UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number 001-31539

SM ENERGY COMPANY

(Exact name of registrant as specified in its charter)

Delaware	41-0518430
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1775 Sherman Street, Suite 1200, Denver, Colorado	80203
(Address of principal executive offices)	(Zip Code)

(303) 861-8140

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	SM	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer	☑	Accelerated filer	☐
	Non-accelerated filer	☐	Smaller reporting company	☐
			Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 23, 2020, the registrant had 114,458,893 shares of common stock outstanding.

1

TABLE OF CONTENTS

Item		Page
	Cautionary Information about Forward-Looking Statements	3
	Part I	4
Item 1.	Financial Statements (unaudited)	4
	Condensed Consolidated Balance Sheets June 30, 2020, and December 31, 2019	4
	Condensed Consolidated Statements of Operations Three and Six Months Ended June 30, 2020, and 2019	5
	Condensed Consolidated Statements of Comprehensive Income (Loss) Three and Six Months Ended June 30, 2020, and 2019	6
	Condensed Consolidated Statements of Stockholders’ Equity Continuous Quarterly Presentation Ended June 30, 2020, and 2019	7
	Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2020, and 2019	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk (included within the content of Item 2)	44
Item 4.	Controls and Procedures	44
	Part II	45
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6.	Exhibits	49

2

Cautionary Information about Forward-Looking Statements

This Report on Form 10-Q (“Form 10-Q” or “this report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements included in this report, other than statements of historical facts, that address activities, conditions, events, or developments with respect to our financial condition, results of operations, business prospects or economic performance that we expect, believe, or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “budget,” “could,” “estimate,” “expect,” “forecast,” “intend,” “pending,” “plan,” “potential,” “project,” “target,” “will,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements appear throughout this report, and include statements about such matters as:

•the impacts of macroeconomic events and the global COVID-19 pandemic (“Pandemic”) on us, our industry, our financial condition, results of operations, future operations, business prospects, capital and financial resources, ability to service our debt, ability to access the capital markets, and our plans to address the foregoing;

•the amount and nature of future capital expenditures and the availability of liquidity and capital resources to fund capital expenditures;

•our expected total production volumes for the fiscal year 2020;

•any changes to the borrowing base or aggregate lender commitments under our Sixth Amended and Restated Credit Agreement, as amended (“Credit Agreement”);

•our outlook on future crude oil, natural gas, and natural gas liquids (also respectively referred to as “oil,” “gas,” and “NGLs” throughout this report) prices, well costs, service costs, lease operating costs, and general and administrative costs;

•our drilling of wells and other exploration and development activities, our ability to obtain permits and governmental approvals, and plans by us, our joint development partners, and/or other third-party operators;

•possible or expected acquisitions and divestitures, including the possible divestiture or farm-down of, or joint development of, certain properties;

•oil, gas, and NGL reserve estimates and estimates of both future net revenues and the present value of future net revenues associated with those reserve estimates;

•future oil, gas, and NGL production estimates, identified drilling locations, as well as drilling prospects, inventories, projects and programs;

•cash flows, liquidity, interest and related debt service expenses, changes in our effective tax rate, and our ability to repay debt in the future;

•business strategies and other plans and objectives for future operations, including plans for expansion and growth of operations or to defer capital investment, plans with respect to future dividend payments, and our outlook on our future financial condition or results of operations; and

•other similar matters, such as those discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this report.

Our forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments, and other factors that we believe are appropriate under the circumstances. These statements are subject to known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from any future results or performance expressed or implied by the forward-looking statements. Factors that may cause our financial condition, results of operations, business prospects or economic performance to differ from expectations include the factors discussed in the Risk Factors section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”), in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, our 2020 Proxy Statement, and the Risk Factors section in Part II, Item 1A of this report.

We caution you that forward-looking statements are not guarantees of future performance and actual results or performance may be materially different from those expressed or implied in forward-looking statements. The forward-looking statements in this report speak only as of the filing of this report. Although we may from time to time voluntarily update our prior forward-looking statements, we disclaim any commitment to do so except as required by applicable securities laws.

3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

	June 30, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	10	$	10
Accounts receivable	127,173		184,732
Derivative assets	211,582		55,184
Prepaid expenses and other	16,704		12,708
Total current assets	355,469		252,634
Property and equipment (successful efforts method):
Proved oil and gas properties	8,134,461		8,934,020
Accumulated depletion, depreciation, and amortization	(4,536,537)		(4,177,876)
Unproved oil and gas properties	923,666		1,005,887
Wells in progress	266,957		118,769
Other property and equipment, net of accumulated depreciation of $65,447 and $64,032, respectively	37,278		72,848
Total property and equipment, net	4,825,825		5,953,648
Noncurrent assets:
Derivative assets	34,390		20,624
Other noncurrent assets	51,944		65,326
Total noncurrent assets	86,334		85,950
Total assets	$	5,267,628	$	6,292,232
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	257,053	$	402,008
Derivative liabilities	38,250		50,846
Other current liabilities	12,597		19,189
Total current liabilities	307,900		472,043
Noncurrent liabilities:
Revolving credit facility	193,000		122,500
Senior Notes, net	2,263,119		2,610,298
Asset retirement obligations	86,628		84,134
Deferred income taxes	57,049		189,386
Derivative liabilities	24,028		3,444
Other noncurrent liabilities	55,072		61,433
Total noncurrent liabilities	2,678,896		3,071,195
Commitments and contingencies (note 6)
Stockholders’ equity:
Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 113,553,271 and 112,987,952 shares, respectively	1,136		1,130
Additional paid-in capital	1,825,327		1,791,596
Retained earnings	465,310		967,587
Accumulated other comprehensive loss	(10,941)		(11,319)
Total stockholders’ equity	2,280,832		2,748,994
Total liabilities and stockholders’ equity	$	5,267,628	$	6,292,232

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2020		2019		2020		2019
Operating revenues and other income:
Oil, gas, and NGL production revenue	$	169,790	$	406,854	$	524,023	$	747,330
Net gain on divestiture activity	91		262		91		323
Other operating revenues	(249)		56		1,252		449
Total operating revenues and other income	169,632		407,172		525,366		748,102
Operating expenses:
Oil, gas, and NGL production expense	80,445		123,050		199,997		244,355
Depletion, depreciation, amortization, and asset retirement obligation liability accretion	180,856		206,330		414,345		384,076
Exploration	9,787		10,877		21,136		22,225
Impairment	8,750		12,417		998,513		18,755
General and administrative	27,227		30,920		54,674		63,006
Net derivative (gain) loss	167,200		(79,655)		(378,140)		97,426
Other operating (income) expense, net	8,046		(934)		8,612		(599)
Total operating expenses	482,311		303,005		1,319,137		829,244
Income (loss) from operations	(312,679)		104,167		(793,771)		(81,142)
Interest expense	(40,354)		(39,627)		(81,866)		(77,607)
Gain on extinguishment of debt	227,281		—		239,476		—
Other non-operating expense, net	(185)		(562)		(679)		(879)
Income (loss) before income taxes	(125,937)		63,978		(636,840)		(159,628)
Income tax (expense) benefit	36,685		(13,590)		135,693		32,448
Net income (loss)	$	(89,252)	$	50,388	$	(501,147)	$	(127,180)
Basic weighted-average common shares outstanding	113,008		112,262		113,015		112,257
Diluted weighted-average common shares outstanding	113,008		112,932		113,015		112,257
Basic net income (loss) per common share	$	(0.79)	$	0.45	$	(4.43)	$	(1.13)
Diluted net income (loss) per common share	$	(0.79)	$	0.45	$	(4.43)	$	(1.13)
Dividends per common share	$	—	$	—	$	0.01	$	0.05

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2020		2019		2020		2019
Net income (loss)	$	(89,252)	$	50,388	$	(501,147)	$	(127,180)
Other comprehensive income, net of tax:
Pension liability adjustment	188		119		378		382
Total other comprehensive income, net of tax	188		119		378		382
Total comprehensive income (loss)	$	(89,064)	$	50,507	$	(500,769)	$	(126,798)

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share data and dividends per share)

				Additional Paid-in Capital				Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Common Stock					Retained Earnings
	Shares	Amount
Balances, December 31, 2019	112,987,952	$	1,130	$	1,791,596	$	967,587	$	(11,319)	$	2,748,994
Net loss	—	—		—		(411,895)		—		(411,895)
Other comprehensive income	—	—		—		—		190		190
Cash dividends declared, $0.01 per share	—	—		—		(1,130)		—		(1,130)
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings	730	—		(3)		—		—		(3)
Stock-based compensation expense	—	—		5,561		—		—		5,561
Balances, March 31, 2020	112,988,682	$	1,130	$	1,797,154	$	554,562	$	(11,129)	$	2,341,717
Net loss	—	—		—		(89,252)		—		(89,252)
Other comprehensive income	—	—		—		—		188		188
Issuance of common stock under Employee Stock Purchase Plan	297,013	3		944		—		—		947
Stock-based compensation expense	267,576	3		5,709		—		—		5,712
Issuance of warrants	—	—		21,520		—		—		21,520
Balances, June 30, 2020	113,553,271	$	1,136	$	1,825,327	$	465,310	$	(10,941)	$	2,280,832

				Additional Paid-in Capital				Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Common Stock					Retained Earnings
	Shares	Amount
Balances, December 31, 2018	112,241,966	$	1,122	$	1,765,738	$	1,165,842	$	(12,380)	$	2,920,322
Net loss	—	—		—		(177,568)		—		(177,568)
Other comprehensive income	—	—		—		—		263		263
Cash dividends declared, $0.05 per share	—	—		—		(5,612)		—		(5,612)
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings	2,579	—		(18)		—		—		(18)
Stock-based compensation expense	—	—		5,838		—		—		5,838
Balances, March 31, 2019	112,244,545	$	1,122	$	1,771,558	$	982,662	$	(12,117)	$	2,743,225
Net income	—	—		—		50,388		—		50,388
Other comprehensive income	—	—		—		—		119		119
Issuance of common stock under Employee Stock Purchase Plan	184,079	2		1,957		—		—		1,959
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings	290	—		(2)		—		—		(2)
Stock-based compensation expense	96,719	1		6,153		—		—		6,154
Other	—	—		(1)		1		—		—
Balances, June 30, 2019	112,525,633	$	1,125	$	1,779,665	$	1,033,051	$	(11,998)	$	2,801,843

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	For the Six Months Ended June 30,
	2020		2019
Cash flows from operating activities:
Net loss	$	(501,147)	$	(127,180)
Adjustments to reconcile net loss to net cash provided by operating activities
Net gain on divestiture activity	(91)		(323)
Depletion, depreciation, amortization, and asset retirement obligation liability accretion	414,345		384,076
Impairment	998,513		18,755
Stock-based compensation expense	11,273		11,992
Net derivative (gain) loss	(378,140)		97,426
Derivative settlement gain (loss)	215,965		(879)
Amortization of debt discount and deferred financing costs	8,578		7,633
Gain on extinguishment of debt	(239,476)		—
Deferred income taxes	(136,268)		(33,237)
Other, net	(3,827)		(1,287)
Net change in working capital	(57,254)		21,454
Net cash provided by operating activities	332,471		378,430
Cash flows from investing activities:
Net proceeds from the sale of oil and gas properties (1)	92		12,520
Capital expenditures	(310,209)		(576,127)
Other, net	—		319
Net cash used in investing activities	(310,117)		(563,288)
Cash flows from financing activities:
Proceeds from revolving credit facility	841,000		696,500
Repayment of revolving credit facility	(770,500)		(578,500)
Debt issuance costs related to 10.0% Senior Secured Notes due 2025	(10,491)		—
Cash paid to repurchase 6.125% Senior Notes due 2022	(28,318)		—
Repayment of 1.50% Senior Convertible Notes due 2021	(53,508)		—
Net proceeds from sale of common stock	947		1,959
Dividends paid	(1,130)		(5,612)
Other, net	(354)		(1,044)
Net cash provided by (used in) financing activities	(22,354)		113,303
Net change in cash, cash equivalents, and restricted cash	—		(71,555)
Cash, cash equivalents, and restricted cash at beginning of period	10		77,965
Cash, cash equivalents, and restricted cash at end of period	$	10	$	6,410
Supplemental schedule of additional cash flow information and non-cash activities:
Operating activities:
Cash paid for interest, net of capitalized interest	$	(82,313)	$	(67,646)
Investing activities:
Decrease in capital expenditure accruals and other	$	(28,896)	$	(10,097)
Supplemental non-cash investing activities:
Carrying value of properties exchanged	$	—	$	66,588
Supplemental non-cash financing activities:
Non-cash gain on extinguishment of debt, net	$	292,984	$	—
Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	$	10	$	12
Restricted cash (1)	—		6,398
Cash, cash equivalents, and restricted cash at end of period	$	10	$	6,410

____________________________________________

⁽¹⁾ As of June 30, 2019, a portion of net proceeds from the sale of oil and gas properties was restricted for future property acquisitions. Restricted cash is included in the other noncurrent assets line item on the accompanying unaudited condensed consolidated balance sheets (“accompanying balance sheets”).

The accompanying notes are an integral part of these condensed consolidated financial statements.

8

SM ENERGY COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Summary of Significant Accounting Policies

Description of Operations

SM Energy Company, together with its consolidated subsidiaries (“SM Energy” or the “Company”), is an independent energy company engaged in the acquisition, exploration, development, and production of oil, gas, and NGLs in the State of Texas.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Quarterly Report on Form 10-Q, and Regulation S-X. These financial statements do not include all information and notes required by GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the 2019 Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year. In connection with the preparation of the Company’s unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of June 30, 2020, and through the filing of this report. Additionally, certain prior period amounts have been reclassified to conform to current period presentation in the accompanying unaudited condensed consolidated financial statements.

Significant Accounting Policies

The significant accounting policies followed by the Company are set forth in Note 1 - Summary of Significant Accounting Policies in the 2019 Form 10-K and are supplemented by the notes to the unaudited condensed consolidated financial statements included in this report. These unaudited condensed consolidated financial statements should be read in conjunction with the 2019 Form 10-K.

Recently Issued Accounting Standards

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 was issued to reduce the complexity of accounting for income taxes for those entities that fall within the scope of the accounting standard. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company early adopted ASU 2019-12 on January 1, 2020, and there was no material impact on the Company’s unaudited condensed consolidated financial statements or disclosures upon adoption.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Generally, the guidance is to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the options provided by ASU 2020-04. Please refer to Note 5 - Long-Term Debt for discussion of the use of the London Interbank Offered Rate (“LIBOR”) in connection with borrowings under the Credit Agreement.

As disclosed in the 2019 Form 10-K, on January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. As expected, there was no material impact on the Company’s unaudited condensed consolidated financial statements or disclosures upon adoption of these ASUs.

There are no ASUs that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures that have been issued but not yet adopted by the Company as of June 30, 2020, or through the filing of this report.

9

Note 2 - Revenue from Contracts with Customers

The Company recognizes its share of revenue from the sale of produced oil, gas, and NGLs from its Midland Basin and South Texas assets. Oil, gas, and NGL production revenue presented within the accompanying unaudited condensed consolidated statements of operations (“accompanying statements of operations”) is reflective of the revenue generated from contracts with customers.

The tables below present oil, gas, and NGL production revenue by product type for each of the Company’s operating regions for the three and six months ended June 30, 2020, and 2019:

	Midland Basin						South Texas						Total
	Three Months Ended June 30,						Three Months Ended June 30,						Three Months Ended June 30,
	2020			2019			2020			2019			2020			2019
	(in thousands)
Oil production revenue	$	114,358		$	288,447		$	5,158		$	15,697		$	119,516		$	304,144
Gas production revenue	11,921			16,449			22,942			48,775			34,863			65,224
NGL production revenue	45			(43)			15,366			37,529			15,411			37,486
Total	$	126,324		$	304,853		$	43,466		$	102,001		$	169,790		$	406,854
Relative percentage	74		%	75		%	26		%	25		%	100		%	100		%

____________________________________________

Note: Amounts may not calculate due to rounding.

	Midland Basin						South Texas						Total
	Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019			2020			2019
	(in thousands)
Oil production revenue	$	390,494		$	513,694		$	20,715		$	29,511		$	411,209		$	543,205
Gas production revenue	23,255			32,041			52,318			98,296			75,573			130,337
NGL production revenue	103			(22)			37,138			73,810			37,241			73,788
Total	$	413,852		$	545,713		$	110,171		$	201,617		$	524,023		$	747,330
Relative percentage	79		%	73		%	21		%	27		%	100		%	100		%

____________________________________________

Note: Amounts may not calculate due to rounding.

The Company recognizes oil, gas, and NGL production revenue at the point in time when custody and title (“control”) of the product transfers to the purchaser, which differs depending on the applicable contractual terms. Transfer of control drives the presentation of transportation, gathering, processing, and other post-production expenses (“fees and other deductions”) within the accompanying statements of operations. Fees and other deductions incurred by the Company prior to control transfer are recorded within the oil, gas, and NGL production expense line item on the accompanying statements of operations. When control is transferred at or near the wellhead, sales are based on a wellhead market price that is impacted by fees and other deductions incurred by the purchaser subsequent to the transfer of control. Please refer to Note 2 - Revenue from Contracts with Customers in the 2019 Form 10-K for more information regarding the types of contracts under which oil, gas, and NGL production revenue is generated.

Significant judgments made in applying the guidance in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, relate to the point in time when control transfers to purchasers in gas processing arrangements with midstream processors. The Company does not believe that significant judgments are required with respect to the determination of the transaction price, including amounts that represent variable consideration, as volume and price carry a low level of estimation uncertainty given the precision of volumetric measurements and the use of index pricing with generally predictable differentials. Accordingly, the Company does not consider estimates of variable consideration to be constrained.

The Company’s performance obligations arise upon the production of hydrocarbons from wells in which the Company has an ownership interest. The performance obligations are considered satisfied upon control transferring to a purchaser at the wellhead, inlet, or tailgate of the midstream processor’s processing facility, or other contractually specified delivery point. The time period between production and satisfaction of performance obligations is generally less than one day; thus, there are no material unsatisfied or partially unsatisfied performance obligations at the end of the reporting period.