BUSINESS COMBINATION

3 Months Ended

Mar. 31, 2022

Business Combination and Asset Acquisition [Abstract]

Delaware Basin Leasehold and Mineral Acres Acquisitions

On December 14, 2021, the Company completed an acquisition of assets from a private operator. This acquisition was accounted for as a business combination in accordance with ASC Topic 805, which requires the assets acquired and liabilities assumed to be recorded at fair value as of the respective acquisition date. The Company obtained certain oil and natural gas producing properties and undeveloped acreage located in Lea and Eddy Counties, New Mexico, strategically located primarily within the Company’s existing acreage in its Ranger and Arrowhead asset areas.

As consideration for the business combination, the Company paid approximately $161.7 million in cash, subject to certain customary post-closing working capital adjustments, including adjusting for production, revenues, operating expenses and capital expenditures from August 1, 2021 to closing. In addition, the Company will increase the purchase price by $5.0 million for each quarter during 2022 in which the average oil price, as defined in the purchase and sale agreement, is greater than $75.00 per barrel. The Company recorded this contingent consideration at fair value on the date of the business combination and will record the change in the fair value in future periods as “Other expense” in its unaudited condensed consolidated statements of operations. The fair value of the contingent consideration increased $7.8 million between December 31, 2021 and March 31, 2022 to an estimated fair value of $16.0 million as of March 31, 2022. The Company used the Monte Carlo simulation method to measure the fair value of the contingent consideration, which has unobservable inputs and is thus classified at Level 3 in the fair value hierarchy (see Note 8 for discussion of the fair value hierarchy).

The preliminary allocation of the consideration given related to this business combination was as follows (in thousands). The Company anticipates that the allocation of the consideration given should be finalized during 2022 upon determination of the final customary purchase price adjustments.

Consideration given	Allocation
Cash	$161,680
Working capital adjustments	(4,959)
Fair value of contingent consideration at December 14, 2021	6,718
Total consideration given	$163,439
Allocation of purchase price
Oil and natural gas properties
Evaluated	$139,312
Unproved and unevaluated	31,745
Accrued liabilities	(360)
Advances from joint interest owners	(6,865)
Asset retirement obligations	(393)
Net assets acquired	$163,439