Through our Management Agreement, we depend on the KKR Group personnel to manage and operate our business, the loss of any of whom would materially and adversely affect future operations. Additionally, operational risks affecting the KKR Group, and our ability to work collaboratively with the KKR Group, including with respect to the allocation of corporate opportunities, may impact our business and have a material effect on our results of operations
15
In connection with the Merger Transactions, we entered into a Management Agreement to engage the Manager to manage the strategy, assets and day-to-day business and affairs of us and our subsidiaries, subject at all times to applicable law, the further terms and conditions set forth in the Management Agreement and to the supervision of our Board of Directors. Pursuant to the Management Agreement, the Manager will provide us with our executive management team and will manage our day-to-day operations. Additionally, pursuant to the Management Agreement:
•Investment opportunities in upstream oil and gas assets will be presented to us with the total amount of the available investment allocated between us and EIGF II in good faith by the Manager on a pro rata basis subject to and taking into account available capital, applicable concentration limits, investment restrictions and other similar considerations. After all available investment capital within EIGF II has been fully deployed, the Manager shall ensure that at least 70% of any such investment amounts are allocated to us.
•From time to time, investment opportunities outside of upstream oil and gas assets may arise that are suitable for investment by us, on the one hand, and by and EIGF II (and any successor fund) or other KKR Funds, on the other that are (A) engaged in an investment strategy that is materially different from us (such as distressed debt or special situations investment vehicles) and (B) have pre-existing defined allocation rights pursuant to KKR’s allocation policies or contractual undertakings agreed with the investors in such other KKR Funds. In such cases, we may elect to co-invest alongside EIGF II and/or such other KKR Funds in such investments, in which case KKR will allocate such investment opportunities among us, on the one hand, and EIGF II and/or such other KKR Funds, on the other hand, in a manner consistent with the priority investment rights of such KKR Funds, taking into account such factors as KKR deems appropriate. We shall have no obligation to make any such co-investment.
•As consideration for the services rendered pursuant to the Management Agreement and the Manager’s overhead, including compensation of the executive management team, as of the closing date of the Merger Transactions, the Manager is entitled to receive:
(i) compensation from us equal to $13.5 million per annum (calculated based on our pro rata portion of $53.3 million (the “Management Compensation”) based on our relative ownership of OpCo), which is included in General and administrative expenses on our combined and consolidated statements of operations. As our business and assets expand, the Management Compensation will increase by an amount equal to 1.5% per annum of the net proceeds from all future issuances of primary equity securities by us (including in connection with acquisitions) and, in certain instances, OpCo; however, incremental management fees will not apply to secondary share offerings or the issuance of shares of our Class A Common Stock upon the redemption or exchange of OpCo Units.
We expect our ownership percentage of OpCo will increase over time through the exchange of OpCo Units into shares of our Class A Common Stock or the issuance of additional shares of Class A Common Stock. As this occurs, the portion of the Management Compensation borne by us will increase from $13.5 million up to, in the situation in which we own all of the interests in OpCo, the total Management Compensation. While only the portion borne by us impacts our combined and consolidated statements of operations, we include the full Management Compensation in the calculation of Adjusted EBITDAX and Levered Free Cash Flow (the delta between the Management Compensation and the amount borne by us is represented by “Certain-redeemable noncontrolling interest distributions made by OpCo related to the management fee”). We believe our Adjusted Cash General and Administrative Expense, which excludes noncash equity-based compensation and includes the Management Compensation, is in line with our peers on a per Boe basis.
(ii) a performance-based incentive grant pursuant to which the Manager is targeted to receive up to 10% of outstanding Class A Common Stock based on the achievement of certain performance-based measures (the "Incentive Compensation."). The Incentive Compensation consists of five tranches that may become earned during successive performance periods and will be settled over a five year period beginning after the end of the first performance period in 2024, and each tranche relates to a target number of shares of Class A Common Stock equal to 2% of the outstanding Class A Common Stock as of the time such tranche is settled. Performance goals are evaluated on absolute stock price performance and relative stock price performance versus a set of our peers and there is no vesting based solely on time. Based on the level of achievement with respect to the performance goals applicable to such tranche, the Manager is entitled to settlement of such tranche with respect to a number of shares of Class A Common Stock ranging from 0% to 4.8% of the outstanding Class A Common Stock at the time each tranche is settled so long as the Manager continuously provides services to us until the end of the performance period applicable to a tranche.
16
(iii) reimbursement for the Manager's pro rata share (based on percentage of public ownership of us) of any documented costs or expenses incurred by the Manager on behalf of us (other than normal overhead expenses relating to the business or operations of the Manager). These costs and expenses include, among other things, costs of outside counsel, accountants and auditors, taxes, fees related to regulatory compliance, costs related to information technology services and other costs related to identifying, evaluating and structuring investments.
•The Management Agreement has an initial three-year term, with automatic three-year renewals thereafter.
•Upon the written notice to the Manager at least 180 days prior to the expiration of the initial term or any automatic renewal term, we may, without cause, decline to renew the Management Agreement upon the affirmative determination by at least two-thirds of our independent directors reasonably and in good faith that (1) there has been unsatisfactory long-term performance by the Manager that is materially detrimental to us and our subsidiaries taken as a whole or (2) the fees payable to the Manager, in the aggregate, are materially unfair and excessive compared to those that would be charged by a comparable asset manager managing assets comparable to our assets, subject to the Manager’s right to renegotiate the fees. In the event of such a termination, we shall pay the Manager a termination fee equal to three (3) times the sum of (i) the average annual Management Compensation and (ii) the average of the Incentive Compensation (but only with respect to the fully vested portion thereof as of the termination date), in each case earned by the Manager during the 24-month period immediately preceding the most recently completed calendar quarter prior to the termination.
Properties
Summary of our assets
Leasehold acreage
Our portfolio includes a variety of oil and natural gas assets throughout proven onshore U.S. basins, including in the Eagle Ford, Rockies, Barnett, Permian, and Mid-Con. In addition to this geographic diversity, we believe that our portfolio of leasehold acreage is enhanced and complemented by our additional interests in mineral acreage and midstream infrastructure. We had leasehold interests in an aggregate 1,029 thousand net acres as of December 31, 2021, 898 thousand on which we were designated as operator. We are responsible for our pro rata share of capital expenditures and lease operating expenses for the operated and non-operated working interests within our leasehold acreage based on our percentage working interest and we are entitled to revenues derived from such interest based on our net revenue interest, which generally equals our working interest in such property less any royalties and production payments and any overriding royalty and net profits interests burdening the property.
Mineral and royalty interests
In addition to our leasehold acreage, we own mineral and royalty interests. As of December 31, 2021, we owned mineral and royalty interests in 174 thousand gross acres and an overriding royalty interest in 117 thousand gross acres, both operated by large, well-capitalized oil and natural gas companies primarily in the Eagle Ford, Marcellus, Utica and Rockies. On our mineral acreage, all of which we have leased to other operators, we have typically retained a royalty interest, which is a cost-free percentage of production revenue that expires upon termination of the lease, at which time the entire mineral interest reverts to us. These interests entitle us to receive an average 5.4% royalty and 0.7% overriding royalty interest on all production from such acreage with no additional future capital or operating costs required.
Midstream infrastructure
Further, we own a 12.0% interest in the Springfield Gathering System in the Eagle Ford Shale in Dimmit, La Salle and Webb Counties of southeast Texas. The Springfield Gathering System is operated by Western Midstream Partners, LP (NYSE: WES) and includes both oil and gas gathering systems. We also own and operate the Howell Pipeline, a 125-mile, 16-inch carbon dioxide pipeline that stretches across central Wyoming. The Howell Pipeline provides CO2 supply to support enhanced oil recovery operations on our acreage located in the Salt Creek and Monell Fields, in addition to serving third-party customers in the area. Additionally, we own a 50% interest in a centralized production facility, referred to as the Hub, which is located just east of Erie, Colorado, and provides a single site for processing equipment for portions of our DJ asset. We have a 65.0% equity method investment in the Lost Creek Gathering System, a 158-mile, 20-inch natural gas pipeline in Wyoming. We also own interests in and operate three gas processing plants and several pipelines in Wyoming. Finally, we own a 66.7% interest and operate the Cherokee Water Gathering System, an approximately 200-mile produced water pipeline in Oklahoma. Our midstream assets provide services to our upstream assets and other customers.
Our operating areas
Our operating areas include the Eagle Ford, Rockies, Barnett, Permian and Mid-Con. The below table describes the net acreage, net PDP wells, production and proved reserve amounts for each of our geographic areas for the year ended and as of December 31, 2021:
2021 Production (3)
Rockies (1)
Other Basins (2)
(1)We have a contractual right to participate in 29 thousand net acres in the DJ basin through an agreement with a large operator and will be entitled to receive our proportionate share of acreage in the future based on our participation in proposed wells.
(2)Includes working interest properties located in California as well as our minerals and royalty interests.
(3)Includes only 25 days of production for assets previously held by Contango acquired in the Merger Transactions.
Oil, natural gas and NGL reserve data
The following table summarizes our estimated net proved reserves as of December 31, 2021 based on an evaluation prepared in accordance with SEC Pricing, including the provisions of the SEC rule regarding reserve estimation regarding a historical twelve month pricing average applied prospectively.
2021 (1)
2020 (1)
Standardized Measure (millions) (2)
PV-0 (millions) (2)
PV-10 (millions) (2)
PV-0 (millions) (2)
PV-10 (millions) (2)
PV-0 (millions) (2)
PV-10 (millions) (2)
(1)Our reserves and present value (discounted at ten percent, or PV-10) were determined using average first-day-of-the-month prices for the prior 12 months in accordance with SEC guidance. For oil and NGL volumes, the average WTI posted price of $66.56 per barrel and $39.56 per barrel as of December 31, 2021 and 2020, was adjusted for items such as gravity, quality, local conditions, gathering, transportation fees and distance from market. For natural gas volumes, the average Henry Hub Index spot price of $3.60 per MMBtu and $1.99 per MMBtu as of December 31, 2021 and 2020, was similarly adjusted for items such as quality, local conditions, gathering, transportation fees and distance from market. All prices are held constant throughout the lives of the properties. The average adjusted product prices over the remaining lives of the properties are $64.84 per barrel of oil, $3.46 per Mcf of natural gas and $27.21 per barrel of NGLs as of December 31, 2021. The average adjusted product prices over the remaining lives of the properties were $37.67 per barrel of oil, $1.62 per Mcf of natural gas and $10.66 per barrel of NGLs as of December 31, 2020.