Range Resources Corp: Form 10-Q for the period ended Sep 30, 2023

Overview of Our Business

We are a Fort Worth, Texas-based independent natural gas, natural gas liquids (NGLs) and crude oil and condensate company primarily engaged in the exploration, development and acquisition of natural gas properties in the Appalachian region of the United States. We operate in one segment and have a single company-wide management team that administers all properties as a whole rather than by discrete operating segments. We measure financial performance as a single enterprise and not on a geographical or an area-by-area basis.

Our overarching business objective is to build stockholder value through returns-focused development of natural gas properties. Our strategy to achieve our business objective is to generate consistent cash flows from reserves and production through internally generated drilling projects occasionally coupled with complementary acquisitions and divestitures of non-core assets. Our revenues, profitability and future growth depend substantially on prevailing prices for natural gas, NGLs and oil and on our ability to economically find, develop, acquire, produce and market these reserves. Commodity prices have been and are expected to remain volatile. Our primary near-term focus includes the following:

• operate safely while being good stewards of the environment;
• achieve competitive returns on investments;
• manage liquidity and further improve financial strength;
• focus on organic opportunities through disciplined capital investments;
• improve operational efficiencies and economic returns;
• reduce emissions and target net-zero Scope 1 and Scope 2 greenhouse gas emissions by year-end 2025;
• attract and retain quality employees; and
• align employee incentives with our stockholders’ interests and key business objectives.

We prepare our financial statements in conformity with U.S. GAAP which requires us to make estimates and assumptions that affect our reported results of operations and the amount of our reported assets, liabilities and proved reserves. We use the successful efforts method of accounting for our natural gas, NGLs and oil activities.

Prices for natural gas, NGLs and oil fluctuate widely and affect:

• revenues, profitability and cash flow;
• the quantity of natural gas, NGLs and oil we can economically produce;
• the quantity of natural gas, NGLs and oil shown as proved reserves;
• the amount of cash flows available for reinvestment; and
• our ability to borrow and raise additional capital.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the preceding consolidated financial statements and notes in Item 1.

Market Conditions

We believe we are positioned for sustainable long-term success. We continue to monitor the impact of the actions of OPEC and other large producing nations, the Russia-Ukraine conflict, hostilities in the Middle East, global inventories of oil and natural gas, future monetary policy and governmental policies aimed at transitioning towards lower carbon energy and we expect prices for some or all of the commodities we produce to remain volatile given the complex dynamics of supply and demand that exist in the market. In first quarter 2023, natural gas prices declined based on the relatively mild winter and extended down time at a liquefied natural gas export facility. Subsequently, high levels of domestic U.S. gas storage compared with the five-year average kept natural gas prices below $3.00 in both the second and third quarter 2023. Longer term natural gas futures have remained stronger based on market expectations that associated gas-related activity in oil basins and dry gas basin activity will show modest rates of growth when compared with the past due to infrastructure constraints, capital discipline and core inventory exhaustion. In addition, the global energy crisis further highlighted the low cost and low emissions shale gas resource base in North America, supporting continued strong structural demand growth for U.S. liquefied natural gas exports, domestic industrial gas demand and power generation. Other factors such as geopolitical disruptions, supply chain disruptions, cost inflation, concerns over a potential economic recession and the pace and extent of tightening global monetary policy may impact the supply and demand for oil, natural gas and NGLs. We continue to assess and monitor the impact and consequences of these factors on our operations.

While expected commodity prices have declined in 2023 compared to prior year, we believe market data supports a positive outlook given significant new demand and export infrastructure currently under construction. We believe that our competitive full-cycle cost structure, robust drilling inventory, reduced debt levels and risk reduction through hedging have us well positioned within the industry.

Prices for natural gas, NGLs and oil that we produce significantly impact our revenues and cash flows. Natural gas, NGLs and oil benchmarks significantly decreased in third quarter 2023 when compared to the same period of 2022 and also decreased in first nine months 2023 compared to the same period of 2022. As a result, we experienced a significant decrease in price realizations. The following table lists related benchmarks for natural gas, oil and NGLs composite prices for the three and nine months ended September 30, 2023 and 2022:

(a) Based on weighted average of bid week prompt month prices on the New York Mercantile Exchange.

(b) Based on our estimated NGLs product composition per barrel.

Our price realizations (not including the impact of our derivatives) may differ from these benchmarks for many reasons, including quality, location or production being sold at different indices.

Consolidated Results of Operations

Overview of Third Quarter 2023 Results

During third quarter 2023, we recognized net income of $49.4 million, or $0.20 per diluted common share compared to net income of $373.1 million, or $1.49 per diluted common share during third quarter 2022. The lower net income in third quarter 2023 compared to third quarter 2022 reflects the impact of significantly lower commodity prices on our natural gas, NGLs and oil sales, on our reported derivative fair value income (loss) and on our transportation gathering, processing and compression expense. See page 29 for more information on our derivative fair value income (loss).

For third quarter 2023, we experienced a decrease in revenue from the sale of natural gas, NGLs and oil due to a 49% decrease in net realized prices (average prices including all derivative settlements and third-party transportation costs paid by us) when compared to the same quarter of 2022. Daily production averaged 2.1 Bcfe in both the third quarter 2023 and 2022.

Our third quarter 2023 financial and operating performance included the following results:

• revenue from the sale of natural gas, NGLs and oil decreased 63% from the same period of 2022 with a 63% decrease in average realized prices (before cash settlements on our derivatives) and slightly lower production volumes;
• revenue from the sale of natural gas, NGLs and oil (including cash settlements on our derivatives) decreased 38% from the same period of 2022;
• transportation, gathering, processing and compression per mcfe was $1.42 in third quarter 2023 compared to $1.65 in the same period of 2022 primarily due to lower commodity prices;
• direct operating expense per mcfe was $0.12 in third quarter 2023 compared to $0.11 in the same period of 2022 primarily due to higher water handling/hauling costs along with higher workovers and stock-based compensation;
• general and administrative expense per mcfe decreased 5% from same period of 2022 primarily due to lower general office expenses, including technology costs;
• interest expense per mcfe decreased 20% from the same period of 2022 due to lower debt balances; and
• depletion, depreciation and amortization ("DD&A") rate per mcfe decreased 2% from the same period of 2022.

Third quarter 2023 also included the following highlights to enhance our balance sheet, return capital to investors and preserve liquidity:

• paid $19.3 million of dividends, or $0.08 per share compared to $19.5 million, or $0.08 per share in third quarter 2022; and
• as of September 30, we have $162.8 million of cash on hand along with $1.2 billion available under our credit facility.

Our cash flow from operating activities in third quarter 2023 was $150.3 million, a decrease of $370.7 million from the third quarter 2022 with significantly lower commodity prices and the impact from the change in working capital.

Overview of First Nine Months 2023 Results

During first nine months 2023, we recognized net income of $561.1 million, or $2.27 per diluted common share compared to a net income of $369.1 million, or $1.45 per diluted common share during first nine months 2022. The improvement in our net income for first nine months 2023 compared to 2022 reflects the impact of significantly lower commodity prices on our reported derivative fair value income or loss. Given the significant decrease in commodity prices, our derivative fair value income or loss, which includes the non-cash fair value adjustment related to our derivatives, was a gain of $530.1 million in first nine months 2023 compared to a loss of $1.6 billion in first nine months of the prior year. In addition, first nine months 2023 includes the impact of significantly lower commodity prices on our natural gas, NGLs and oil sales partially offset by a gain on extinguishment of debt compared to a loss in the same period of the prior year. For additional information on our derivative fair value income (loss), see page 29.

For first nine months 2023, we experienced a decrease in revenue from the sale of natural gas, NGLs and oil due to a 42% decrease in net realized prices (average prices including all derivative settlements and third-party transportation costs paid by us) somewhat offset by slightly higher production volumes when compared to the same period of 2022. Daily production averaged 2.1 Bcfe in both the first nine months 2023 and 2022.

Our first nine months 2023 financial and operating performance included the following results:

• revenue from the sale of natural gas, NGLs and oil decreased 55% from the same period of 2022 with a 55% decrease in average realized prices (before cash settlements on our derivatives) partially offset by slightly higher production volumes;
• revenue from the sale of natural gas, NGLs and oil (including cash settlements on our derivatives) decreased 32% from the same period of 2022;
• transportation, gathering, processing and compression expense per mcfe was $1.44 in first nine months 2023 compared to $1.66 in the same period of 2022 primarily due to lower commodity prices;
• direct operating expense per mcfe was $0.13 in first nine months 2023 compared to $0.11 in the same period of 2022 due to higher workovers along with higher water handling/hauling costs and higher contract labor and service costs;
• general and administrative expense per mcfe for the first nine months 2023 decreased 5% from the same period of 2022 primarily due to lower stock-based compensation costs;
• interest expense per mcfe decreased 27% from the same period of 2022 due to lower debt balances; and
• DD&A rate per mcfe decreased 2% from the same period of 2022.

First nine months 2023 also included the following highlights to enhance our balance sheet, return capital to investors and preserve liquidity:

• paid $57.9 million in dividends or $0.24 per share compared to $19.5 million or $0.08 per share in first nine months 2022;
• repurchased $9.7 million of our common stock compared to $308.9 million in the same period of 2022;
• repurchased in the open market $61.6 million face value of our 4.875% senior notes due 2025 at a discount; and
• enhanced liquidity with the accumulation of cash totaling $162.8 million along with $1.2 billion available under our credit facility.

Our cash flow from operating activities in first nine months 2023 was $751.8 million, a decrease of $500.3 million from the same period of 2022 with significantly lower realized prices partially offset by slightly higher production volumes and the impact from the change in working capital.

Natural Gas, NGLs and Oil Sales, Production and Realized Price Calculations

Our revenues vary primarily as a result of changes in realized commodity prices and production volumes. Our revenues are generally recognized when control of the product is transferred to the customer and collectability is reasonably assured. In third quarter 2023, natural gas, NGLs and oil sales decreased 63% compared to third quarter 2022 with a 63% decrease in average realized prices (before cash settlements on our derivatives). In first nine months 2023, natural gas, NGLs and oil sales decreased 55% compared to the same period of 2022 with a 55% decrease in average realized prices (before cash settlements on derivatives) partially offset by slightly higher production volumes. The following table illustrates the primary components of natural gas, NGLs and oil sales for the three and nine months ended September 30, 2023 and 2022 (in thousands):

Our production is determined by drilling success which offsets the natural decline of our natural gas and oil reserves through production. Our production for the three and nine months ended September 30, 2023 and 2022 is set forth in the following table:

(a) Represents volumes sold regardless of when produced.

(b) Oil and NGLs volumes are converted to mcfe at the rate of one barrel equals six mcf based upon the approximate relative energy content of oil to natural gas, which is not indicative of the relationship between oil and natural gas prices.

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Our average realized price received (including all derivative settlements and third-party transportation costs) during third quarter 2023 was $1.67 per mcfe compared to $3.30 per mcfe in third quarter 2022. Our average realized price received (including all derivative settlements and third-party transportation costs) during first nine months 2023 was $1.89 per mcfe compared to $3.27 per mcfe in first nine months 2022. We believe computed final realized prices should include the total impact of transportation, gathering, processing and compression expense. Our average realized price (including all derivative settlements and third-party transportation costs) calculation also includes all cash settlements for derivatives. Average realized prices (excluding derivative settlements) do not include derivative settlements or third-party transportation costs which are reported in transportation, gathering, processing and compression expense in the accompanying consolidated statements of operations. Average realized prices (excluding derivative settlements) do include transportation costs where we receive net revenue proceeds from purchasers. Average realized price calculations for three and nine months ended September 30, 2023 and 2022 are shown below:

(a) Oil and NGLs volumes are converted to mcfe at the rate of one barrel equals six mcf based upon the approximate relative energy content of oil to natural gas, which is not indicative of the relationship between oil and natural gas prices.

Realized prices include the impact of basis differentials and gains or losses realized from our basis hedging. The prices we receive for our natural gas can be more or less than the NYMEX price because of adjustments for delivery location, relative quality and other factors. The following table provides this impact on a per mcf basis:

The following tables reflect our production and average realized commodity prices (excluding derivative settlements and third-party transportation costs paid by Range) (in thousands, except prices):

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Transportation, gathering, processing and compression expense was $277.2 million in third quarter 2023 compared to $323.0 million in third quarter 2022. These third-party costs are lower in third quarter 2023 when compared to third quarter 2022 due to lower fuel prices, lower electricity costs and the impact of lower NGLs prices which result in lower processing costs.

Transportation, gathering, processing and compression expense was $830.9 million in the first nine months 2023 compared to $948.7 million in the same period of the prior year. These third party costs are lower in first nine months 2023 when compared to the same period of 2022 due to the impact of lower NGL prices which result in lower processing costs, lower electricity and fuel costs. We have included these costs in the calculation of average realized prices (including all derivative settlements and third-party transportation expenses paid by Range). The following table summarizes transportation, gathering, processing and compression expense for the three and nine months ended September 30, 2023 and 2022 on a per mcf and per barrel basis (in thousands, except for costs per unit):

Derivative fair value income (loss) was income of $38.4 million in third quarter 2023 compared to a loss of $457.7 million in third quarter 2022. Derivative fair value income was $530.1 million in first nine months 2023 compared to a loss of $1.6 billion in the same period of the prior year. All of our derivatives are accounted for using the mark-to-market accounting method. Mark-to-market accounting treatment can result in more volatility of our revenues as the change in the fair value of our commodity derivative positions is included in total revenue. As commodity prices increase or decrease, such changes will have an opposite effect on the mark-to-market value of our derivatives. Gains on our derivatives generally indicate potentially lower wellhead revenues in the future while losses indicate potentially higher future wellhead revenues. The following table summarizes the impact of our commodity derivatives for the three and nine months ended September 30, 2023 and 2022 (in thousands):

(a) Non-cash fair value adjustments on commodity derivatives is a non-U.S. GAAP measure. Non-cash fair value adjustments on commodity derivatives only represent the net change between periods of the fair market values of commodity derivative positions and exclude the impact of settlements on commodity derivatives during the period. We believe that non-cash fair value adjustments on commodity derivatives is a useful supplemental disclosure to differentiate non-cash fair market value adjustments from settlements on commodity derivatives during the period. Non-cash fair value adjustments on commodity derivatives is not a measure of financial or operating performance under U.S. GAAP, nor should it be considered a substitute for derivative fair value income or loss as reported in our consolidated statements of operations. This also includes the change in fair value of our divestiture contingent consideration.

Brokered natural gas, marketing and other revenue in third quarter 2023 was $44.6 million compared to $133.1 million in third quarter 2022 which is the result of significantly lower broker sales prices somewhat offset by higher broker sales volumes (volumes not related to our production). The revenue in third quarter 2023 also includes the receipt of $1.3 million of interest income. Brokered natural gas, marketing and other revenue was $171.6 million in first nine months 2023 compared to $328.7 million in first nine months 2022 which is the result of significantly lower broker sales prices somewhat offset by higher broker sales volumes. The nine months ended September 30, 2023 also includes the receipt of $5.1 million in make-whole payments and $4.0 million of interest income. We continue to optimize our transportation portfolio using these volumes. See also Brokered natural gas and marketing expense below for more information on our net brokered margin.

Operating Costs per Mcfe

We believe some of our expense fluctuations are best analyzed on a unit-of-production or per mcfe basis. Our costs for certain services, labor and supplies have been impacted by on-going demand and, to a lesser extent, inflation and supply chain disruptions, all of which affected the cost of our operations in 2022 and first nine months of 2023. The following table presents information about certain of our expenses on a per mcfe basis for the three and nine months ended September 30, 2023 and 2022:

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Direct operating expense was $22.6 million in third quarter 2023 compared to $21.3 million in third quarter 2022. Direct operating expenses include normally recurring expenses to operate and produce our wells, well workovers and repair-related expenses. Our direct operating costs increased in third quarter 2023 primarily due to higher water handling/hauling costs, higher equipment costs and higher contract labor and services along with higher workover costs. Our production volumes were slightly lower in third quarter 2023 compared to the same period of the prior year. We incurred $603,000 of workover costs in third quarter 2023 compared to $223,000 in third quarter 2022. These costs are expected to enhance production from existing wells. On a per mcfe basis, direct operating expense was $0.12 in third quarter 2023 compared to $0.11 in the same quarter of the prior year due to higher workovers and stock-based compensation expense.

Direct operating expense was $73.4 million in the first nine months 2023 compared to $61.6 million in the same period of the prior year. Our direct operating costs increased in the first nine months 2023 when compared to the same period of the prior year due to higher workover costs, higher water handling/hauling costs, higher contract labor and services along with higher equipment costs. We incurred $4.3 million of workover costs in first nine months 2023 compared to $1.3 million of workover costs in first nine months 2022. These costs are expected to enhance production from existing wells. On a per mcfe basis, direct operating costs increased $0.02 from $0.11 to $0.13 due to higher workover costs and higher water handling/hauling costs. The following table summarizes direct operating expense per mcfe for the three and nine months ended September 30, 2023 and 2022:

Taxes other than income expense is predominately comprised of the Pennsylvania impact fee which is paid based on market commodity prices. In February 2012, the Commonwealth of Pennsylvania enacted an "impact fee" which functions as a tax on unconventional natural gas and oil production from the Marcellus Shale in Pennsylvania. This impact fee was $4.5 million in third quarter 2023 compared to $8.4 million in third quarter 2022. The impact fee is based on drilling activities and is adjusted based on prevailing natural gas prices. Taxes other than income includes an impact fee of $18.0 million in first nine months 2023 compared to $22.5 million in first nine months 2022 which reflects lower natural gas prices. This category also includes franchise, real estate and other taxes. The following table summarizes taxes other than income per mcfe for the three and nine months ended September 30, 2023 and 2022:

General and administrative (G&A) expense was $38.1 million in third quarter 2023 compared to $40.6 million in third quarter 2022. The third quarter 2023 decrease of $2.5 million when compared to the same period of 2022 is primarily due to lower stock-based compensation expense and lower general office costs, including technology costs. On a per mcfe basis, third quarter 2023 G&A expense was 5% lower than third quarter 2022 primarily due to lower general office expenses.

G&A expense for first nine months 2023 decreased $5.2 million when compared to the same period of 2022 due to lower stock-based compensation expense of $5.8 million and lower legal fees partially offset by higher salaries and benefits. On a per mcfe basis, first nine months 2023 G&A expense decreased 5% from first nine months of the prior year due to lower stock-based compensation. The following table summarizes G&A expenses on a per mcfe basis for the three and nine months ended September 30, 2023 and 2022:

Interest expense was $30.6 million in third quarter 2023 compared to $38.7 million in third quarter 2022. Interest expense was $93.9 million for first nine months 2023 compared to $127.9 million for first nine months of 2022. The following table presents information about interest expense per mcfe for the three and nine months ended September 30, 2023 and 2022:

(a) Includes commitment fees but excludes debt issuance costs.

On an absolute basis, the decrease in interest expense for third quarter 2023 from the same period of 2022 was primarily due to lower overall average outstanding debt balances. We had no debt outstanding on the bank credit facility for third quarter 2023 compared to $21.9 million in third quarter 2022 and the weighted average interest rate on the bank credit facility was 5.7% in third quarter 2022.

On an absolute basis, the decrease in interest expense for first nine months 2023 from the same period of 2022 was primarily due to lower overall outstanding debt balances. Average debt balance outstanding on the bank credit facility was $10.7 million for first nine months 2023 compared to $59.0 million for first nine months 2022 and the weighted average interest rates on the bank credit facility was 8.4% in first nine months 2023 compared to 3.7% in first nine months 2022.

Depletion, depreciation and amortization expense was $87.6 million in third quarter 2023 compared to $90.5 million in third quarter 2022. This decrease is due to a 2% decrease in depletion rates. Depletion expense, the largest component of DD&A expense, was $0.44 per mcfe in third quarter 2023 compared to $0.45 per mcfe in third quarter 2022.

DD&A expense was $259.2 million in first nine months 2023 compared to $262.6 million in the same period of 2022. This decrease is due to a 2% decrease in depletion rates somewhat offset by a slight increase in production volumes. Depletion expense per mcfe was $0.44 in first nine months 2023 compared to a $0.45 in the same period of 2022.

We have historically adjusted our depletion rates in the fourth quarter of each year based on the year-end reserve report and at other times during the year when circumstances indicate there has been a significant change in reserves or costs. The following table summarizes DD&A expense per mcfe for the three and nine months ended September 30, 2023 and 2022:

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Other Operating Expenses

Our total operating expenses also include other expenses that generally do not trend with production. These expenses include stock-based compensation, brokered natural gas and marketing expense, exploration expense, abandonment and impairment of unproved properties, exit costs, deferred compensation plan expenses and gain or loss on early extinguishment of debt. Stock-based compensation includes the amortization of restricted stock grants and PSUs. The following table details the allocation of stock-based compensation to functional expense categories for the three and nine months ended September 30, 2023 and 2022 (in thousands):

Brokered natural gas and marketing expense was $46.2 million in third quarter 2023 compared to $127.3 million in third quarter 2022 due to significantly lower commodity prices partially offset by higher broker purchase volumes (volumes not related to our production). Brokered natural gas and marketing expense was $158.1 million in first nine months 2023 compared to $330.5 million in first nine months 2022 due to significantly lower commodity prices partially offset by higher broker purchase volumes. The following table details our brokered natural gas, marketing and other net margin for the three and nine months ended September 30, 2023 and 2022 (in thousands):

(a) Includes transportation costs.

Exploration expense was $7.0 million in third quarter 2023 compared to $7.5 million in third quarter 2022 with lower delay rentals and other expense partially offset by higher seismic costs. Exploration expense was $19.0 million in first nine months 2023 compared to $19.7 million in first nine months 2022 with lower delay rentals and other expense partially offset by higher seismic costs. The following table details our exploration expense for the three and nine months ended September 30, 2023 and 2022 (in thousands):

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Abandonment and impairment of unproved properties expense was $11.0 million in third quarter 2023 compared to $3.2 million in third quarter 2022. Abandonment and impairment of unproved properties was $44.3 million in first nine months 2023 compared to $12.3 million in the same period of 2022. Abandonment and impairment of unproved properties for third quarter and first nine months 2023 increased when compared to the same period of 2022 due to higher expected lease expirations in Pennsylvania. When we do not intend to drill on a property prior to expiration, we have allowed acreage to expire and we expect to allow acreage to expire in the future. However, we also believe acres needed for our future development plans can be leased again.

Exit costs were $10.7 million in third quarter 2023 compared to $11.1 million in third quarter 2022. In third quarter 2023, we recorded $10.7 million accretion expense primarily related to retained liabilities for certain gathering, transportation and processing obligations extending until 2030 compared to accretion expense of $11.1 million in the same quarter of the prior year.

Exit costs were $71.7 million in first nine months 2023 compared to $58.2 million in first nine months 2022. We recorded accretion expense of $31.9 million in first nine months 2023 compared to accretion expense of $33.5 million in the same period of 2022. The first nine months 2023 also includes an adjustment of $39.8 million to increase this retained liability primarily for an increase in forecasted rates due to inflation compared to an adjustment of $24.8 million in the same period of the prior year to increase this obligation for a change in forecasted drilling plans of the buyer and other adjustments.

Deferred compensation plan expense was a loss of $9.0 million in third quarter 2023 compared to a loss of $5.8 million in third quarter 2022. This non-cash item relates to the increase or decrease in value of the liability associated with our common stock that is vested and held in our deferred compensation plan. The deferred compensation liability is adjusted to fair value by a charge or a credit to deferred compensation plan expense. Our stock price increased from $29.40 at June 30, 2023 to $32.41 September 30, 2023. In the same period of the prior year our stock price increased from $24.75 at June 30, 2022 to $25.26 at September 30, 2022. During first nine months 2023, deferred compensation was a loss of $29.5 million compared to a loss of $59.9 million in the same period of 2022. Our stock price increased from $25.02 at December 31, 2022 to $32.41 at September 30, 2023. In the same period of the prior year, our stock price increased from $17.83 at December 31, 2021 to $25.26 at September 30, 2022.

(Gain) loss on early extinguishment of debt was a gain of $439,000 in first nine months 2023, compared to a loss of $69.2 million in first nine months 2022. In second quarter 2023, we purchased in the open market $61.6 million principal amount of 4.875% senior notes due 2025 at a discount and recorded a gain of $439,000, net of transaction costs and the expensing of deferred financing costs on the repurchased debt. In first quarter 2022, we announced a call for the redemption of $850.0 million of our outstanding 9.25% senior notes due 2026. The redemption price equaled 106.938% of par plus accrued and unpaid interest. We recognized a loss on early extinguishment of debt in first quarter 2022 of $69.2 million, net of transaction costs and the expensing of the remaining deferred financing costs on the repurchased debt.

Income tax expense (benefit) was an expense of $15.7 million in third quarter 2023 compared to expense of $59.6 million in third quarter 2022. Income tax expense was $152.3 million in first nine months 2023 compared to an expense of $46.9 million in the same period of 2022. The 2023 and 2022 effective tax rates were different than the statutory tax rate due to state income taxes, equity compensation, valuation allowances and other discrete tax items.

Management’s Discussion and Analysis of Financial Condition, Capital Resources and Liquidity

Cash Flows

Cash flows from operations are primarily affected by production volumes and commodity prices, net of the effects of settlements of our derivatives. Our cash flows from operations are also impacted by changes in working capital. Short-term liquidity needs are satisfied by borrowings under our bank credit facility and/or cash on hand. Because of this, and because our principal source of operating cash flows (proved reserves to be produced in future years) cannot be reported as working capital, we often have low or negative working capital. From time to time, we enter into various derivative contracts to provide an economic hedge of our exposure to commodity price risk associated with anticipated future natural gas, NGLs and oil production. The production we hedge has varied and will continue to vary from year to year depending on, among other things, our expectation of future commodity prices and capital budget, fixed costs or other investment requirements. Any payments due to counterparties under our derivative contracts should ultimately be funded by proceeds received from the sale of our production. Production receipts, however, often lag payments to the counterparties. As of September 30, 2023, we have entered into derivative agreements covering 76.4 Bcfe for the remainder of 2023, 297.1 Bcfe for 2024, 131.4 Bcfe for 2025 and 19.2 Bcfe for 2026, not including our basis swaps.

The following table presents sources and uses of cash and cash equivalents for the nine months ended September 30, 2023 and 2022 (in thousands):

Sources of Cash and Cash Equivalents

Cash flows provided from operating activities in first nine months 2023 was $751.8 million compared to $1.3 billion in first nine months 2022. Cash provided from operating activities is largely dependent upon commodity prices and production volumes, net of the effects of settlement of our derivative contracts. The decrease in cash provided from operating activities from first nine months 2022 to first nine months 2023 reflects significantly lower realized prices partially offset by the impact of a favorable change in working capital (the timing of cash receipts and disbursements). As of September 30, 2023, we have hedged more than 40% of our projected total production for the remainder of 2023, with more than 50% of our projected natural gas production hedged. Changes in working capital (as reflected in our consolidated statements of cash flows) for first nine months 2023 was a negative $54.9 million compared to a negative $277.6 million for first nine months 2022.

Uses of Cash and Cash Equivalents

Additions to natural gas properties for first nine months 2023 were consistent with expectations relative to our announced 2023 capital budget.

Repayment of senior notes for first nine months 2023 includes the repurchase in the open market $61.6 million principal amount of our 4.875% senior notes due 2025 at a discount.

Treasury stock purchases for first nine months 2023 include the repurchase of 400,000 shares for a total of $9.7 million as part of our previously announced stock repurchase program.

Liquidity and Capital Resources

Based on the current commodity price environment, we believe we have sufficient liquidity and capital resources to execute our business plan for the foreseeable future. We continue to manage the duration and level of our drilling and completion commitments in order to maintain flexibility with regard to our activity level and capital expenditures. As of September 30, 2023, we had cash on hand in the amount of $162.8 million and availability under our credit facility of $1.2 billion.

Sources of Cash

We expect our 2023 capital program to be funded by cash flows from operations. During the nine months ended September 30, 2023, we generated $751.8 million of cash flows from operating activities. As of September 30, 2023, we had approximately $1.4 billion of liquidity, consisting of $1.2 billion available under our bank credit facility and $162.8 million of cash on hand. Our borrowing base can be adjusted as a result of changes in commodity prices, acquisitions or divestitures of proved properties or financing activities. We may draw on our bank credit facility to meet short-term cash requirements.

Although we expect cash flows and capacity under the existing credit facility to be sufficient to fund our expected current capital program, we may also have the option to raise funds through new debt or equity offerings or from other sources of financing. All of our sources of liquidity can be affected by the general conditions of the broader economy, force majeure events and fluctuations in commodity prices, operating costs and volumes produced, all of which affect us and our industry. We have no control over market prices for natural gas, NGLs or oil, although we may be able to influence realized revenues through the use of derivative contracts as part of our commodity price risk management.

Bank Credit Facility

Our bank credit facility is secured by substantially all of our assets. As of September 30, 2023, we had no outstanding borrowings under our bank credit facility and we maintained a borrowing base of $3.0 billion and aggregate lender commitments of $1.5 billion. We also have undrawn letters of credit of $262.8 million as of September 30, 2023. We were in compliance with the applicable covenants under the bank credit facility as of September 30, 2023.

The borrowing base is subject to regular, semi-annual redeterminations and is dependent on a number of factors but primarily the lender’s assessment of our future cash flows. Our scheduled borrowing base redetermination was completed in September 2023 with our borrowing base and lender commitments reaffirmed.

Our daily weighted-average bank credit facility debt balance was $10.7 million for first nine months ended September 30, 2023 compared to $59.0 million for the same period of the prior year. Borrowings under the revolving bank credit facility can either be at the alternate base rate (ABR, as defined in the bank credit facility agreement) plus a spread ranging from 0.75% to 1.75% or at the secured overnight financing rate (SOFR, as defined in the bank credit facility agreement) plus a spread ranging from 1.75% to 2.75%. The applicable spread is dependent upon borrowings relative to the borrowing base. We may elect, from time to time, to convert all or any part of our SOFR loans to base rate loans or to convert all or any of the base rate loans to SOFR loans.

Uses of Cash

We use cash for the development, exploration and acquisition of natural gas properties and for the payment of gathering, transportation and processing costs, operating, general and administrative costs, taxes and debt obligations, including interest, dividends and share repurchases. Expenditures for the development, exploration and acquisition of natural gas properties are the primary use of our capital resources. During first nine months 2023, we funded $448.8 million of capital expenditures as reported in our consolidated statement of cash flows with operating cash flows. The amount of our future capital expenditures will depend upon a number of factors including our cash flows from operating, investing and financing activities, infrastructure availability, supply and demand fundamentals and our ability to execute our development program. In addition, the impact of commodity prices on investment opportunities, the availability of capital and the timing and results of our development activities may lead to changes in funding requirements for future development. We periodically review our budget to assess changes in current and projected cash flows, debt requirements and other factors.

We may from time to time repurchase or redeem all or portions of our outstanding debt securities for cash, through exchanges for other securities or a combination of both. Such repurchases or redemptions may be made in open market transactions and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Our next significant long-term debt maturity is in the amount of $688.4 million due 2025. As part of our strategy for 2023, we will continue to focus on improving our financial strength.

Our quarterly cash dividend was reinstated in third quarter 2022. See also Cash Dividend Payments below. During first nine months 2023, we repurchased 400,000 shares of our common stock at an aggregate cost of $9.7 million. The total remaining share repurchase authorization was approximately $1.1 billion at September 30, 2023.

Shelf Registration

We have a universal shelf registration statement filed with the SEC under which we, as a well-known seasoned issuer for purposes of SEC rules, have the ability to sell an indeterminate amount of various types of debt and equity securities.

Cash Dividend Payments

On August 31, 2023, the dividend committee of our board of directors approved a dividend of $0.08 per share payable on September 29, 2023 to stockholders of record at the close of business on September 15, 2023. The determination of the amount of future dividends, if any, to be declared and paid is at the sole discretion of the board of directors and primarily depends on cash flow, capital expenditures, debt covenants and various other factors.

Cash Contractual Obligations

Our contractual obligations include long-term debt, operating leases, derivative obligations, asset retirement obligations and transportation, processing and gathering commitments including the divestiture contractual commitment. As of September 30, 2023, we do not have any significant off-balance sheet debt or other such unrecorded obligations and we have not guaranteed any debt of any unrelated party. As of September 30, 2023, we had a total of $262.8 million of undrawn letters of credit under our bank credit facility.

Since December 31, 2022, there have been no material changes to our contractual obligations.

Interest Rates

At September 30, 2023, we had approximately $1.8 billion of debt outstanding which bore interest at fixed rates averaging 6.0%. We had no variable rate debt outstanding at September 30, 2023.

Off-Balance Sheet Arrangements

We do not currently utilize any significant off-balance sheet arrangements with unconsolidated entities to enhance our liquidity or capital resource position, or for any other purpose. However, as is customary in the oil and gas industry, we have various contractual work commitments, some of which are described above under Cash Contractual Obligations.

Inflation and Changes in Prices

Our revenues, the value of our assets and our ability to obtain bank loans or additional capital on attractive terms have been and will continue to be affected by changes in natural gas, NGLs and oil prices and the costs to produce our reserves. Natural gas, NGLs and oil prices are subject to significant fluctuations that are beyond our ability to control or predict. Certain of our costs and expenses are affected by general inflation and we expect costs for the remainder of 2023 to continue to be a function of supply and demand.

Forward-Looking Statements

Certain sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements concerning trends or events potentially affecting our business. These statements typically contain words such as "anticipates," "believes," "expects," "targets," "plans," "estimates," "predicts," "may," "should," "would" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, which could cause future outcomes to differ materially from those set forth in the forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our current forecasts for our existing operations and do not include the potential impact of any future events. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. For additional risk factors affecting our business, see Item 1A. Risk Factors as set forth in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 27, 2023.

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term "market risk" refers to the risk of loss arising from adverse changes in natural gas, NGLs and oil prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market-risk exposure. All of our market-risk sensitive instruments were entered into for purposes other than trading. All accounts are U.S. dollar denominated.

Market Risk

We are exposed to market risks related to the volatility of natural gas, NGLs and oil prices. We employ various strategies, including the use of commodity derivative instruments, to manage the risks related to these price fluctuations. These derivative instruments apply to a varying portion of our production and provide partial price protection. These arrangements can limit the benefit to us of increases in prices but offer protection in the event of price declines. Further, if our counterparties defaulted, this protection might be limited as we might not receive the benefits of the derivatives. Realized prices are primarily driven by worldwide prices for oil and regional index prices for North American natural gas production. However, natural gas and NGLs prices are becoming global commodities similar to oil. Natural gas and oil prices have been volatile and unpredictable for many years. Changes in natural gas prices affect us more than changes in oil prices because approximately 65% of our December 31, 2022 proved reserves are natural gas and 2% of proved reserves are oil and condensate. In addition, a portion of our NGLs, which are 33% of proved reserves, are also impacted by changes in oil prices. We are also exposed to market risks related to changes in interest rates, based on our credit facility balance. These risks did not change materially from December 31, 2022 to September 30, 2023.

Commodity Price Risk

We use commodity-based derivative contracts to manage exposures to commodity price fluctuations. We do not enter into these arrangements for speculative or trading purposes. At times, certain of our derivatives are swaps where we receive a fixed price for our production and pay market prices to the counterparty. Our derivatives program can also include collars, which establish a minimum floor price and a predetermined ceiling price. Our program may also include a three-way collar which is a combination of three options. We have also entered into natural gas derivative instruments containing a fixed price swap and a sold option (which we refer to as a swaption). At September 30, 2023, our derivative program includes swaps, collars, three-way collars and swaptions. The fair value of these contracts, represented by the estimated amount that would be realized upon immediate liquidation based on a comparison of the contract price and a reference price, generally NYMEX for natural gas and crude oil or Mont Belvieu for NGLs, as of September 30, 2023, approximated a net unrealized pretax gain of $192.1 million. These contracts expire monthly through December 2026. At September 30, 2023, the following commodity derivative contracts were outstanding, excluding our basis swaps which are discussed below:

(a) We also sold natural gas swaptions of 90,000 Mmbtu/day for calendar year 2025 at a weighted average price of $4.25/Mmbtu that expire December 2023. Additionally, we sold natural gas swaptions of 20,000 Mmbtu/day for calendar year 2026 at a weighted average price of $4.10/Mmbtu that expire June 2024. The fair value of these swaptions at September 30, 2023 was a net derivative liability of $2.4 million.

We believe NGLs prices are somewhat seasonal, particularly for propane. Therefore, the relationship of NGLs prices to NYMEX WTI (or West Texas Intermediate) will vary due to product components, seasonality and geographic supply and demand. We sell NGLs in several regional and international markets. If we are not able to sell or store NGLs, we may be required to curtail production or shift our drilling activities to dry gas areas.

The Appalachian region has limited local demand and infrastructure to accommodate ethane. We have agreements where we have contracted to either sell or transport ethane from our Marcellus Shale area. We cannot ensure that these facilities will remain available. If we are not able to sell ethane under at least one of these agreements, we may be required to curtail production or, as we have done in the past, purchase or divert natural gas to blend with our rich residue gas.

Other Commodity Risk

We are impacted by basis risk, caused by factors that affect the relationship between commodity futures prices reflected in derivative commodity instruments and the cash market price of the underlying commodity. Natural gas transaction prices are frequently based on industry reference prices that may vary from prices experienced in local markets. If commodity price changes in one region are not reflected in other regions, derivative commodity instruments may no longer provide the expected hedge, resulting in increased basis risk. Therefore, in addition to the swaps, collars, three-way collars and swaptions discussed above, we have entered into natural gas basis swap agreements. The price we receive for our gas production can be more or less than the NYMEX Henry Hub price because of basis adjustments, relative quality and other factors. Basis swap agreements effectively fix the basis adjustments. The fair value of the natural gas basis swaps was a gain of $17.1 million at September 30, 2023 and they settle monthly through December 2026.

At September 30, 2023, we are entitled to receive contingent consideration associated with the sale of our North Louisiana assets, for the year ended 2023, of up to $21.0 million based on future achievement of certain natural gas and oil prices based on published indexes along with the realized NGLs prices of the buyer. The fair value at September 30, 2023 was a gain of $7.4 million.

The following table shows the fair value of our derivatives and the hypothetical changes in fair value that would result from a 10% and a 25% change in commodity prices at September 30, 2023. We remain at risk for possible changes in the market value of commodity derivative instruments; however, such risks should be mitigated by price changes in the underlying physical commodity (in thousands):

Our commodity-based derivative contracts expose us to the credit risk of non-performance by the counterparty to the contracts. Our exposure is diversified primarily among major investment grade financial institutions and we have master netting agreements with our counterparties that provide for offsetting payables against receivables from separate derivative contracts. Our derivative contracts are with multiple counterparties to minimize our exposure to any individual counterparty. At September 30, 2023, our derivative counterparties include fourteen financial institutions, of which all but six are secured lenders in our bank credit facility. Counterparty credit risk is considered when determining the fair value of our derivative contracts. While our counterparties are primarily major investment grade financial institutions, the fair value of our derivative contracts has been adjusted to account for the risk of non-performance by certain of our counterparties, which was immaterial.

Interest Rate Risk

At September 30, 2023, we had total debt of $1.8 billion. All of our outstanding debt is based on fixed interest rates and, as a result, we do not have significant exposure to movements in market interest rates. Our credit facility provides for variable interest rate borrowings; however, we did not have any borrowings outstanding as of September 30, 2023.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2023 at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the three months ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We are subject to various risks and uncertainties in the course of our business. In addition to the factors discussed elsewhere in this report, you should carefully consider the risks and uncertainties described under Item 1A. Risk Factors filed in our Annual Report on Form 10-K for the year ended December 31, 2022.