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April 29, 2020, 8:03 a.m. EDT


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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes forward-looking statements. Please refer to the Cautionary Information about Forward-Looking Statements section of this report for important information about these types of statements. Overview of the Company General Overview Our purpose is to make people's lives better by responsibly producing energy supplies, contributing to energy security and prosperity, and having a positive impact in the communities where we live and work. Our long-term vision is to sustainably grow value for all of our stakeholders. We believe that in order to accomplish this vision, we must be a premier operator of top tier assets. At present, our investment portfolio is focused on high quality oil and gas producing assets in the state of Texas, specifically in the Midland Basin of West Texas and in South Texas. Areas of Operations Our Midland Basin assets are located in the Permian Basin in West Texas and are comprised of approximately 80,000 net acres ("Midland Basin"). In the first quarter of 2020, we focused on continuing to delineate, develop, and expand our Midland Basin position. Our current Midland Basin position provides substantial future development opportunities within multiple oil-rich intervals, including the Spraberry and Wolfcamp formations. Our South Texas assets are comprised of approximately 158,900 net acres located in Dimmit and Webb Counties, Texas ("South Texas"). Our current operations in South Texas are focused on developing the Eagle Ford shale formation and delineating the Austin Chalk formation. Our overlapping acreage position in the Eagle Ford shale and Austin Chalk formations includes acreage in oil, gas-condensate, and dry gas windows with gas composition amenable to processing for NGL extraction. First Quarter 2020 Overview and Outlook for the Remainder of 2020 The competition between Russia and Saudi Arabia for crude oil market share and the global COVID-19 pandemic have simultaneously increased supply and decreased demand for oil, gas, and NGLs to historic extremes, and have impacted our entire industry. The implications of these unprecedented events continue to unfold and may have further negative effects to our business such as production curtailment, reduced storage capacity, and reductions to our operating plans. For additional detail, please refer to Risk Factors in Part II, Item 1A of this report and those risk factors previously disclosed in our 2019 Form 10-K. While we were impacted by these macroeconomic events in the first quarter of 2020, specifically the impacts to the realized prices we receive for our production, and will likely be impacted to a greater degree for the remainder of 2020, we expect to maintain our current ability to sustain strong operational performance and financial stability. We remain focused on maximizing returns and increasing the value of our top tier Midland Basin and South Texas assets. We expect to do this through continued development optimization and delineation. We believe our assets provide significant production growth potential and returns that are capable of providing internally generated cash flows in low commodity price environments, which support our priorities of improving leverage metrics and maintaining financial flexibility. Our financial risk management program has significantly reduced the impact of substantially lower oil prices in 2020 as a significant amount of our total expected 2020 oil production is covered by derivative contracts at prices greater than or equal to $55.00 per barrel. However, further negative impacts resulting from these events, such as production curtailments and storage capacity constraints, could limit our ability to deliver production and capitalize on the value of our derivative contracts in 2020 and beyond. Given the dynamic nature of the macroeconomic events discussed above, we are unable to reasonably estimate the period of time that these market conditions will exist, the extent of the impact they will have on our business, liquidity, results of operations, financial condition, or the timing of any subsequent recovery. Sustainability is a key focus of our plans, in terms of positioning ourselves financially to participate in future energy investment opportunities and executing our strategy of being a premier operator with high standards for corporate responsibility. We remain committed to exceptional safety, health, and environmental stewardship; supporting the professional development of a diverse and thriving team of employees; making a positive difference in the communities where we live and work; and transparency in reporting on our progress in these areas. Energy production was deemed an essential business amidst the global COVID-19 pandemic. While the execution of our business operations requires certain individuals to be physically present at well site locations, we implemented processes and protocols where substantially all of our office based people are working remotely in order to restrict physical interactions to mitigate the spread of COVID-19. For individuals who are unable to perform their jobs remotely, we have implemented social distancing measures and continue to communicate and train our employees to maintain a healthy and safe work environment. Since these measures have been implemented, we continue to operate at a very high level without significant disruptions to our ability to operate our business or our control environment. The information below summarizes our recent operating and financial performance and our expectations for the remainder of 2020, including our liquidity position.

We entered 2020 with a total capital program budgeted to be between $825 million and $850 million. However, given the circumstances discussed above, as of the filing of this report we expect to reduce our 2020 capital program budget by approximately 20 percent for the full year 2020. Our financial and operational flexibility allows us to continually monitor the economic environment throughout the year and adjust our activity level as warranted. Our 2020 program remains focused on our most economic oil development projects in both our Midland Basin and South Texas assets. Please refer to Overview of Liquidity and Capital Resources below for discussion of how we expect to fund our 2020 capital program.

                  net loss of $411.9 million, or $3.64 per diluted share, for the three
                  months ended March 31, 2020, compared with a net loss of $177.6
                  million, or $1.58 per diluted share, for the same period in 2019. The
                  net loss for the three months ended March 31, 2020, was primarily
                  driven by impairment expense of $989.8 million, partially offset by a

adjusted EBITDAX, a non-GAAP financial measure, for the three months ended March 31, 2020, was $286.0 million, compared with $186.5 million for the same period in 2019. Please refer to the caption Non-GAAP Financial Measures below for additional discussion and our definition of adjusted EBITDAX and reconciliations of net income (loss) and net cash provided by operating activities.

Operational Activities. The financial results and operational activity discussed throughout this report reflect some of the impacts resulting from the competition between Russia and Saudi Arabia for crude oil market share and the global COVID-19 pandemic. We maintain flexibility to continually monitor the economic environment throughout the year and make related adjustments as warranted.

The table below provides a quarterly summary of changes in our drilled but not completed well count and current year drilling and completion activity in our operated programs for the three months ended March 31, 2020:

                                                  Midland Basin          South Texas             Total
                                                Gross        Net      Gross        Net      Gross      Net
        Wells drilled but not completed at
        December 31, 2019                         51          48        21          21        72        69
        Wells drilled                             25          22         3           3        28        25
        Wells completed                          (19 )       (19 )      (1 )        (1 )     (20 )     (20 )
        Other (1)                                  -           1         -           -         -         1
        Wells drilled but not completed at
        March 31, 2020                            57          52        23          23        80        75

Costs Incurred in Oil and Gas Producing Activities. Costs incurred in oil and gas property acquisition, exploration, and development activities, whether capitalized or expensed, totaled $167.4 million for the three months ended March 31, 2020, and were incurred in our Midland Basin and South Texas programs as further detailed under Operational Activities above.

                                                        Midland Basin               South Texas                Total
                                                  Three Months Ended March      Three Months Ended      Three Months Ended
                                                             31,                     March 31,               March 31,
                                                    2020            2019         2020         2019       2020         2019
        Oil (MMBbl)                                5.9                 4.5       0.4           0.3       6.3           4.8
        Gas (Bcf)                                  9.9                 6.9      16.6          17.0      26.5          23.9
        NGLs (MMBbl)                                 -                   -       1.6           1.9       1.6           1.9
        Equivalent (MMBOE)                         7.6                 5.7       4.8           5.0      12.4          10.7
        Avg. daily equivalents (MBOE/d)           83.4                63.3      52.5          55.5     135.9         118.7
        Relative percentage                         61 %                53 %      39 %          47 %     100 %         100 %

The following table summarizes commodity price data, as well as the effects of derivative settlements, for the first quarter of 2020 as well as the fourth and first quarters of 2019:

                                                                    For the Three Months Ended
                                                     March 31, 2020       December 31, 2019     March 31, 2019
        Oil (per Bbl):
        Average NYMEX contract monthly price       $        46.17        $           56.96     $       54.90
        Realized price, before the effect of       $        45.96        $           56.09     $       49.47
        derivative settlements
        Effect of oil derivative settlements       $         8.44        $           (0.87 )   $       (0.28 )
        Average NYMEX monthly settle price (per    $         1.95        $            2.50     $        3.15
        Realized price, before the effect of       $         1.54        $            2.42     $        2.73
        derivative settlements (per Mcf)
        Effect of gas derivative settlements (per
        Mcf)                                       $         0.55        $            0.33     $       (0.18 )
        NGLs (per Bbl):
        Average OPIS price (1)                     $        17.02        $           21.96     $       26.28
        Realized price, before the effect of       $        13.62        $           17.84     $       19.39
        derivative settlements
        Effect of NGL derivative settlements       $         3.27        $            6.09     $        0.28

We expect future benchmark prices for oil, gas, and NGLs to remain depressed due to the severe demand declines and global over-supply resulting from the impacts of the competition between Russia and Saudi Arabia for crude oil market share and the global COVID-19 pandemic. In addition to supply and demand fundamentals, as a global commodity, the price of oil is affected by real or perceived geopolitical risks in various regions of the world as well as the relative strength of the United States dollar compared to other currencies. Our realized prices at local sales points may also be affected by infrastructure capacity in the area of our operations and beyond. Please refer to First Quarter 2020 Overview and Outlook for the Remainder of 2020 above for additional discussion of factors impacting pricing.

                                         As of April 22, 2020      As of March 31, 2020
        NYMEX WTI oil (per Bbl)         $                25.58    $                29.82
        NYMEX Henry Hub gas (per MMBtu) $                 2.55    $                 2.16
        OPIS NGLs (per Bbl)             $                13.27    $                12.30

We use financial derivative instruments as part of our financial risk management program. We have a financial risk management policy governing our use of derivatives, and decisions regarding entering into derivative commodity contracts are overseen by a financial risk management committee consisting of senior executive officers and finance personnel. The amount of our production covered by derivatives is driven by the amount of debt on our balance sheet, the level of capital commitments and long-term obligations we have in place, and our ability to enter into favorable derivative commodity contracts. With our current derivative commodity contracts, we believe we have partially reduced our exposure to volatility in commodity prices and location differentials in the near term. Our use of costless collars for a portion of our derivatives allows us to participate in some of the upward movements in oil and gas prices while also setting a price floor for a portion of our oil and gas production. Please refer to Note 10 - Derivative Financial Instruments in Part I, Item 1 of this report and to Commodity Price Risk in Overview of Liquidity and Capital Resources below for additional information regarding our oil, gas, and NGL derivatives.

Financial Results of Operations and Additional Comparative Data The tables below provide information regarding selected production and financial information for the three months ended March 31, 2020, and the preceding three quarters.

Apr 29, 2020

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