attributable to production volume growth, paired with a
comprehensive supply chain outreach on key spend categories.
Lease operating expenses increased $0.25 per Boe, or 7%, to $3.67 for the nine
months ended September 30, 2020 from $3.42 for the nine months ended
September 30, 2019 . This increase in lease operating expenses per Boe is
primarily attributable to the acquired Jagged Peak properties discussed above,
partially offset by increased production volumes.
Transportation and processing costs. Transportation and processing costs, which
represent third-party costs related to certain of our natural gas and NGLs
marketing and processing agreements, were $22.2 million and $50.9 million for
the three and nine months ended September 30, 2020 , respectively, and $12.1
million and $26.9 million for the three and nine months ended September 30,
2019 , respectively. These period-over-period increases are primarily due to the
increase in production period-over-period, as well as transportation and
fractionation charges and other fees. On a per Boe basis, transportation and
processing costs were $1.32 and $0.99 for the three and nine months ended
September 30, 2020 , respectively, and $0.87 and $0.71 for the three and nine
months ended September 30, 2019 , respectively. The increases in transportation
and processing costs per Boe for the three and nine months ended September 30,
2020 , as compared to the three and nine months ended September 30, 2019 , are
primarily attributable to increased transportation and fractionation charges and
other fees.
Production and ad valorem taxes. Production and ad valorem taxes were $31.7
million and $92.3 million for the three and nine months ended September 30,
2020 , respectively, and $38.2 million and $96.4 million for the three and nine
months ended September 30, 2019 , respectively. On a per Boe basis, production
and ad valorem taxes decreased to $1.88 per Boe for the three months ended
September 30, 2020 from $2.76 per Boe for the three months ended September 30,
2019 and to $1.79 per Boe for the nine months ended September 30, 2020 from
$2.55 per Boe for the nine months ended September 30, 2019 .
Overall, for the three and nine months ended September 30, 2020 , as compared to
the same periods in 2019, production and ad valorem taxes decreased by
approximately $6.5 million and $4.1 million , respectively, predominately as a
result of decreased oil, natural gas and NGLs prices offset by increased
production volumes.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization ("DD&A") expense was $128.0 million and $530.2 million for the
three and nine months ended September 30, 2020 , respectively, and $211.7 million
and $584.0 million for the three and nine months ended September 30, 2019 ,
respectively.
The decrease in DD&A during the three months ended September 30, 2020 , as
compared to the three months ended September 30, 2019 , is primarily attributable
to the decrease in costs subject to depletion as a result of the impairment of
our proved oil and natural gas properties recorded in the first quarter of 2020,
as discussed in Note 5-Property, Plant and Equipment to our condensed
consolidated financial statements included elsewhere in this Quarterly Report,
offset by a 22% increase in production during the three months ended
September 30, 2020 as compared to the three months ended September 30, 2019 .
The decrease in DD&A during the nine months ended September 30, 2020 , as
compared to the nine months ended September 30, 2019 , is largely attributable to
to the decrease in costs subject to depletion as a result of the impairment of
our proved oil and natural gas properties recorded in the first quarter of 2020,
as discussed in Note 5-Property, Plant and Equipment to our condensed
consolidated financial statements included elsewhere in this Quarterly Report,
offset by a 36% increase in production during the nine months ended
September 30, 2020 , as compared to the same period in 2019.
On a per Boe basis, DD&A expense decreased to $7.60 per Boe during the three
months ended September 30, 2020 from $15.30 per Boe during the three months
ended September 30, 2019 . This period-over-period decrease was primarily
attributable to the decrease in costs subject to depletion as a result of the
impairment of our
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proved oil and natural gas properties, recorded in the first quarter of 2020, as
discussed in Note 5-Property, Plant and Equipment to our condensed
consolidated financial statements included elsewhere in this Quarterly Report.
DD&A expense decreased to $10.30 per Boe for the nine months ended September 30,
2020 from $15.42 per Boe for the nine months ended September 30, 2019 , primarily
due to the increase in total proved and proved developed reserves as discussed
above.
General and administrative expenses. General and administrative expenses were
$33.3 million and $106.1 million during the three and nine months ended
September 30, 2020 , respectively, and $36.7 million and $109.7 million during
the three and nine months ended September 30, 2019 , respectively.
On a per Boe basis, general and administrative expenses were $1.97 and $2.06 for
the three and nine months ended September 30, 2020 , respectively, and $2.65 and
$2.90 for the three and nine months ended September 30, 2019 , respectively.
These period-over-period decreases are a result of production volume growth
outpacing general and administrative expenses.
Exploration and abandonment costs. The following table provides a breakdown of
exploration and abandonment costs incurred for the periods indicated (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Leasehold abandonments and impairments
50 103 7,171 972
Other - - - 8
Total exploration and abandonment costs
During the three and nine months endedSeptember 30, 2020 , we recognized leasehold abandonment and impairment charges of approximately$7.9 million and$564.4 million , respectively, as compared to$11.9 million and$34.1 million during the three and nine months endedSeptember 30, 2019 , respectively. During the nine months endedSeptember 30, 2020 , we recorded$531.1 million of leasehold abandonment and impairment charges associated with the probable loss of held-by-production operated and non-operated acreage due to shutting-in vertical wells with modest production or because we believe the applicable operator has no current plans to drill or extend the applicable leases prior to their expiration. Additionally, during the nine months endedSeptember 30, 2020 , we recorded non-cash leasehold abandonment and impairment charges of$13.0 million relating to acreage expiring in future years and$20.3 million associated with leases expiring during the current year, in each case because we have no current plans to drill or extend the leases prior to their expiration. During the three and nine months endedSeptember 30, 2020 , we incurred geological and geophysical expenses of$0.1 million and$7.2 million , respectively, as compared to$0.1 million and$1.0 million , respectively, for the three and nine months endedSeptember 30, 2019 . Our geological and geophysical expenses consist of the costs of acquiring and processing seismic data, geophysical data and core analysis, primarily relating to geoscientific analysis of our acreage. The increase in geological and geophysical expenses for the nine months endedSeptember 30, 2020 , as compared to the nine months endedSeptember 30, 2019 , is primarily due to transfer fees and costs relating to the acquisition of seismic data in connection with the Jagged Peak Acquisition. We recognized other exploration costs of$8.0 thousand during the nine months endedSeptember 30, 2019 , which includes research and other similar costs. There were no such costs incurred during the three and nine months endedSeptember 30, 2020 or the three months endedSeptember 30, 2019 . Impairment. As a result of the carrying amount of certain of our proved oil and natural gas properties being less than their expected undiscounted future cash flows, we recognized a non-cash charge against earnings of$4.4 billion during the nine months ended September 30, 2020, as discussed in more detail in Note 16-Disclosures About Fair Value to our condensed consolidated financial statements included elsewhere in this Quarterly Report. There were no such costs for the three and nine months endedSeptember 30, 2019 or during the three months endedSeptember 30, 2020 . 54 -------------------------------------------------------------------------------- Table of Contents Acquisition costs. During the three and nine months endedSeptember 30, 2020 , we incurred$0.3 million and$15.3 million , respectively, in acquisition costs. These acquisition costs primarily relate to the Jagged Peak Acquisition and include non-recurring legal costs, advisory costs, accounting and valuation costs, consulting costs and other general and administrative expenses directly associated with the acquisition. During the three and nine months endedSeptember 30, 2019 , we incurred no such acquisition costs. Rig termination costs. During the nine months endedSeptember 30, 2020 , we incurred charges of$14.9 million to terminate third-party drilling rig agreements. There were no such charges during the nine months endedSeptember 30, 2019 . Restructuring and other termination costs. During the three months endedSeptember 30, 2020 , we incurred$8.1 million of restructuring and other termination costs as part of our effort to align employee headcount and office space with our reduced activity levels as a result of the impact of COVID-19 on oil prices. During the nine months endedSeptember 30, 2020 , we incurred one-time restructuring and other termination costs of$45.4 million , primarily associated with the Jagged Peak Acquisition. During the nine months endedSeptember 30, 2019 , we incurred one-time restructuring and other termination costs of$1.6 million as part of our efforts to reduce future general and administrative expenses, which included a reduction in employee headcount. There were no such costs incurred during the three months endedSeptember 30, 2019 . Other operating expenses. Other operating expenses were$5.2 million and$16.8 million for the three and nine months endedSeptember 30, 2020 , respectively, and$2.2 million and$3.6 million for the three and nine months endedSeptember 30, 2019 , respectively. The increases period over period are related to increased idle charges and increased expenses related to our water midstream operations. During the three and nine months endedSeptember 30, 2020 , other operating expenses included$1.5 million and$11.2 million , respectively, in idle charges resulting from terminated or modified third-party drilling rig agreements as compared to$2.2 million and$3.6 million , respectively, during the three and nine months endedSeptember 30, 2019 . Other operating expenses related to our water midstream operations during the three and nine months endedSeptember 30, 2020 were$4.0 million and$5.1 million , respectively. Other (expense) income The following table summarizes our other income and expenses for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Other (expense) income (in thousands): Interest expense, net$ (40,456) $ (33,578) $ (122,589) $ (100,177) Gain (loss) on early extinguishment of debt 56 - (21,037) - (Loss) gain on derivatives (87,021) 56,552 178,665 (43,574) Change in TRA liability - - 70,529 - Interest income 16 216 285 610 Other expense (928) (1,678) (4,794) (905) Total other (expense) income, net$ (128,333) $
21,512
Interest expense, net. Interest expense, net was$40.5 million and$122.6 million for the three and nine months endedSeptember 30, 2020 , respectively, and$33.6 million and$100.2 million for the three and nine months endedSeptember 30, 2019 , respectively. The increase during the three and nine months endedSeptember 30, 2020 , as compared to the three and nine months endedSeptember 30, 2019 , is primarily due to the assumption of the 5.875% senior notes due 2026 (the "2026 Notes") in connection with the Jagged Peak Acquisition and increased borrowings under the Revolving Credit Agreement, as discussed in Note 8-Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report. Gain (loss) on early extinguishment of debt. During the three months endedSeptember 30, 2020 , we recorded gain on early extinguishment of debt of$0.1 million related to the open market acquisition and cancellation of$2.0 million aggregate principal amount of our 5.250% senior unsecured notes due 2025 (the "New 2025 Notes"), as discussed in Note 8-Debt to our condensed consolidated financial statements included elsewhere in this 55 -------------------------------------------------------------------------------- Table of Contents Quarterly Report. During the nine months endedSeptember 30, 2020 , we recorded a$21.0 million loss on early extinguishment of debt primarily due to our redemption of$400.0 million in aggregate principal amount of outstanding 6.250% senior unsecured notes due 2024. No such expenses were incurred for the three and nine months endedSeptember 30, 2019 . (Loss) gain on derivatives. We recognized a loss on derivatives of$87.0 million and a gain on derivatives of$178.7 million during the three and nine months endedSeptember 30, 2020 , respectively, as compared to a gain on derivatives of$56.6 million and a loss on derivatives of$43.6 million for the three and nine months endedSeptember 30, 2019 , respectively. The change in (loss) gain on derivatives for each of the periods is attributable to changes in commodity prices as well as the restructuring of our hedge portfolio during the nine months endedSeptember 30, 2020 . Where applicable, a decrease in the value of our commodity portfolio is generally attributable to higher commodity prices and, conversely, an increase in the value of our commodity portfolio is generally attributable to lower commodity prices. Change in TRA liability. We recorded$70.5 million during the nine months endedSeptember 30, 2020 associated with the write-off of our TRA liability primarily resulting from a valuation allowance recorded against the associated deferred tax asset. There was no such income recorded during the three months endedSeptember 30, 2020 or the three and nine months endedSeptember 30, 2019 . Interest income. Interest income was$16.0 thousand and$0.3 million during the three and nine months endedSeptember 30, 2020 , respectively, and$0.2 million and$0.6 million during the three and nine months endedSeptember 30, 2019 , respectively. Other expense. Other expense was$0.9 million and$4.8 million for the three and nine months endedSeptember 30, 2020 , respectively, as compared to$1.7 million and$0.9 million for the three and nine months endedSeptember 30, 2019 , respectively. The increase in other expense for the nine months endedSeptember 30, 2020 , as compared to the same period in 2019, is attributable to a$1.7 million adjustment to reduce the carrying value of certain other property, plant and equipment, a$3.4 million decrease in income from our equity investment inSpraberry Production Services, LLC and a$1.3 million decrease in other miscellaneous expenses. Income Tax (Expense) Benefit During the three and nine months endedSeptember 30, 2020 , we recognized income tax expense of$3.1 million and income tax benefit of$574.0 million , respectively, as compared to income tax expense of$35.0 million and$59.8 million during the three and nine months endedSeptember 30, 2019 , respectively. During the nine months endedSeptember 30, 2020 , we recognized impairment of proved oil and natural gas properties of$4.4 billion and leasehold abandonment and impairment of unproved oil and natural gas properties of$564.4 million . As a result, the deferred tax balance changed from net deferred tax liabilities to net deferred tax assets, which resulted in the establishment of a valuation allowance against the net deferred tax assets. We recognized the valuation allowance as a discrete item in our estimated annual effective tax rate as discussed in Note 11-Income Taxes to our condensed consolidated financial statements included elsewhere in this Quarterly Report. The increase in income tax benefit during the nine months endedSeptember 30, 2020 , as compared to the nine months endedSeptember 30, 2019 , is predominately associated with the valuation allowance recorded against our net deferred tax asset balance, as discussed above. Capital Requirements and Sources of Liquidity The following table sets forth our capital expenditures for drilling, completions and infrastructure for the periods indicated (in thousands): Three Months Ended September Nine Months Ended 30, September 30, 2020 2019 2020 2019 Capital expenditures$ 84,899 $ 318,293 $ 527,981 $ 1,096,611 Our 2020 budget for capital development expenditures is between$650 million and$700 million , of which approximately$625 million to$675 million is expected to be used for drilling, completions and equipment, and approximately$25 million is expected to be used for infrastructure and other expenditures. We expect 56 -------------------------------------------------------------------------------- Table of Contents approximately 40% to 50% of the 2020 budget to be associated with drilling and completions for proved undeveloped reserves as ofDecember 31, 2019 . Our capital budget excludes any amounts that may be paid for acquisitions. The amount and timing of capital expenditures during the remainder of 2020 is largely discretionary and within our control and will depend, in large part, on commodity prices. We could choose to defer a portion of these planned capital expenditures depending on a variety of factors, including, but not limited to, the success of our drilling activities, prevailing and anticipated prices for oil and natural gas, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other working interest owners. Based upon current oil and natural gas price expectations for fiscal year 2020, we believe that our cash on hand, cash flow from operations and borrowings under the Revolving Credit Agreement will be sufficient to fund our operations through 2020. As ofSeptember 30, 2020 , our liquidity was as follows (in millions): Cash and cash equivalents$ 4.7 Revolving Credit Agreement availability 763.0 Liquidity$ 767.7 Future cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, our commodity derivative contracts and the extent to which our production is hedged and the significant capital expenditures required to more fully develop our properties. For example, we expect a portion of our future capital expenditures to be financed with cash flows from operations derived from wells drilled in drilling locations not associated with proved reserves on ourDecember 31, 2019 reserve report. The failure to achieve anticipated production and cash flows from operations from such wells could result in a reduction in future capital spending. Further, our capital expenditure budget for 2020 does not allocate any amounts for acquisitions of oil and natural gas properties. In the event we make additional acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures or seek additional capital. If we require additional capital for that or other reasons, we may seek such capital through reserve base borrowings, joint venture partnerships, production payment financings, asset sales, offerings of debt or equity securities or other means. We cannot assure you that needed capital will be available on acceptable terms or at all, particularly in light of current market conditions. If we are unable to obtain funds when needed or on acceptable terms, we may be required to further curtail our current drilling programs, which could result in a loss of acreage through lease expirations. In addition, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to replace our reserves. We may from time to time seek to retire or purchase our outstanding debt through cash purchases or exchanges for other debt or equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Dividends The following table sets forth information with respect to cash dividends and distributions declared by our board of directors during the nine months endedSeptember 30, 2020 and the year endedDecember 31, 2019 : Total Dividend/Distribution Dividend/Distribution Payment(3) Declaration Date(1) Record Date Payment Date Amount(2) (in thousands) August 26, 2019 September 20, 2019 September 30, 2019 $ 0.03 $ 9,547 November 5, 2019 December 10, 2019 December 20, 2019 $ 0.03 $ 9,548 January 23, 2020 March 10, 2020 March 20, 2020 $ 0.05 $ 20,786 May 4, 2020 June 9, 2020 June 19, 2020 $ 0.05 $ 20,801 August 5, 2020 September 8, 2020 September 18, 2020 $ 0.05 $ 20,779 (1) On October 28, 2020, our board of directors declared a cash dividend of$0.05 per share of Class A common stock and, in its capacity as the managing member ofParsley LLC , a corresponding distribution of$0.05 per 57 -------------------------------------------------------------------------------- Table of Contents PE Unit, payable onDecember 18, 2020 to holders of Class A common stock and PE Unitholders of record as ofDecember 8, 2020 . The portion of theParsley LLC distribution attributable to PE Units held by the Company will be used to fund the quarterly dividend on issued and outstanding shares of Class A common stock. (2) Per share of Class A common stock and per PE Unit. The portion of theParsley LLC distribution attributable to PE Units held by the Company was used to fund the quarterly dividend on issued and outstanding shares of Class A common stock. (3) Reflects total cash dividend and distribution payments made, or to be made, to holders of Class A common stock and PE Unitholders (other than the Company) as of the applicable record date (net of forfeited dividends on forfeited shares and share equivalents). The decision to pay any future dividends is solely within the discretion of, and subject to approval by, our board of directors. Our board of directors' determination with respect to any such dividends, including the record date, the payment date and the actual amount of the dividend, will depend upon our results of operations, financial condition, liquidity, capital requirements, contractual restrictions, restrictions imposed by applicable law and other factors that the board deems relevant at the time of such determination. In addition, our debt agreements and the Parsley LLC Agreement place certain restrictions onParsley LLC's ability to distribute cash to PE Unitholders (including to us to fund dividends to holders of Class A common stock). Cash Flows The following table summarizes our cash flows for the periods indicated (in thousands): Nine Months Ended September 30, 2020 2019 Net cash provided by operating activities$ 761,066 $ 941,300 Net cash used in investing activities (603,781) (1,096,990) Net cash used in financing activities (173,362) (2,866) Cash flows provided by operating activities. Net cash provided by operating activities was approximately$761.1 million and$941.3 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Net cash provided by operating activities decreased primarily due to a$204.0 million decrease in total revenues due to lower average realized commodity prices during the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 , offset by increased production volumes. Cash based operating expenses increased$158.7 million , offset by a$224.0 million increase associated with cash received from derivatives, in each case, during the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . Cash based operating expenses include lease operating expenses, transportation and processing costs, production and ad valorem taxes, cash general and administrative expenses, rig termination costs, restructuring and other termination costs, acquisition costs and certain other operating expenses. Cash flows used in investing activities. Net cash used in investing activities was approximately$603.8 million and$1,097.0 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The reduction in the amount of cash used in investing activities was due primarily to a$450.3 million decrease in development costs related to our oil and natural gas properties and$53.3 million in cash received upon completion of the Jagged Peak Acquisition, which is described in more detail in Note 6-Acquisitions and Divestitures to our condensed consolidated financial statements included elsewhere in this Quarterly Report. Cash flows used in financing activities. Net cash used in financing activities was approximately$173.4 million and$2.9 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Net cash used in financing activities increased primarily due to a$101.5 million increase in payments on long-term debt in excess of borrowings of long-term debt, dividends paid of approximately$61.8 million during the nine months endedSeptember 30, 2020 and an increase of$5.5 million of payments primarily relating to the vesting of certain stock-based awards. Capital Sources Revolving Credit Agreement. See Note 8-Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding the Revolving Credit Agreement. 58 -------------------------------------------------------------------------------- Table of Contents 5.250% Senior Unsecured Notes due 2025. See Note 8-Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding the New 2025 Notes. 5.875% Senior Unsecured Notes due 2026. See Note 8-Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding the 2026 Notes. 4.125% Senior Unsecured Notes due 2028. See Note 8-Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding the 2028 Notes. Derivative Activity. We plan to continue our practice of entering into hedging arrangements to (i) reduce the effect of price volatility on our oil and natural gas revenues and (ii) support our annual capital budgeting and expenditure plans. Under this strategy, we intend to continue our historical practice of entering into commodity derivative contracts at times and on terms desired to maintain a portfolio of commodity derivative contracts covering all or a portion of our projected oil production. Working Capital Our working capital totaled($338.4) million and($397.3) million atSeptember 30, 2020 andDecember 31, 2019 , respectively. Our collection of receivables has historically been timely, and losses associated with uncollectible receivables have historically not been significant. Our cash and cash equivalents totaled$4.7 million and$20.7 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. The$16.0 million decrease in cash and cash equivalents was largely related to the decline in average realized commodity prices during the first nine months of 2020. The impact of lower prices was partially offset by an increase in cash received associated with derivatives, as well as a reduction in cash payments made due to decreased development activity as shown in the table in "-Factors Affecting the Comparability of Our Financial Condition and Results of Operations-Capital Expenditures." Due to the costs incurred related to our drilling program, we may incur additional working capital deficits in the future. We expect that our pace of development, production volumes, commodity prices and differentials to NYMEX prices for our oil and natural gas production will continue to be the largest variables affecting our working capital. Contractual Obligations We had no material changes, other than described in our Quarterly Report on Form 10-Q for the six months endedJune 30, 2020 , and our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2020 , in our contractual commitments and obligations during the nine months endedSeptember 30, 2020 from the amounts listed under "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations" in the Annual Report. Critical Accounting Policies and Estimates There have not been any material changes during the nine months endedSeptember 30, 2020 to the methodology applied by management for critical accounting policies previously disclosed in the Annual Report. Please read "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in the Annual Report for further description of our critical accounting policies. Off-Balance Sheet Arrangements As ofSeptember 30, 2020 , we were party to certain transportation and sale agreements providing for the delivery of fixed and determinable quantities of oil and natural gas, which we enter into in the ordinary course of business. If production volumes are not sufficient to meet these contracted delivery commitments, we may be subject to deficiency fees unless we purchase commodities in the market to satisfy such commitments. See Note 12-Commitments and Contingencies to our condensed consolidated financial statements included elsewhere in this Quarterly Report for additional information. We do not otherwise maintain off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital 59 -------------------------------------------------------------------------------- Table of Contents expenditures or capital resources which are not disclosed in the notes to the condensed consolidated financial statements. 60
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