Business Context and Reporting Period
Chord Energy Corporation, formerly Oasis Petroleum Inc., is an independent exploration and production company focused on oil-rich assets in the Williston Basin. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, and was filed August 4, 2022.
The July 1, 2022 merger with Whiting Petroleum occurred after the reporting period. Accordingly, the financial statements and operating results principally reflect Oasis and do not include Whiting’s results. Oasis changed its name to Chord Energy upon closing. The February 1, 2022 merger of Oasis Midstream Partners with Crestwood was reported as a discontinued operation.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Total revenue | $789.4 million | $364.0 million | $1.442 billion | $689.4 million |
| Operating income | $330.8 million | $325.1 million | $622.7 million | $424.5 million |
| Net income attributable to Chord | $130.8 million | $73.4 million | $596.8 million | $29.8 million |
| Net income from continuing operations | $130.8 million | $41.8 million | $111.3 million | $(41.0) million |
| Diluted earnings per share | $6.23 | $3.52 | $28.44 | $1.49 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $662.0 million | $350.4 million |
Second-quarter operating margin was approximately 41.9%, compared with 89.3% in the prior-year quarter, which benefited from a $223.0 million gain on asset sales. Six-month operating margin was approximately 43.2%. Second-quarter net margin was approximately 16.6%; six-month net margin was approximately 41.4%, substantially benefiting from discontinued-operation income.
- Oil and gas revenues increased 111% year over year in the second quarter and 106% for the six-month period, driven by higher commodity prices and, for the six months, higher production.
- Average second-quarter production was 64,079 Boepd, 64% oil. Six-month average production was 66,827 Boepd, compared with 55,730 Boepd in the prior-year period.
- Second-quarter average crude oil sales price before derivative settlements was $111.79 per barrel; the realized price after settlements was $78.71. Natural gas and NGL average sales price before settlements was $9.57 per Mcf; realized price after settlements was $8.62.
- Lease operating expense was $67.7 million, or $11.61 per Boe, in the second quarter. Six-month LOE was $130.8 million, or $10.81 per Boe.
- Net loss on derivatives was $98.3 million in the second quarter and $466.2 million for the six months. Commodity derivative settlements reduced cash flow by $201.7 million during the six-month period.
- The Crestwood investment generated a second-quarter net loss of $96.3 million, including a $110.0 million unrealized fair-value loss partially offset by a $13.7 million cash distribution gain.
Cash Flow, Balance Sheet, Debt and Liquidity
| Balance-sheet item | June 30, 2022 | December 31, 2021 |
|---|---|---|
| Cash and cash equivalents | $571.1 million | $172.1 million |
| Total assets | $3.062 billion | $3.027 billion |
| Long-term debt, net | $393.4 million | $392.5 million |
| Stockholders’ equity | $1.198 billion | $1.222 billion |
- Six-month operating cash flow was $662.0 million. Investing cash flow was $(151.7) million, including $114.3 million of capital expenditures, $201.7 million of derivative settlements, and $148.8 million of divestiture proceeds. Financing cash flow was $(114.0) million, primarily reflecting $139.9 million of dividends.
- Working capital was a deficit of $134.6 million at June 30, 2022, compared with a surplus of $30.3 million at year-end, primarily because of current derivative liabilities.
- The company had no revolving-credit borrowings and $2.4 million of letters of credit outstanding at June 30. The facility had $450.0 million of elected commitments and $447.6 million of unused capacity.
- The $400.0 million of 6.375% senior unsecured notes mature June 1, 2026. The filing reports no borrowings under the Whiting credit facility at June 30; related accrued interest and fees of approximately $2.2 million were paid after the merger.
- On July 1, 2022, the amended credit agreement increased the borrowing base to $2.0 billion, elected commitments to $800.0 million, and maturity to July 1, 2027. As of July 31, reported liquidity was $892.6 million, including $95.7 million of cash and $796.9 million of unused borrowing capacity.
Material Changes Versus Prior Comparable Period
- Total revenue rose 117% in the second quarter and 109% for the six months, primarily due to higher oil, gas and NGL prices and higher six-month production.
- Operating income increased only modestly in the second quarter because the prior-year period included a $223.0 million asset-sale gain. Six-month operating income increased 47%.
- Continuing-operations net income improved from a $41.0 million loss to $111.3 million for the six months, while total net income increased to $596.8 million.
- Six-month results included $485.6 million of income from discontinued operations, principally a $518.9 million pretax gain from the OMP/Crestwood transaction. This makes total net income less representative of recurring E&P performance.
- Operating expenses increased to $821.5 million for the six months from $487.9 million, reflecting higher purchased oil and gas costs, production taxes, LOE, DD&A and merger-related G&A costs.
- The company received $160.0 million in cash and Crestwood units in the OMP transaction and held a Crestwood investment valued at $505.3 million at June 30, representing approximately 19% of Crestwood’s outstanding units as of July 22.
Guidance, Outlook, Risks and Unusual Items
- Management introduced a return-of-capital framework on August 3, 2022: a $1.25 quarterly base dividend, variable dividends and repurchases based on free cash flow and leverage. The targeted return is at least 75% of free cash flow below 0.5x leverage, at least 50% below 1.0x leverage, and the base dividend above 1.0x leverage.
- A $15.00 per share special dividend was paid July 8, 2022. The company also repurchased $124.8 million of stock after quarter-end and authorized a new $300.0 million repurchase program in August.
- The merger resulted in the issuance of 22.7 million shares and $245.4 million of cash consideration to Whiting stockholders. Integration costs, synergies and the preliminary purchase price allocation remained subject to finalization.
- At June 30, the company had a net commodity derivative liability of approximately $436.6 million. A 10% increase in crude oil prices was estimated to reduce derivative fair value by approximately $130.0 million, while a 10% decrease was estimated to increase it by approximately $127.7 million.
- Key risks include volatile oil, gas and NGL prices; inflation and supply-chain constraints; winter-weather and operating disruptions; pipeline and transportation availability, including potential DAPL disruption; environmental and regulatory obligations; counterparty risk; and the ability to integrate Whiting and achieve expected synergies.
- Whiting bankruptcy claims remain unresolved. The company reserved 1,224,840 shares for potential distributions and reported $55 million of outstanding settlement offers. Point Arguello decommissioning-related claims also remain subject to litigation and could require equity issuance, cash payments or other consideration.
- The company maintains a $290.3 million valuation allowance against deferred tax assets, indicating that realization of some or all tax benefits remains uncertain.
Investor Verification Priorities
- Verify post-merger financial results, reserve information, production levels and synergies once Chord’s filings include a full quarter of Whiting operations.
- Assess recurring earnings and free cash flow excluding the $518.9 million OMP divestiture gain, fair-value changes in Crestwood, and derivative mark-to-market effects.
- Review the size, timing and cash-flow impact of derivative settlements and the company’s 2022–2023 hedge positions.
- Monitor leverage, borrowing-base redeterminations, liquidity after the special dividend and repurchases, and the 2026 senior-notes maturity.
- Track the final purchase price allocation for the Whiting merger and the resolution of bankruptcy, decommissioning and other assumed contingencies.
- Confirm the sustainability of the new dividend and repurchase policy under lower commodity prices and higher operating costs.