UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September~~March 3031, ~~2019~~2020

☐ 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: 001-37712

ROSEHILL RESOURCES INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		4790-~~5500436~~1184262
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

16200 Park Row, Suite 300 Houston, Texas 77084 (Address of principal executive offices) (Zip Code) (281) 675-3400 (Registrant’s telephone number, including area code)

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

~~Check~~Title ~~whether~~of ~~the~~each ~~issuer~~class ~~(1)~~Trading ~~filed all reports required to be filed by Section 13 or 15~~Symbol(ds) Name of ~~the~~each ~~Exchange~~exchange ~~Act~~on ~~during~~which ~~the~~registered ~~preceding~~Class 12A ~~months~~Common ~~(or~~Stock ~~for~~ROSE ~~such~~The ~~shorter~~NASDAQ ~~period~~Capital ~~that~~Market ~~the~~Class ~~registrant~~A ~~was~~Common ~~required~~Stock toPublic ~~file~~Warrants ~~such~~ROSEW ~~reports),~~The ~~and (2)~~NASDAQ ~~has~~Capital ~~been~~Market ~~subject~~Class toA ~~such~~Common ~~filing~~Stock ~~requirements~~Public ~~for~~Units ~~the~~ROSEU ~~past~~The 90NASDAQ ~~days.~~Capital ~~Yes ý No ☐~~Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ý 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 ý 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	ý	Smaller reporting company	ý
		Emerging growth company	ý

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 Securities Exchange Act of 1934). Yes ☐ No ý

~~Securities~~As ~~registered~~of ~~pursuant~~June 26, to2020, ~~Section~~28,944,000 ~~12(b)~~shares of ~~the~~Class ~~Act:~~A Common Stock, par value $0.0001 per share, and 15,707,692 shares of Class B Common Stock, par value $0.0001 per share, were issued and outstanding.

~~Title~~Explanatory of each class Trading Symbol(s) Name of each exchange on which registered Class A Common Stock ROSE The NASDAQ Capital Market Class A Common Stock Public Warrants ROSEW The NASDAQ Capital Market Class A Common Stock Public Units ROSEU The NASDAQ Capital MarketNote

AsOn ofMarch ~~November 1~~4, ~~2019~~2020, 14the Securities and Exchange Commission issued an order (Release No. 34-88318) under Section 36 of the Securities Exchange Act of 1934,~~454~~ as amended (the “Exchange Act”),~~526~~ ~~shares~~granting exemptions from specified provisions of ~~Class~~the AExchange ~~common~~Act ~~stock~~and certain rules thereunder. On March 25, ~~par~~2020, ~~value~~the $0order was modified and superseded by a new SEC order (Release No.~~0001~~ ~~per~~34-88465) ~~share~~(the “SEC Order”), that provides conditional relief to public companies that are unable to timely comply with their filing obligations as a result of the outbreak and 29spread of the COVID-19 coronavirus pandemic (“COVID-19”). Rosehill Resources Inc. relied on the SEC Order to delay the filing of this Quarterly Report on Form 10-Q for the quarterly period ended March 31,~~807~~ 2020 due to circumstances related to COVID-19. In particular,~~692~~ ~~shares~~as a result of ~~Class~~office Bclosures ~~common~~due ~~stock~~to “lock-down” or “stay at home” orders implemented in response to the COVID-19 pandemic, ~~par~~remote ~~value~~working $0arrangements we have implemented, and material reductions in personnel, we experienced delays in our accounting and control procedures.~~0001~~ ~~per~~In ~~share~~addition, ~~were~~the ~~issued~~disruptions to our business caused by COVID-19 have resulted in a significant diversion of resources to attend to the operational needs of the business. As a result, we required additional time to prepare and ~~outstanding~~finalize this report.

ROSEHILL RESOURCES INC.

FORM 10-Q FOR THE QUARTER ENDED ~~SEPTEMBER~~MARCH 3031, ~~2019~~2020

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	3
	Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	4
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019	4
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018	5
	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	7
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019	6
	Notes to Condensed Consolidated Financial Statements	98
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3437
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5560
Item 4.	Controls and Procedures	5661
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	5762
Item 1A.	Risk Factors	5762
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	5764
Item 6.	Exhibits	5865

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

ROSEHILL RESOURCES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share amounts)

	September 30, 2019			December 31, 2018
	March 31, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	478,~~132~~309		$	202,~~157~~991
Accounts receivable	3721,~~351~~333			3234,~~260~~910
Accounts receivable, related parties	—			78
Derivative assets	79,907			10,340
Derivative assets	15,931			30,819
Prepaid and other current assets	1,464			2,393
Prepaid and other current assets	2,051			1,371
Total current assets	181,013			50,634
Total current assets	59,465			84,685
Property and equipment:
Oil and natural gas properties (successful efforts), net	~~754~~409,~~285~~322			~~666~~744,~~797~~597
Other property and equipment, net	2,~~621~~739			2,~~592~~984
Total property and equipment, net	~~756~~412,~~906~~061			~~669~~747,~~389~~581
Other assets, net	3,675			4,678
Derivative assets	60,784			33,105
Derivative assets	46,027			58,314
Deferred tax assets	—			37,726
Total assets	$	866,073		$	817,066
Other assets, net	5,180			3,466
Total assets	$	659,038		$	872,512
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,826		$	21,013
Current portion of long-term debt, net	$	435,834		$	—
Accounts payable, related parties	1,144			287
Accounts payable	10,928			15,922
Derivative liabilities	117			—
Accounts payable, related parties	499			209
Accrued liabilities and other	29,808			27,335
Derivative liabilities	2,122			4,016
Accrued capital expenditures	24,804			30,529
Accrued liabilities and other	21,823			26,513
Total current liabilities	68,699			79,164
Accrued capital expenditures	22,613			23,031
Total current liabilities	493,819			69,691
Long-term liabilities:
Long-term debt, net	~~365,196~~—			~~288~~355,~~298~~511
Asset retirement obligations	14,~~178~~671			1314,~~524~~431
Deferred tax liabilities	~~5,107~~378			91,~~278~~196
Derivative liabilities	13,~~797~~041			~~696~~1,300
Other liabilities	3,645			3,658
Liability related to tax receivable agreement	166			53,809
Total long-term liabilities	389,923			315,454
Other liabilities	1,064			432
Total liabilities	458,622			394,618
Total long-term liabilities	19,320			426,679
Commitments and contingencies (Note 16)
Total liabilities	513,139			496,370
Commitments and contingencies (Note 19)
Mezzanine equity
Series B Preferred Stock; $0.0001 par value, 10.0% Redeemable, $1,000 per share liquidation preference; of the 1,000,000 shares of Preferred Stock authorized, 210,000 shares designated, 156,746 shares issued and outstanding as of September 30, 2019 and December 31, 2018	161,012			155,111
Series B Preferred Stock; $0.0001 par value, 10.0% Redeemable, $1,000 per share liquidation preference; of the 1,000,000 shares of Preferred Stock authorized, 210,000 shares designated, 156,746 shares issued and outstanding as of March 31, 2020 and December 31, 2019	168,924			163,026
Stockholders’ equity
Series A Preferred Stock; $0.0001 par value, 8.0% Cumulative Perpetual Convertible, $1,000 per share liquidation preference; of the 1,000,000 shares of Preferred Stock authorized, 150,000 shares designated, 103,717 and 101,699 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	86,679			84,631
Series A Preferred Stock; $0.0001 par value, 8.0% Cumulative Perpetual Convertible, $1,000 per share liquidation preference; of the 1,000,000 shares of Preferred Stock authorized, 150,000 shares designated, 107,658 and 105,589 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively	90,620			88,551
Class A Common Stock; $0.0001 par value, 250,000,000 shares authorized and 14,451,367 and 13,760,136 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	1			1
Class A Common Stock; $0.0001 par value, 250,000,000 shares authorized and 28,811,078 and 28,554,526 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively	3			3
Class B Common Stock; $0.0001 par value, 30,000,000 shares authorized, 29,807,692 shares issued and outstanding as of September 30, 2019 and December 31, 2018	3			3
Class B Common Stock; $0.0001 par value, 30,000,000 shares authorized, 15,707,692 shares issued and outstanding as of March 31, 2020 and December 31, 2019	2			2
Additional paid-in capital	3664,~~538~~754			4272,~~271~~859
Retained earnings	28,606			26,661
Retained earnings (accumulated deficit)	(129,223		)	11,126
Total common stockholders’ equity	65,148			68,936
Total common stockholders’ equity (deficit)	(64,464		)	83,990
Noncontrolling interest	94(49,~~612~~181		)	~~113~~40,~~770~~575
Total stockholders’ equity	246,439			267,337
Total stockholders’ equity (deficit)	(23,025		)	213,116
Total liabilities, mezzanine equity and stockholders’ equity	$	~~866~~659,~~073~~038		$	~~817~~872,~~066~~512

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

ROSEHILL RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Three Months						~~Nine Months~~
	Ended September 30,						Ended September 30,
	Ended March 31,
	2019			2018			2019			2018
	2020			2019
Revenues:
Oil sales	$	7357,~~747~~752		$	7265,~~799~~853		$	~~206,440~~		$	~~197,414~~
Natural gas sales	~~390~~104			21,~~633~~474			~~1,215~~			~~6,686~~
Natural gas liquids sales	2,~~122~~338			74,~~125~~533			~~9,847~~			~~14,770~~
Total revenues	7660,~~259~~194			8271,~~557~~860			~~217,502~~			~~218,870~~
Operating expenses:
Lease operating expenses	12,~~207~~095			9,~~205~~635			~~31,012~~			~~29,315~~
Production taxes	3,516			4,034			10,011			10,515
Production taxes and ad valorem taxes	3,759			4,238
Gathering and transportation	~~881~~1,371			12,~~327~~361			~~4,562~~			~~3,246~~
Depreciation, depletion, amortization and accretion	3431,~~533~~486			4735,~~469~~964			~~103,158~~			~~104,784~~
Exploration costs	788			1,348			3,156			3,659
Impairment of oil and natural gas properties	333,840			—
General and administrative	8,867			8,342			27,266			23,369
Exploration costs	13,720			1,255
(Gain) loss on disposition of property and equipment	8			29			(11,106		)	325
General and administrative	10,620			9,055
Total operating expenses	60,800			71,754			168,059			175,213
Loss on disposition of property and equipment	18			9
Operating income	15,459			10,803			49,443			43,657
Total operating expenses	406,909			62,517
Other income (expense):
Operating income (loss)	(346,715		)	9,343
Interest expense, net	(7,950		)	(5,363		)	(19,560		)	(13,892		)
Other income (expense):
Gain (loss) on commodity derivative instruments, net	39,368			(67,314		)	(36,826		)	(108,553		)
Interest expense, net	(10,814		)	(5,600		)
Other income (expense), net	(764		)	(93		)	(671		)	329
Gain (loss) on commodity derivative instruments, net	110,120			(104,571		)
Total other income (expense), net	30,654			(72,770		)	(57,057		)	(122,116		)
Other income, net	54,108			62
Income (loss) before income taxes	46,113			(61,967		)	(7,614		)	(78,459		)
Total other income (expense), net	153,414			(110,109		)
Income tax expense (benefit)	(8,995		)	22,923			(4,172		)	5,523
Loss before income taxes	(193,301		)	(100,766		)
Net income (loss)	55,108			(84,890		)	(3,442		)	(83,982		)
Income tax expense	37,027			3,306
Net income (loss) attributable to noncontrolling interest	26,185			(61,450		)	(21,280		)	(83,873		)
Net loss	(230,328		)	(104,072		)
Net income (loss) attributable to Rosehill Resources Inc. before preferred stock dividends	28,923			(23,440		)	17,838			(109		)
Net loss attributable to noncontrolling interest	(89,979		)	(73,909		)
Series A Preferred Stock dividends and deemed dividends	2,048			2,011			6,081			5,907
Net loss attributable to Rosehill Resources Inc. before preferred stock dividends	(140,349		)	(30,163		)
Series B Preferred Stock dividends, deemed dividends, and return	5,955			5,917			17,626			17,494
Series A Preferred Stock dividends and deemed dividends	2,102			2,006
Net income (loss) attributable to Rosehill Resources Inc. common stockholders	$	20,920		$	(31,368	)	$	(5,869	)	$	(23,510	)
Series B Preferred Stock dividends, deemed dividends, and return	5,898			5,808
Earnings (loss) per common share:
Net loss attributable to Rosehill Resources Inc. common stockholders	$	(148,349	)	$	(37,977	)
Basic	$	1.45		$	(4.76	)	$	(0.41	)	$	(3.66	)
Loss per common share:
Diluted	$	0.88		$	(4.76	)	$	(0.67	)	$	(3.66	)
Basic	$	(5.19	)	$	(2.75	)
Weighted average common shares outstanding:
Diluted	$	(5.38	)	$	(2.75	)
Basic	14,451			6,592			14,223			6,416
Weighted average common shares outstanding:
Diluted	53,100			6,592			44,031			6,416
Basic	28,566			13,830
Diluted	44,274			13,830

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

ROSEHILL RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(In thousands, except share amounts)

Three Months Ended ~~September~~March 3031, ~~2019~~2020:

	Preferred Stock Series A			Common Stock
				Class A				Class B
	Shares	Value		Shares		Value		Shares	Value		AdditionalPaid-in Capital			Retained Earnings (Accumulated Deficit)			TotalCommon Stockholders’ Equity (Deficit)			Non-controllingInterest			Total Equity (Deficit)
Balance at June 30, 2019	101,669	$	84,631	14,450,980		$	1	29,807,692	$	3	$	35,957		$	7,686		$	43,647		$	67,298		$	195,576
Balance at December 31, 2019	105,589	$	88,551	28,554,526		$	3	15,707,692	$	2	$	72,859		$	11,126		$	83,990		$	40,575		$	213,116
Net income	—	—		—		—		—	—		—			28,923			28,923			26,185			55,108
Net loss	—	—		—		—		—	—		—			(140,349		)	(140,349		)	(89,979		)	(230,328		)
Restricted stock issued	—	—		~~418~~339,001		—		—	—		—			—			—			—			—
Restricted stock withheld for taxes	—	—		(3182,449	)	—		—	—		—			—			—			—			—
Stock-based compensation	—	—		—		—		—	—		~~1,710~~118			—			~~1,710~~118			—			~~1,710~~118
Series A Preferred Stock dividends	2,~~048~~069	2,~~048~~069		—		—		—	—		—(2,102		)	~~(2,048~~—		)	(2,~~048~~102		)	—			—(33		)
Series B Preferred Stock dividends, deemed dividends and return	—	—		—		—		—	—		—			(5,955		)	(5,955		)	—			(5,955		)
Series A Preferred Stock conversions	—	—		—		—		—	—		—			—			—			—			—
Equity shift	—	—		—		—		—	—		(1,129		)	—			(1,129		)	1,129			—
Series B Preferred Stock dividends, deemed dividends and return	—	—		—		—		—	—		(5,898		)	—			(5,898		)	—			(5,898		)
Balance at September 30, 2019	103,717	$	86,679	14,451,367		$	1	29,807,692	$	3	$	36,538		$	28,606		$	65,148		$	94,612		$	246,439
Equity shift	—	—		—		—		—	—		(223		)	—			(223		)	223			—
Balance at March 31, 2020	107,658	$	90,620	28,811,078		$	3	15,707,692	$	2	$	64,754		$	(129,223	)	$	(64,464	)	$	(49,181	)	$	(23,025	)

Three Months Ended ~~September~~March 3031, ~~2018~~2019:

	Preferred StockSeries A			Common Stock
	Preferred Stock Series A			Common Stock
				Class A				Class B
	Shares	Value		Shares		Value		Shares	Value		AdditionalPaid-in Capital			Retained Earnings (Accumulated Deficit)			TotalCommon Stockholders’ Equity (Deficit)			Non-~~controlling Interest~~controllingInterest			Total Equity (Deficit)
Balance at June 30, 2018	99,647	$	82,609	6,542,368		$	1	29,807,692	$	3	$	30,630		$	7,858		$	38,492		$	(8,026	)	$	113,075
Balance at December 31, 2018	101,669	$	84,631	13,760,136		$	1	29,807,692	$	3	$	42,271		$	26,661		$	68,936		$	113,770		$	267,337
Net loss	—	—		—		—		—	—		—			(2330,~~440~~163		)	(2330,~~440~~163		)	(6173,~~450~~909		)	(84104,~~890~~072		)
Restricted stock issued	—	—		~~198~~558,~~484~~239		—		—	—		—			—			—			—			—
Restricted stock withheld for taxes	—	—		—(31,054	)	—		—	—		3(89		)	—			3(89		)	—			3(89		)
Stock-based compensation	—	—		—		—		—	—		~~1,986~~974			—			~~1,986~~974			—			~~1,986~~974
Series A Preferred stock dividends	1,006	1,006		—		—		—	—		(5,907		)	3,897			(2,010		)	—			(1,004		)
Series A Preferred Stock dividends	—	—		—		—		—	—		(2,006		)	—			(2,006		)	—			(2,006		)
Series B Preferred stock dividends, deemed dividends and return	—	—		—		—		—	—		(17,494		)	11,576			(5,918		)	—			(5,918		)
Series B Preferred Stock dividends, deemed dividends and return	—	—		—		—		—	—		(5,808		)	—			(5,808		)	—			(5,808		)
Equity Shift	—	—		—		—		—	—		(1,954		)	—			(1,954		)	1,954			—
Equity shift	—	—		—		—		—	—		(86		)	—			(86		)	86			—
Balance at September 30, 2018	100,653	$	83,615	6,740,852		$	1	29,807,692	$	3	$	7,264		$	(109	)	$	7,159		$	(67,522	)	$	23,252
Balance at March 31, 2019	101,669	$	84,631	14,287,321		$	1	29,807,692	$	3	$	35,256		$	(3,502	)	$	31,758		$	39,947		$	156,336

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

ROSEHILL RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(Unaudited)

(In thousands, except share amounts)

Nine Months Ended September 30, 2019:

	Preferred Stock Series A			Common Stock
				Class A				Class B
	Shares	Value		Shares		Value		Shares	Value		AdditionalPaid-in Capital			Retained Earnings (Accumulated Deficit)			TotalCommon Stockholders’ Equity			Non-controllingInterest			Total Equity
Balance at December 31, 2018	101,669	$	84,631	13,760,136		$	1	29,807,692	$	3	$	42,271		$	26,661		$	68,936		$	113,770		$	267,337
Net income (loss)	—	—		—		—		—	—		—			17,838			17,838			(21,280		)	(3,442		)
Restricted stock issued	—	—		759,992		—		—	—		—			—			—			—			—
Restricted stock withheld for taxes	—	—		(68,761	)	—		—	—		(246		)	—			(246		)	—			(246		)
Stock-based compensation	—	—		—		—		—	—		4,449			—			4,449			—			4,449
Series A Preferred Stock dividends	2,048	2,048		—		—		—	—		(2,006		)	(4,075		)	(6,081		)	—			(4,033		)
Series B Preferred Stock dividends, deemed dividends and return	—	—		—		—		—	—		(5,808		)	(11,818		)	(17,626		)	—			(17,626		)
Equity shift	—	—		—		—		—	—		(2,122		)	—			(2,122		)	2,122			—
Balance at September 30, 2019	103,717	$	86,679	14,451,367		$	1	29,807,692	$	3	$	36,538		$	28,606		$	65,148		$	94,612		$	246,439

Nine Months Ended September 30, 2018:

	Preferred StockSeries A			Common Stock
				Class A				Class B
	Shares	Value		Shares		Value		Shares	Value		AdditionalPaid-in Capital			Retained Earnings (Accumulated Deficit)			TotalCommon Stockholders’ Equity			Non-controlling Interest			Total Equity
Balance at December 31, 2017	97,698	$	80,660	6,222,299		$	1	29,807,692	$	3	$	29,946		$	—		$	29,950		$	12,054		$	122,664
Net loss	—	—		—		—		—	—		—			(109		)	(109		)	(83,873		)	(83,982		)
Restricted stock issued	—	—		550,814		—		—	—		—			—			—			—			—
Restricted stock withheld for taxes	—	—		(32,261	)	—		—	—		(258		)	—			(258		)	—			(258		)
Stock-based compensation	—	—		—		—		—	—		5,274			—			5,274			—			5,274
Series A Preferred Stock dividends	2,955	2,955		—		—		—	—		(5,907		)	—			(5,907		)	—			(2,952		)
Series B Preferred stock dividends, deemed dividends and return	—	—		—		—		—	—		(17,494		)	—			(17,494		)	—			(17,494		)
Equity shift	—	—		—		—		—	—		(4,297		)	—			(4,297		)	4,297			—
Balance at September 30, 2018	100,653	$	83,615	6,740,852		$	1	29,807,692	$	3	$	7,264		$	(109	)	$	7,159		$	(67,522	)	$	23,252

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

ROSEHILL RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2019			2018
	2020			2019
Cash flows from operating activities:
Net loss	$(230,328	~~(3,442~~	)	$(104,072	~~(83,982~~	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion	~~103~~31,~~158~~486			~~104~~35,~~784~~964
Deferred income taxes	(4,172		)	5,523
Impairment of oil and gas properties	333,840			—
Stock-based compensation	4,629			5,364
Deferred income taxes	37,027			2,994
(Gain) loss on disposition of property and equipment	(11,106		)	325
Stock-based compensation	19			974
Loss on derivative instruments	37,912			108,500
(Gain) loss on derivative instruments	(106,025		)	104,490
Net cash paid in settlement of derivative instruments	(9,519		)	(17,193		)
Net cash received (paid) in settlement of derivative instruments	8,627			(1,821		)
Amortization of debt issuance costs	~~1,433~~518			~~1,723~~427
Settlement of asset retirement obligations	(7		)	(551		)
Write-off of undeveloped and exploratory costs	12,806			—
Other	283			1
Revaluation of Tax Receivable Agreement liability	(53,643		)	—
Changes in operating assets and liabilities:
Increase in accounts receivable and accounts receivable, related parties	(5,005		)	(22,412		)
Decrease (increase) in accounts receivable and accounts receivable, related parties	13,577			(650		)
(Increase) decrease in prepaid and other assets	587			(176		)
Decrease (increase) in prepaid and other assets	918			(329		)
Increase in accounts payable and accrued liabilities and other	762			14,828
Increase (decrease) in accounts payable and accrued liabilities and other	(4,507		)	13,670
Increase (decrease) in accounts payable, related parties	~~857~~290			(~~211~~275		)
Net cash provided by operating activities	116,087			116,522
Increase (decrease) in lease liabilities	(305		)	—
Net cash provided by operating activities	44,583			51,373
Cash flows from investing activities:
Additions to oil and natural gas properties	(~~211~~45,~~796~~204		)	(~~292~~75,~~955~~825		)
Acquisition of White Wolf	—			(4,005		)
Proceeds received from disposition of oil and natural gas properties	—			1,100
Acquisition of land and leasehold, royalty and mineral interest	(1,175		)	(15,245		)
Additions to other property and equipment	(120		)	(55		)
Proceeds received - Tatanka Asset sale	21,770			—
Proceeds from sale of other property and equipment	10			—
Additions to other property and equipment	(683		)	(1,834		)
Net cash used in investing activities	(45,314		)	(74,780		)
Net cash used in investing activities	(191,884		)	(314,039		)
Cash flows from financing activities:
Proceeds from revolving credit facility	~~108~~96,000			~~274~~13,000
Repayment on revolving credit facility	(3216,000		)	~~(80,000~~—		)
Debt issuance costs	~~(799~~—		)	(~~2,497~~644		)
Dividends paid on preferred stock	(153,~~169~~951		)	(73,~~388~~362		)
Restricted stock used for tax withholdings	~~(246~~—		)	(~~258~~89		)
Payment on capital lease obligation	~~(14~~—		)	(213		)
Net cash provided by financing activities	5976,~~772~~049			~~183~~8,~~836~~902
Net decrease in cash, cash equivalents, and restricted cash	~~(16~~75,~~025~~318		)	(1314,~~681~~505		)
Cash and cash equivalents beginning of period	202,~~157~~991			2420,~~682~~157
Cash and cash equivalents end of period	$	478,~~132~~309		$	115,~~001~~652

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

ROSEHILL RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

(In thousands)

Supplemental cash flow information and noncash activity:

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2019			2018
	2020			2019
Supplemental disclosures:
Cash paid for interest	$	175,~~600~~598		$	103,~~160~~424
Supplemental noncash activity:
Asset retirement obligations incurred, net of revision of estimates	$	~~268~~(22	)	$	~~4,367~~66
Changes in accrued capital expenditures	~~(5,725~~418		)	(24,~~035~~618		)
Changes in accounts payable for capital expenditures	(72,~~243~~504		)	(78,~~662~~264		)
Series A Preferred Stock dividends paid-in-kind	2,~~048~~102			~~2,955~~—
Series A Preferred Stock cash dividends declared and payable	—			12,~~005~~006
Series B Preferred Stock dividends paid-in-kind	—			4,554
Series B Preferred Stock accrued dividends	4,677			—
Series B Preferred Stock cash dividends declared and payable	~~3,951~~—			23,~~323~~866
Series B Preferred Stock return	~~4,771~~816			51,~~130~~577
Series B Preferred Stock deemed dividend	~~1,130~~405			~~984~~365

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

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Organization and Basis of Presentation

Organization

Rosehill Resources Inc. (the “Company” or “Rosehill”) is an independent oil and natural gas company focused on the acquisition, exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves in the Permian Basin. The Company’s assets are concentrated in the Delaware Basin, a sub-basin of the Permian Basin.

~~The~~Recent Company was incorporated in Delaware on September 21, 2015 as a special purpose acquisition company under the name of KLR Energy Acquisition Corp. (“KLRE”) for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving the Company and one or more businesses. On April 27, 2017, the Company acquired a portion of the equity of Rosehill Operating Company, LLC (“Rosehill Operating”), in a transaction structured as a reverse recapitalization (the “Transaction”), into which Tema Oil & Gas Company (“Tema”), a wholly owned subsidiary of Rosemore, Inc. (“Rosemore”), contributed certain assets and liabilities. At the closing of the Transaction, the Company became the sole managing member of Rosehill Operating. Following the Transaction, the Company changed its name to Rosehill Resources Inc.Developments

AsThe adverse economic effects of COVID-19 have materially decreased demand for crude oil as a result of the ~~sole~~restrictions ~~managing~~implemented ~~member~~by governments trying to curb the outbreak and changes in consumer behavior. This has led to a significant global oversupply of ~~Rosehill~~oil ~~Operating~~and consequently a substantial decrease in crude oil prices. While global oil producers, including the ~~Company~~Organization of Petroleum Exporting Countries (“OPEC”) and other oil producing nations (together with OPEC, ~~through~~“OPEC+”), ~~its~~have ~~officers~~reached agreement to cut oil production to a limited extent, downward pressure on commodity prices has remained and ~~directors~~could continue for the foreseeable future, isparticularly ~~responsible~~given concerns over available storage capacity for ~~all~~oil. The ~~operational~~Company ~~and~~considered ~~administrative~~the ~~decision~~impact of COVID-~~making~~19 and ~~control~~the substantial decline in crude oil prices on the assumptions and estimates used in preparation of ~~all~~its financial statements and as a result has recognized a number of material charges during the ~~day-~~three months ended March 31, 2020, including impairments to~~-day~~ ~~business~~its ~~affairs~~capitalized ofcosts ~~Rosehill~~for ~~Operating~~proved ~~without~~and unproved crude oil and natural gas properties. The Company has also recorded a full valuation allowance on its deferred tax assets and reduced its Tax Receivable Agreement liability. These items are discussed further in the ~~approval~~following notes. In response to adverse effects of ~~any~~COVID-19 ~~other~~on ~~member~~the Company’s financial condition, ~~unless~~the ~~specified~~Company inhalted its capital drilling activities and reduced personnel. The full extent of the ~~Second~~impact ~~Amended~~of COVID-19 on the Company’s operations is uncertain. A prolonged pandemic and ~~Restated~~low ~~Limited~~commodity ~~Liability~~prices could have a further material adverse effect on the Company’s ~~Agreement~~results of ~~Rosehill~~operations, ~~Operating~~financial ~~(the~~condition, ~~“LLC~~and ~~Agreement”)~~liquidity, including additional impairments to oil and natural gas properties.

On March 27, 2020, President Trump signed into U.S. federal law the “Coronavirus Aid, and Economic Security Act” (“CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. We have analyzed the different aspects of the CARES Act and determined that there is no impact on the Company’s financial statements.

Certain events of default under the Amended and Restated Credit Agreement and the Note Purchase Agreement (in each case, as defined below) have occurred, and the Company entered into a forbearance agreement with the lenders under the Amended and Restated Credit Agreement. On June 30, 2020, the Company entered into a Restructuring Support Agreement (“RSA”) with the stakeholders named therein, pursuant to which the Company expects to file for protection under Chapter 11 of the Bankruptcy Code for the purpose of confirming the Plan (as defined below). See further information, please read Note 3 - Liquidity and Note 20 - Subsequent Events.

Basis of Presentation

The condensed consolidated financial results of the Company consist of the financial results of Rosehill and Rosehill Operating Company, LLC (“Rosehill Operating”), its consolidated subsidiary. As of ~~September~~March 3031, ~~2019~~2020, the Company owns approximately 3264.7% of the common units of Rosehill Operating (the “Rosehill Operating Common Units”) and Tema Oil & Gas Company (“Tema”) owns approximately 6735.3% of the Rosehill Operating Common Units.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared ~~pursuant~~in toaccordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”). ~~Certain~~for ~~information~~interim ~~and~~financial ~~note~~reporting. Accordingly, certain disclosures normally included in ~~annual~~an ~~financial~~Annual ~~statements~~Report ~~prepared~~on inForm ~~accordance~~10-K ~~with generally accepted accounting principles in the United States (“U.S. GAAP”)~~ have been condensed or omitted ~~pursuant to those rules and regulations~~, although the ~~Company~~company believes that the disclosures made are adequate to make the information not misleading. ItThe ~~is suggested that these~~ condensed consolidated financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s consolidated financial statements and ~~the~~related notes ~~thereto~~ included in the Company’s ~~latest~~ Annual Report on Form 10-K for the period ended December 31, 2019. ~~The~~Except ~~unaudited~~as ~~condensed~~disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements ~~reflect~~included ~~all~~in ~~normal~~the ~~and~~Company’s ~~recurring~~Annual ~~adjustments~~Report ~~that~~on ~~are~~Form 10-K for the period ended December 31, in2019. In the opinion of management, all normal, recurring adjustments and accruals considered necessary ~~for~~to ~~the~~present ~~fair~~fairly, ~~presentation~~in ofall material respects, the Company’s interim financial results ofhave ~~operations~~been included. Operating results for the ~~interim~~ periods. presented are not indicative of expected results for

~~Variable Interest Entities~~8

Rosehill Operating is a variable interest entity. The Company determined that it is the primary beneficiary of Rosehill Operating as the Company is the sole managing member and has the power to direct the activities most significant to Rosehill Operating’s economic performance as well as the obligation to absorb losses and receive benefits that are potentially significant. The Company consolidated 100% of Rosehill Operating’s assets and liabilities and results of operations in the Company’s condensed consolidated financial statements. Although Tema has a larger ownership interest in Rosehill Operating, because it has disproportionately fewer voting rights, Tema is shown as a noncontrolling interest holder of Rosehill Operating. For further discussion, see Noncontrolling Interest in Note 13 - Stockholders’ Equity.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the full year. The Company has disclosed that it has substantial doubt about its ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued and the impact on the presentation of these condensed consolidated financial statements in Note 3 - Liquidity.

All intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current presentation on the accompanying consolidated financial statements. Such reclassifications had no impact on net income, cash flows or shareholders’ equity previously reported.

Variable Interest Entities

Rosehill Operating is a variable interest entity. The Company determined that it is the primary beneficiary of Rosehill Operating as the Company is the sole managing member and has the power to direct the activities most significant to Rosehill Operating’s economic performance as well as the obligation to absorb losses and receive benefits that are potentially significant and the Company now holds a majority of the ownership interest of Rosehill Operating. The Company consolidated 100% of Rosehill Operating’s assets and liabilities and results of operations in the Company’s consolidated financial statements. For further discussion, see Noncontrolling Interest in Note 16 - Stockholders’ Equity.

Note 2 – Summary of Significant Accounting Policies and Recently Issued Accounting Standards

The significant accounting policies followed by the Company are set forth in Note 2 – Summary of Significant Accounting Policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019.

Accounting ~~Standards~~Standard Adopted in ~~2019~~2020

~~Revenue~~On ~~Recognition.~~January ~~ASU 2014-09~~1, ~~Revenue~~ ~~from~~2020 ~~Contracts~~we ~~with~~adopted ~~Customers~~ASC (Topic ~~606) (“ASC~~842, ~~606”)~~Leases, ~~supersedes~~which ~~the~~requires ~~revenue~~companies ~~recognition~~to ~~requirements~~generally ~~in Topic~~recognize ~~605,~~on ~~Revenue~~the ~~Recognition,~~balance sheet operating and ~~industry-specific~~financing ~~guidance~~lease ~~in Subtopic~~liabilities ~~932-605,~~and ~~Extractive~~a ~~Activities~~corresponding right-~~Oil~~of-use ~~and~~assets. ~~Gas-Revenue~~We ~~Recognition and~~adopted ~~requires~~this anstandard ~~entity~~using tothe ~~recognize~~modified ~~revenue~~retrospective ~~when~~method. The itCompany ~~transfers~~has ~~promised~~elected ~~goods~~the orfollowing ~~services~~practical toexpedients ~~customers~~that inallow an ~~amount~~entity ~~that~~to ~~reflects~~carry ~~the~~forward ~~consideration~~historical ~~the~~accounting ~~entity~~treatment ~~expects~~relating to: be(i) ~~entitled~~lease toidentification inand ~~exchange~~classification for ~~those~~existing ~~goods~~leases orand ~~services~~(ii) existing land easements. InThe ~~May~~adoption ~~2016,~~of the ~~FASB~~standard ~~issued~~resulted ~~ASU~~in ~~2016-12, Revenue~~the ~~from~~recognition ~~Contracts~~of ~~with~~approximately ~~Customers~~$2.1 ~~(Topic~~million ~~606):~~of ~~Narrow~~right-~~Scope~~of-use ~~Improvements~~assets and ~~Practical~~$2.6 ~~Expedients,~~million of lease liabilities as ~~clarifying~~of ~~guidance~~January to1, ~~improve~~2020, with the ~~operability~~entire ~~and~~amount ~~understandability~~relating to our operating leases.The adoption of ~~the~~this ~~implementation~~standard ~~guidance~~did not have a significant impact on ~~principal~~the ~~versus~~Company’s ~~agent~~Consolidated ~~considerations~~Statements of Operations or Consolidated Statements of Cash Flows. Refer to Note 5 - Leases for additional information.

~~ASC~~Fair ~~606~~Value ~~became~~Measurement ~~effective~~Disclosures. ~~for~~In August 2018, the ~~Company~~FASB onissued ~~January~~ASU 12018-13, ~~2019,~~Fair ~~and~~Value ~~the~~Measurement ~~Company~~(Topic ~~has~~820): ~~elected~~Disclosure toFramework ~~adopt~~- itChanges ~~using~~to the ~~modified~~Disclosure ~~retrospective~~Requirements ~~method.~~for ~~The~~Fair ~~Company~~Value ~~has~~Measurement, ~~completed~~which ~~its~~removes, ~~review~~modifies ofand ~~the~~adds ~~impact~~disclosure ofrequirements ~~ASC~~on ~~606~~fair onvalue ~~its~~measurements. ~~significant~~ASU ~~contracts~~2018-13 ~~and~~is ~~determined~~effective ~~that~~for the Company ~~was~~for ~~not~~fiscal ~~required~~years tobeginning ~~record~~after aDecember ~~cumulative~~15, ~~effect adjustment to retained earnings~~2019. The ~~implementation~~Company ofadopted ~~ASC~~ASU ~~606~~2018-13 ~~did~~on ~~result~~January in1, ~~changes~~2020. The impact to the ~~presentation~~Company ofwas ~~“Revenues”~~additional ~~and~~disclosures ~~“Gathering~~to ~~and~~provide ~~transportation” on~~ the ~~Company’s~~range ~~Condensed~~and ~~Consolidated~~weighted ~~Statement~~average of ~~Operations,~~significant ~~but~~unobservable ~~there~~inputs ~~was~~used noto ~~impact~~develop toLevel ~~net~~3 ~~income~~fair value measures. ~~See~~Refer to Note 179 - ~~Revenue~~Fair ~~from~~Value ~~Contracts~~Measurements ~~with~~for ~~Customers~~more detail on the additional disclosures.

Recently Issued Accounting Standards Not Yet Adopted

~~Leases.~~ In ~~February~~December ~~2016~~2019, the FASB issued ASU ~~2016~~No. 2019-0212, ~~Leases~~Income Taxes (Topic ~~842~~740),: ~~which~~Simplifying ~~requires~~ the ~~recognition~~Accounting ~~of lease assets and lease liabilities by lessees~~ for ~~those~~Income ~~leases~~Taxes (“ASU ~~classified as operating leases under current U~~2019-12”).S. ~~GAAP.~~ASU In2019-12 ~~January~~was ~~2018, the FASB~~ issued ~~ASU~~to ~~2018-01,~~reduce ~~Leases~~the ~~(Topic~~complexity ~~842):~~of ~~Land~~accounting ~~Easement~~for ~~Practical~~income ~~Expedient~~taxes for ~~Transition~~those toentities ~~Topic~~that ~~842,~~fall ~~which~~within ~~provides~~the ~~clarifying~~scope ~~guidance~~of ~~regarding~~the ~~land~~accounting ~~easements and adds practical expedients~~standard. InThe ~~July~~guidance ~~2018,~~is ~~further amendments were issued under ASU 2018-10, Codification Improvements~~ to ~~Topic~~be ~~842,~~applied ~~Leases.~~using Ina ~~July~~prospective ~~2018~~method, ~~the~~excluding ~~FASB~~amendments ~~issued ASU~~related ~~2018-11,~~to ~~Leases~~franchise ~~(Topic 842): Targeted Improvements~~taxes, which ~~provides~~should ~~entities~~be ~~with~~applied anon ~~additional~~either ~~transition~~a ~~method~~retrospective inbasis ~~which~~for anall ~~entity~~periods ~~initially~~presented ~~applies~~or ~~the~~a ~~new~~modified ~~leases~~retrospective ~~standard~~basis atthrough ~~the adoption date and recognizes~~ a cumulative-effect adjustment to ~~the~~retained ~~opening~~earnings ~~balance~~as of ~~retained~~the ~~earnings~~beginning inof the ~~period~~fiscal year of adoption. ASU ~~2016~~2019-0212 ~~and~~is ~~its related updates are~~ effective for the Company for fiscal years beginning after December 15, 2021 due to its emerging growth company status, with early adoption permitted. The Company is still evaluating the impact of ASU 2019-12.

~~The~~Note ~~Company~~3 is– continuing its assessment of ASU 2016-02. The Company has assessed the scope of its current contractual arrangements, reviewed the majority of its existing contracts and is continuing to evaluate certain operational and corporate policies and processes in light of these findings. The Company enters into contracts for drilling rig services, fracturing services, compression, real estate and other contracts which contain equipment and other assets used in its exploration, development and production activities and corporate functions. Certain of these contracts are anticipated to require recognition of a right-of-use asset and related lease liability. At this time, the impact upon adoption of ASU 2016-02 and other related ASUs is not quantifiable, but is expected to significantly impact the Company’s consolidated balance sheet by increasing assets and liabilities related to operating leases. The Company plans to elect the practical expedients under ASU 2018-11 which allows lessors to elect, by class of underlying asset, to not separate lease and associated non-lease components if certain criteria are met. Additionally, the Company plans to elect the package of practical expedients within ASU 2016-02 that allows an entity to not reassess prior to the effective date (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases and the practical expedient of hindsight when determining the lease term of existing contracts at the effective date. The Company also plans to elect the practical expedient under ASU 2018-01 and not evaluate existing or expired land easements not previously accounted for as leases prior to the effective date.Liquidity

~~Financial~~On ~~Instruments~~March –19, ~~Credit Losses. In June 2016~~2020, the ~~FASB~~Company ~~issued~~announced ~~ASU~~that ~~2016-13,~~it ~~Financial~~had ~~Instruments~~fully –drawn ~~Credit~~the ~~Losses~~available ~~(Topic~~capacity ~~326):~~under ~~Measurement of Credit Losses on Financial Instruments requiring~~ the ~~measurement~~revolving ~~of all expected~~ credit ~~losses for financial assets~~facility, ~~which~~pursuant ~~include~~to ~~trade~~the ~~receivables,~~Amended ~~held~~and atRestated ~~the~~Credit ~~reporting~~Agreement ~~date~~(as ~~based~~defined onin ~~historical~~Note ~~experience,~~13 ~~current~~- ~~conditions~~Long ~~and~~term ~~reasonable~~debt, ~~and supportable forecasts~~net). The ~~guidance~~draw inwas ~~this~~a ~~ASU~~precautionary ismeasure ~~effective~~in ~~for~~order to increase the Company’s ~~for~~cash ~~fiscal~~position ~~years beginning after December 15, 2020,~~ and ~~interim~~preserve ~~periods~~financial ~~within~~flexibility ~~fiscal~~in ~~years~~light ~~beginning~~of ~~after~~uncertainty ~~December~~in ~~15,~~the ~~2021~~global ~~with~~markets ~~early adoption permitted for interim~~ and ~~annual~~commodity ~~periods beginning after December 15, 2018~~prices. The ~~evaluation~~draw ofbrought ~~this~~the ~~standard~~Company’s ~~and~~total ~~its~~outstanding ~~impact~~principal onunder the ~~Company’s~~Amended ~~condensed~~and ~~consolidated~~Restated ~~financial~~Credit ~~statements~~Agreement ~~and~~to ~~related~~$340 ~~disclosures~~million isas ~~currently~~of ~~being~~March ~~assessed~~31, 2020.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On March 23, 2020, the Company received a letter from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that for the 30 consecutive business days ending March 20, 2020, the bid price of the Company’s Class A Common Stock had closed below the $1.00 per share minimum bid price requirement for continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). Under Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days to regain compliance by meeting the continued listing standard, which was extended by Nasdaq in light of market conditions resulting from the COVID-19 pandemic to December 3, 2020.

In March 2020, in response to the substantial decrease in crude oil prices resulting from COVID-19 and the adverse effects on the Company’s financial condition as a result thereof, the Company halted all drilling and completion activity, which has resulted in a reduction in anticipated production and cash flows. The Company’s future cash flows from operations are subject to a number of variables, including uncertainty in forecasted commodity pricing and production, redetermined borrowing base capacity after the forbearance expires, which may be significantly reduced, and the Company’s ability to reduce costs. The Company may generate additional funds through (i) monetization of its commodity derivatives, subject to any required approval from lenders, (ii) the sale of non-core assets and (iii) other sources of capital. The Company may not accomplish any of these alternatives on acceptable terms or at all.

On April 1, 2020, the Company received a default notice from the agent under the Note Purchase Agreement (as defined in Note 13 - Long term debt, net), advising that a Default (as defined in the Note Purchase Agreement) under the Note Purchase Agreement had occurred on account of the Rosehill Operating’s failure to deliver or file audited financial statements in accordance with Section 8.01(a) of the Note Purchase Agreement by March 30, 2020, which failure constituted a Default under Section 10.01(e) of the Note Purchase Agreement and would mature into an Event of Default under and within the time period provided in Section 10.01(e) (the “Identified Default”).

On April 2, 2020, the Company received a default notice from JPMorgan Chase Bank, N.A., as agent under the Amended and Restated Credit Agreement, advising the Company that Rosehill Operating had failed to deliver or file certain of its or the Company’s audited financial statements without a “going concern” or like qualification or exception by March 30, 2020, as required pursuant to Section 8.01(a) of the Amended and Restated Credit Agreement, as well as the accompanying certificates and reports contemplated by Sections 8.01(c), (d), (e) and (m) of the Amended and Restated Credit Agreement. The default notice served as notice that the lenders deemed such failure to be a Default (as defined in the Amended and Restated Credit Agreement) under Section 10.01(e) of the Amended and Restated Credit Agreement.

On April 15, 2020, the Company did not declare or pay cash dividends on its Series B Preferred Stock (the “Series B Preferred Stock Dividend”) that were due on that day. In order to make a dividend payment, the Company’s Amended and Restated Credit Agreement requires that the Company’s borrowings outstanding be 20% less than the committed borrowing capacity in place at the time of a dividend payment. The Company was prohibited from declaring the Series B Preferred Stock Dividend due to insufficient borrowing capacity under the Amended and Restated Credit Agreement. As a result, the dividend rate of the Series B Preferred Stock Dividend increased to 12% per annum until such a time as dividends are fully paid and current, at which time the dividend rate will revert back to 10% per annum. If the Company fails to pay the Series B Preferred Stock Dividend for nine consecutive months, the holders of the Series B Preferred Stock may elect to seek redemption of all or a portion of the Series B Preferred Stock, which redemption amount was approximately $195.2 million had the full redemption occurred as of March 31, 2020. The Company does not expect to be able to pay dividends on the Series B Preferred Stock within the nine consecutive months following April 15, 2020; as such, we expect the Series B Preferred Stock would be redeemable at the holders’ option after that time. If the full redemption had occurred as of March 31, 2020, the redemption amount would have been approximately $195.2 million.

On April 29, 2020, the Company received a default notice from the agent under the Note Purchase Agreement, advising that, in addition to the Identified Default, an Event of Default under the Note Purchase Agreement had occurred on account of Rosehill Operating’s failure to cause Rosehill Intermediate Holdco, LLC, Rosehill Holdco, LLC, and Rosehill Mergerco, LLC (collectively, the “New Rosehill Entities”) to (x) guarantee the Obligations pursuant to Guaranty Agreements and to grant liens and security interests in all of such New Rosehill Entities’ collateral pursuant to a security agreement, and (y) pledge all of the Equity Interests (as defined in the Note Purchase Agreement) of the New Rosehill Entities and to execute and deliver such other additional closing documents, legal opinions and certificates as reasonably requested by the Requisite Holders (as defined in the Note Purchase Agreement), in each case as required pursuant to Section 8.14(b) of the Note Purchase Agreement, which failure constituted an Event of Default under Section 10.01(d) of the Note Purchase Agreement (the “Identified Event of Default”).

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Derivatives~~On ~~and~~April ~~Hedging. In~~29, ~~August 2017~~2020, the ~~FASB~~New ~~issued~~Rosehill ~~ASU~~Entities ~~2017-12, Derivatives~~were ~~and~~dissolved ~~Hedging~~pursuant ~~(Topic 815): Targeted Improvements~~ to ~~Accounting~~their ~~for~~organizational ~~Hedging~~documents ~~Activities, which expands~~ and ~~refines hedge accounting for both financial and non-financial risk components, aligns~~ the ~~recognition~~Delaware ~~and~~Limited ~~presentation~~Liability of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. ASU 2017-12 is effective for the Company ~~for fiscal years beginning after December 15, 2019~~Act. ~~Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements.~~

~~Fair~~On ~~Value~~May ~~Measurement~~4, ~~Disclosures~~2020, the Company entered into a forbearance agreement (the “Forbearance Agreement”) with the lenders under the Amended and Restated Credit Agreement. InAs ~~August~~a ~~2018~~condition to the forbearance, Rosehill Operating made a $20 million payment on the ~~FASB~~amounts ~~issued~~outstanding ~~ASU~~under ~~2018-13~~the Amended and Restated Credit Agreement. Under the Forbearance Agreement, ~~Fair~~the ~~Value~~periodic ~~Measurement~~redetermination ~~(Topic~~of ~~820):~~the ~~Disclosure~~borrowing ~~Framework~~base -that ~~Changes~~was scheduled to ~~the~~occur ~~Disclosure~~on ~~Requirements~~or ~~for~~about ~~Fair~~April ~~Value~~1, ~~Measurement~~2020, which ~~removes~~the Company expected to result in a borrowing base deficiency, ~~modifies~~was postponed throughout the forbearance period, and ~~adds~~the ~~disclosure~~lenders ~~requirements~~agreed onnot ~~fair~~to ~~value~~accelerate ~~measurements~~the amounts owed under the Amended and Restated Credit Agreement as a result of certain existing and anticipated Events of Default during the forbearance period. ~~ASU~~During ~~2018-13~~the isforbearance ~~effective~~period, ~~for~~the lenders have no obligation to make any further loans under the ~~Company~~Amended ~~for~~and ~~fiscal~~Restated ~~years~~Credit ~~beginning~~Agreement. ~~after~~In ~~December~~addition, 15the Forbearance Agreement requires the Company to comply with certain other provisions, ~~2019~~including ~~and~~that within 25 days of entering into the Forbearance Agreement, the Company isand ~~permitted~~certain stakeholders agree in principle to ~~early~~a ~~adopt~~term ~~any~~sheet ~~removed~~for a restructuring transaction (or ~~modified~~“Restructuring ~~disclosures~~Term ~~upon~~Sheet,” ~~issuance~~as ofdefined ~~this~~in ~~ASU~~the Forbearance Agreement) and ~~delay~~within ~~adoption~~40 days of entering into the ~~additional~~Forbearance ~~disclosures~~Agreement, ~~until~~the ~~their~~Company ~~effective~~and ~~date~~those certain stakeholders enter into a restructuring support agreement, which shall provide for a restructuring under Chapter 11 of the U.S. Bankruptcy Code. The Forbearance Agreement will terminate on July 3, 2020 unless terminated earlier under these provisions. The dates by which the Company isand ~~currently~~certain ~~evaluating~~stakeholders were required to agree in principle to the ~~impact~~Restructuring Term Sheet and enter into the RSA were subsequently extended pursuant to certain letter agreements between the Company, Rosehill Operating and the lenders under the Amended and Restated Credit Agreement. As a condition to such letter agreements, the Company and Rosehill Operating agreed that all settlement payments and other net cash proceeds received in respect of any swap agreement be applied to the ~~adoption~~prepayment of ~~this~~Borrowings ~~guidance~~(as ondefined ~~its~~in ~~disclosures~~the Amended and Restated Credit Agreement) then outstanding under the Amended and Restated Credit Agreement.

On May 8 and 19, 2020, the Company received separate notices from the agent under the Note 3Purchase –Agreement, ~~Earnings~~advising the Company that the Identified Default and the Identified Event of Default had matured into Events of Default (~~Loss~~collectively, the “Identified Events of Default”) ~~Per~~and ~~Share~~ that the holders reserved all of their rights, powers, privileges and remedies under the Note Purchase Agreement, and asserted a right to an additional 2% interest on the amounts outstanding under the Note Purchase Agreement.

The ~~following~~Company ~~table~~did ~~sets~~not ~~forth~~provide the ~~calculation~~lenders ofunder ~~basic~~the Amended and ~~diluted~~Restated ~~weighted~~Credit ~~average~~Agreement ~~shares~~and ~~outstanding~~the Note Purchase Agreement with unaudited financial statements and ~~earnings~~other ~~(loss)~~required ~~per~~certificates ~~share~~and ~~for~~operating reports within 45 days after March 31, 2020, which constituted a default under the ~~indicated~~Amended ~~periods:~~and Restated Credit Agreement and the Note Purchase Agreement. The Amended and Restated Credit Agreement and the Note Purchase Agreement each give the Company a 30-day cure period before it becomes an event of default under the respective agreement. However, the Company was unable to satisfy these requirements within the cure period. As such, this represents an event of default under the Amended and Restated Credit Agreement and Note Purchase Agreement.

	Three Months					Nine Months
	Ended September 30,					Ended September 30,
	2019		2018			2019			2018
	(In thousands, except per share data)
Net income (loss) (numerator):
Net income (loss) attributable to common stockholders of Rosehill Resources Inc. - basic	$	20,920	$	(31,368	)	$	(5,869	)	$	(23,510	)
Add: Dividends on Series A Preferred Stock	2,048		—			—			—
Add: Net loss attributable to the noncontrolling interest, net of taxes	23,793		—			(23,672		)	—
Net income (loss) attributable to common stockholders of Rosehill Resources Inc. - diluted	$	46,761	$	(31,368	)	$	(29,541	)	$	(23,510	)
Weighted average shares (denominator):
Weighted average shares – basic	14,451		6,592			14,223			6,416
Add: Dilutive effects of Series A Preferred Stock	8,841		—			—			—
Add: Dilutive effects of Class B Common Stock	29,808		—			29,808			—
Weighted average shares – diluted	53,100		6,592			44,031			6,416
Basic earnings (loss) per share	$	1.45	$	(4.76	)	$	(0.41	)	$	(3.66	)
Diluted earnings (loss) per share	$	0.88	$	(4.76	)	$	(0.67	)	$	(3.66	)

Due to the matters noted above, debt outstanding under the Amended and Restated Credit Agreement and the Second Lien Notes have been reflected as current in the accompanying condensed consolidated balance sheet as of March 31, 2020.

On June 30, 2020, the Company entered into the RSA with the stakeholders named therein, pursuant to which the Company expects to file for protection under Chapter 11 of the Bankruptcy Code to effect consummation of the Plan. Please read Note 20 - Subsequent Events for more details.

These matters raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date that these condensed consolidated financial statements are issued. The condensed consolidated financial statements included in this report have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not include adjustments that might result from the outcome of these uncertainties.

Note 4— Revenue from Contracts with Customers

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~For~~and ~~the~~risk ~~three~~of ~~months~~loss. ~~ended~~For ~~September 30,~~those ~~2019,~~contracts where the Company ~~excluded~~has ~~25.6~~concluded ~~million~~that ~~shares~~control of ~~Class~~the Aproduct ~~Common~~transfers ~~Stock~~at ~~issuable~~the ~~upon~~tailgate ~~exercise~~ of the ~~Company’s~~plant, ~~warrants~~meaning ~~and~~that ~~1.9~~the ~~million~~Company ~~shares~~is ofthe ~~Class~~principal Aand ~~Common~~the ~~Stock~~ultimate ~~issuable~~third ~~upon~~party ~~vesting~~purchaser ofis ~~awards~~its ~~under~~customer, the Company’s ~~Long-Term~~recognizes ~~Incentive~~revenue ~~Plan~~on ~~(as~~a ~~amended~~gross ~~and~~basis, ~~restated~~with ontransportation, ~~May~~processing ~~22,~~and ~~2018,~~gathering ~~the~~expenses ~~“LTIP”)~~presented ~~from~~within the ~~computation~~Gathering ofand ~~diluted~~transportation ~~earnings~~line ~~per~~item ~~share~~on ~~because~~ the ~~effect~~Company’s ofCondensed ~~such~~Consolidated ~~instruments~~Statements ~~was~~of ~~anti-dilutive~~Operations. ~~For~~Alternatively, ~~the~~for ~~nine~~those ~~months~~contracts ~~ended~~where ~~September 30, 2019,~~ the Company ~~excluded~~has ~~25.6~~concluded ~~million~~control ~~shares~~ of ~~Class~~the Aproduct ~~Common~~transfers ~~Stock~~at ~~issuable~~or ~~upon~~near ~~exercise~~the wellhead or inlet of the ~~Company’s warrants~~plant, ~~9.0~~meaning ~~million~~that ~~shares~~the ofCompany ~~Class~~is Athe agent and ~~Common~~the ~~Stock~~midstream ~~issuable~~processing ~~upon~~company ~~conversion~~is of the Company’s 8%customer, ~~Series A Cumulative Perpetual Convertible Preferred Stock (~~the ~~“Series~~Company Arecognizes ~~Preferred~~natural ~~Stock”)~~gas and ~~1.7~~NGL ~~million~~revenues ~~shares~~based ofon ~~Class~~the Anet ~~Common~~amount ~~Stock issuable upon vesting~~ of ~~awards~~proceeds ~~under~~received ~~the LTIP~~ from the ~~computation~~midstream ofprocessing ~~diluted earnings per share because the effect of such instruments was anti-dilutive~~company.

~~For~~Performance the three months ended September 30, 2018, the Company excluded 29.8 million shares of Class A Common Stock issuable upon exchange of the Company’s Class B Common Stock, 25.6 million shares of Class A Common Stock issuable upon exercise of the Company’s warrants, 8.7 million shares of Class A Common Stock issuable upon conversion of the Company’s Series A Preferred Stock and 1.0 million shares of Class A Common Stock issuable upon vesting under the Company’s LTIP from the computation of diluted earnings per share because the effect of such instruments was anti-dilutive. For the nine months ended September 30, 2018, the Company excluded 29.8 million shares of Class A Common Stock issuable upon exchange of the Company’s Class B Common Stock, 25.6 million shares of Class A Common Stock issuable upon exercise of the Company’s warrants, 8.6 million shares of Class A Common Stock issuable upon conversion of the Company’s Series A Preferred Stock and 1.0 million shares of Class A Common Stock issuable upon vesting under the Company’s LTIP from the computation of diluted earnings per share because the effect of such instruments was anti-dilutive.obligations

The Company’s contractual 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 customer at the wellhead, inlet, or tailgate of the midstream processor’s processing facility, or other contractually specified delivery point. For all commodity products, the Company records revenue in the month production is delivered to the customer. Settlement statements for certain natural gas and NGL sales may not be received for 30 to 90 days after the date production volumes are delivered and for oil, generally within 30 days after delivery has occurred. However, payment is unconditional once the performance obligations have been satisfied. At this time, the volume and price can be reasonably estimated and amounts due from customers are accrued in Accounts receivable, net in the Condensed Consolidated Balance Sheets. As of March 31, 2020 and December 31, 2019, such receivable balances were $15.6 million and $34.5 million, respectively, as disclosed in Note 47 –- Accounts Receivable.

~~Accounts~~The ~~receivable~~Company records any differences between its estimates and the actual amounts received for product sales in the month that payment is ~~comprised~~received offrom the ~~following:~~purchaser. Historically, any identified differences between revenue estimates and actual revenue received have not been significant.

	September 30, 2019		December 31, 2018
	(In thousands)
Revenue receivable	$	35,957	$	28,876
Realized derivative receivable	891		2,229
Joint interest billings	122		640
Other	381		515
Accounts receivable	$	37,351	$	32,260

Transaction price allocated to remaining performance obligations

~~Note~~For 5the –Company’s ~~Derivative~~product ~~Instruments~~sales that have a contract term greater than one year, the Company has utilized the practical expedient in ASC Topic 606 which states the Company is not required to disclose the transaction price allocated to the remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, monthly sales of a product generally represent a separate performance obligation; therefore, future commodity volumes to be delivered and sold are wholly unsatisfied and disclosure of the transaction price allocated to such unsatisfied performance obligations is not required.

~~Commodity~~Note ~~derivatives.~~5 ~~The~~– Company enters into various derivative instruments primarily to mitigate a portion of the exposure to potentially adverse market changes in oil and natural gas commodity prices and the associated impact on cash flows. All contracts are entered into for other-than-trading purposes. Oil and natural gas commodity derivative instruments are recorded on the condensed consolidated balance sheets at fair value as either an asset or a liability with changes in fair value recognized in earnings. While commodity derivative instruments are utilized to manage the price risk attributable to expected oil and natural gas production, the Company’s commodity derivative instruments are not designated as accounting hedges under the accounting guidance. The related cash flow impact of the commodity derivative activities is reflected as cash flows from operating activities unless they are determined to have a significant financing element at inception, in which case they are classified within financing activities.Leases

~~Interest~~Effective ~~rate~~January ~~swaps~~1, 2020, the Company adopted Topic 842, which requires lessees to recognize operating and finance leases with terms greater than 12 months on the balance sheet. The Company ~~utilizes interest~~adopted ~~rate~~this ~~swaps~~ standard using the modified retrospective method and elected to ~~reduce~~use ~~its~~the ~~exposure~~optional transition methodology whereby reporting periods prior to ~~adverse~~adoption ~~fluctuations~~continue into ~~London~~be ~~Interbank~~presented ~~Offered~~in ~~(“LIBO”)~~accordance ~~rates~~with onlegacy aaccounting ~~portion~~guidance. As of March 31, ~~its~~2020, ~~revolving~~the ~~credit~~Company ~~facility~~did ~~outstanding~~not ~~borrowings.~~have ~~The~~any ~~realized~~agreements ~~and~~in ~~unrealized~~place ~~gains~~that ~~and~~were ~~losses~~classified as finance leases under Topic 842. Arrangements classified as operating leases are included on the ~~interest~~accompanying ~~rate~~Condensed ~~swaps~~Consolidated ~~are~~Balance ~~recognized~~Sheets inwithin the “~~Interest~~Other ~~expense”~~assets, net”, “Accrued liabilities and other” and “Other liabilities” line items. ~~Entering~~For ~~into~~any ~~interest~~agreement ~~rate~~that ~~swaps~~contains ~~allows~~both lease and non-lease components, such as a service arrangement that also includes an identifiable right-of-use (“ROU”) asset, the Company’s policy for all asset classes is to ~~mitigate,~~combine ~~but~~lease ~~not~~and ~~eliminate,~~non-lease components together and account for the ~~negative~~arrangement ~~effects~~as a single lease. Aside from the recognition of ~~increases~~ROU inassets and corresponding lease liabilities on the ~~LIBO~~accompanying ~~rate~~balance sheets, ~~but~~Topic ~~reduces~~842 does not have a material impact on the ~~Company’s~~timing ~~ability~~or toclassification ~~benefit~~of ~~from~~costs ~~any~~incurred ~~decreases~~for inthose ~~the~~agreements ~~LIBO~~considered ~~rate~~to be leases.

~~Series~~As Boutlined ~~Preferred~~in ~~Stock~~Topic ~~bifurcated~~842, ~~derivative.~~a InROU ~~the~~asset ~~event~~represents of a ~~change~~lessee’s ofright ~~control,~~to ~~the~~use ~~Company~~an ~~shall~~underlying ~~redeem~~asset infor ~~cash~~the ~~all~~lease ofterm, while the ~~outstanding~~associated ~~shares~~lease ofliability ~~Series~~represents Bthe ~~Preferred~~lessee’s ~~Stock,~~obligations ~~excluding~~to ~~Series~~make Blease ~~PIK~~payments. ~~Shares~~At the commencement date, ~~each~~which asis ~~defined~~the indate ~~Note~~on 11which -a ~~10%~~lessor ~~Series~~makes Ban ~~Redeemable~~underlying ~~Preferred~~asset ~~Stock,~~available for use by a ~~price~~lessee, ~~per~~a ~~share~~lease ~~equal~~ROU toasset ~~the~~and ~~Base~~corresponding ~~Return~~lease ~~Amount~~liability asis ~~defined~~recognized inbased ~~Note~~on 11the -present ~~10%~~value ~~Series~~of Bthe ~~Redeemable~~future ~~Preferred~~lease ~~Stock~~payments. The ~~Company~~initial ~~assessed~~measurement ~~the~~of ~~change~~lease ofpayments ~~control~~may ~~feature~~also ~~and~~be ~~determined~~adjusted ~~that~~for ~~the~~certain ~~redemption~~items, ofincluding ~~the~~options ~~outstanding~~that ~~shares~~are ofreasonably ~~Series~~certain Bto ~~Preferred~~be ~~Stock~~exercised, ~~excluding~~such ~~Series~~as Boptions ~~PIK~~to ~~Shares,~~purchase ~~for~~the aasset ~~price~~at ~~per~~the ~~share~~end ~~equal~~of to the ~~Base~~lease ~~Return~~term, ~~Amount~~or ~~was~~options ato ~~bifurcated~~extend ~~derivative~~or early terminate the lease. ~~See~~Excluded ~~Note~~from 11the -initial ~~10%~~measurement ~~Series~~are Bcertain ~~Redeemable~~variable ~~Preferred~~lease ~~Stock~~payments, which for ~~defined~~the ~~terms~~Company’s ~~and~~office ~~more~~rental ~~detail~~agreements, may be a significant component of the total lease costs.

The Company evaluates a contractual arrangement at its inception to determine if it is a lease or contains an identifiable lease component as defined by Topic 842. When evaluating a contract to determine appropriate classification and recognition under

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~The~~Topic ~~following~~842, ~~tables~~significant ~~summarize~~judgment ~~the~~may ~~location~~be ~~and~~necessary ~~fair~~to ~~value~~determine, ~~amounts~~among ofother ~~all~~criteria, ~~the~~if ~~Company’s~~an ~~derivative~~embedded ~~instruments~~leasing inarrangement exists, the ~~Condensed~~length ~~Consolidated~~of ~~Balance~~the ~~Sheets~~term, classification as ~~well~~either asan operating or financing lease, which options are reasonably likely to be exercised, fair value of the ~~gross~~underlying ~~recognized~~ROU ~~derivative~~asset or assets, ~~liabilities~~upfront costs, and ~~offset~~future ~~amounts~~lease payments that are included or excluded in the ~~Condensed~~initial ~~Consolidated~~measurement ~~Balance~~of ~~Sheets:~~the ROU asset.

	September 30, 2019
	Gross Fair Value			Gross Amounts Offset (1)			Net Recognized Fair Value
	(In thousands)
Assets
Commodity derivatives - current	$	40,918		$	(24,987	)	$	15,931
Commodity derivatives - non-current	84,149			(38,122		)	46,027
Interest rate derivatives - current	86			(86		)	—
Total assets	$	125,153		$	(63,195	)	$	61,958
Liabilities
Commodity derivatives - current	$	(24,987	)	$	24,987		$	—
Commodity derivatives - non-current	(38,122		)	38,122			—
Interest rate derivatives - current	(203		)	86			(117		)
Interest rate derivatives - non-current	(1,227		)	—			(1,227		)
Series B Preferred Stock bifurcated derivative - non-current	(570		)	—			(570		)
Total liabilities	$	(65,109	)	$	63,195		$	(1,914	)

Currently, the Company has operating leases for office lease agreements, apartment lease agreement and certain wellhead equipment. For those operating leases included on the accompanying balance sheets, which only include leases with terms greater than 12 months at commencement, the present value of future lease payments was determined based upon the Company’s incremental borrowing rate. The table below summarizes our discount rate and remaining lease term as of March 31, 2020.

(1) The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets and liabilities.



	As of March 31, 2020
Weighted-average discount rate	4.5	%
Weighted-average remaining lease term (years)	1.94

	December 31, 2018
	Gross Fair Value			Gross Amounts Offset (1)			Net Recognized Fair Value
	(In thousands)
Assets
Commodity derivatives - current	$	46,972		$	(16,153	)	$	30,819
Commodity derivatives - non-current	88,008			(29,694		)	58,314
Total assets	$	134,980		$	(45,847	)	$	89,133
Liabilities
Commodity derivatives - current	$	(16,153	)	$	16,153		$	—
Commodity derivatives - non-current	(29,694		)	29,694			—
Series B Preferred Stock bifurcated derivative - non-current	(696		)	—			(696		)
Total liabilities	$	(46,543	)	$	45,847		$	(696	)

Subsequent to initial measurement, costs associated with the Company’s operating leases are either expensed or capitalized depending on how the underlying ROU asset is utilized and in accordance with U.S. GAAP requirements. Variable lease payments are recognized in the period in which they are incurred. Expenses related to short-term leases are recognized on a straight-line basis over the lease term. The following table presents the components of the Company’s lease expenses for the three months ended March 31, 2020.

(1) The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets and liabilities.



	Three Months Ended March 31, 2020
	(in thousands)
Lease costs
Operating lease cost	$	291
Variable lease cost (1)	179
Short-term lease cost (2)	688
Total Lease Cost	$	1,158


(1)	Variable lease payments include additional payments made that were not included in the initial measurement of the ROU asset and corresponding liability for lease agreements with terms longer than 12 months. Variable lease payments primarily relate to variable utility costs associated with the Company’s leased office space.


(2)	Costs associated with short-term lease agreements primarily relate to certain field equipment rentals.

Other information related to the Company’s leases for three months ended March 31, 2020, was as follows:



	Three Months Ended March 31, 2020
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (fixed payments)	$	332
Operating cash flows from operating leases (liability reduction)	$	305
Right-of-use assets obtained in exchange for new operating lease liabilities	$	2,163

Maturities of the Company’s operating lease liabilities included on the accompanying Condensed Consolidated Balance Sheet as of March 31, 2020 were as follows:



	As of March 31, 2020
	(in thousands)
2020	$	1,000
2021	1,051
2022	346
Total lease payments	$	2,397
Less: imputed interest	(100		)
Present value of lease liabilities	$	2,297

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

		2019			2020			2021			2022
Commodity derivative swaps
Oil:
	Notional volume (Bbls) (1)(2)	666,000			1,000,000			—			—
	Weighted average fixed price ($/Bbl)	$	53.59		$	67.69		$	—		$	—
Natural gas:
	Notional volume (MMBtu)	662,389			1,970,368			1,615,792			1,276,142
	Weighted average fixed price ($/MMbtu)	$	2.87		$	2.75		$	2.79		$	2.85
Ethane:
	Notional volume (Gallons)	3,552,696			—			—			—
	Weighted average fixed price ($/Gallons)	$	0.28		$	—		$	—		$	—
Propane:
	Notional volume (Gallons)	2,368,422			—			—			—
	Weighted average fixed price ($/Gallons)	$	0.79		$	—		$	—		$	—
Pentanes:
	Notional volume (Gallons)	789,516			—			—			—
	Weighted average fixed price ($/Gallons)	$	1.47		$	—		$	—		$	—
Commodity derivative two-way collars
Oil:
	Notional volume (Bbls)	105,000			—			—			—
	Weighted average ceiling price ($/Bbl)	$	60.03		$	—		$	—		$	—
	Weighted average floor price ($/Bbl)	$	53.14		$	—		$	—		$	—
Commodity derivative three-way collars
Oil:
	Notional volume (Bbls)	595,364			3,294,000			4,200,000			2,000,000
	Weighted average ceiling price ($/Bbl)	$	66.19		$	70.29		$	60.40		$	61.45
	Weighted average floor price ($/Bbl)	$	60.56		$	57.50		$	54.49		$	55.00
	Weighted average sold put option price ($/Bbl)	$	45.52		$	47.50		$	45.51		$	45.00
Crude oil basis swaps
Midland / Cushing:
	Notional volume (Bbls)	1,366,364			5,254,000			4,200,000			2,100,000
	Weighted average fixed price ($/Bbl)	$	(4.76	)	$	(0.83	)	$	0.49		$	0.54
Argus WTI roll:
	Notional volume (Bbls)	700,000			—			—			—
	Weighted average fixed price ($/Bbl)	$	0.56		$	—		$	—		$	—
Natural gas basis swaps
EP Permian:
	Notional volume (MMBtu)	690,805			2,096,160			—			—
	Weighted average fixed price ($/MMBtu)	$	(1.10	)	$	(1.03	)	$	—		$	—
Interest Rate Swaps:
	Notional principal	$	150,000,000		$	150,000,000		$	150,000,000		$	—
	Average fixed rate	1.721		%	1.721		%	1.721		%	—

As of December 31, 2019, future total obligations on our noncancelable lease obligations were $4.5 million in the aggregate, which consisted of the following: $2.5 million in 2020, $1.5 million in 2021 and $0.5 million in 2022.

Amounts recorded in the accompanying Condensed Consolidated Balance Sheet for operating leases as of March 31, 2020, were as follows:



		As of March 31, 2020
	Classification on our Balance Sheets	(in thousands)
Operating lease ROU assets	Other assets, net	$	1,898

Current operating lease liability	Accrued liabilities and other	$	1,233
Non-current operating lease liability	Other liabilities	$	1,064

Note 6 – Loss Per Share

The following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings (loss) per share for the indicated periods:



	Three Months
	Ended March 31,
	2020			2019
	(In thousands, except per share data)
Net loss (numerator):
Net loss attributable to common stockholders of Rosehill Resources Inc. - basic	$	(148,349	)	$	(37,977	)
Add: Net loss attributable to the noncontrolling interest, net of taxes	(90,036		)	—
Net loss attributable to common stockholders of Rosehill Resources Inc. - diluted	$	(238,385	)	$	(37,977	)

Weighted average shares (denominator):
Weighted average shares – basic	28,566			13,830
Add: Dilutive effects of Class B Common Stock	15,708			—
Weighted average shares – diluted	44,274			13,830

Basic loss per share	$	(5.19	)	$	(2.75	)
Diluted loss per share	$	(5.38	)	$	(2.75	)

For the three months ended March 31, 2020, the Company excluded 25.6 million shares of Class A Common Stock issuable upon exercise of the Company’s warrants, 9.2 million shares of Class A Common Stock issuable upon conversion of the Company’s Series A Preferred Stock and 1.8 million shares of Class A Common Stock issuable upon vesting of awards under the Company’s Long-Term Incentive Plan (as amended and restated on May 22, 2018, the “LTIP”) from the computation of diluted earnings per share because the effect of such instruments was anti-dilutive.

For the three months ended March 31, 2019, the Company excluded 29.8 million shares of Class A Common Stock issuable upon exchange of the Company’s Class B Common Stock, 25.6 million shares of Class A Common Stock issuable upon exercise of the Company’s warrants, 8.7 million shares of Class A Common Stock issuable upon conversion of the Company’s Series A Preferred Stock and 1.0 million shares of Class A Common Stock issuable upon vesting under the Company’s LTIP from the computation of diluted earnings per share because the effect of such instruments was anti-dilutive.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~(1)~~Note ~~During~~7 ~~the~~– ~~second~~Accounts quarter of 2019, the Company entered into commodity derivative swaps where it bought 2,160,000 barrels of crude oil at a weighted average fixed price of $50.48 per barrel to offset commodity derivative swaps for the year ended December 31, 2021, it previously sold of 2,160,000 barrels of crude oil at a weighted average fixed price of $61.21 per barrel.Receivable

~~(2)~~Accounts ~~During~~receivable ~~the~~is ~~second~~comprised ~~quarter~~ of ~~2019,~~ the Company entered into commodity derivative swaps where it bought 1,100,000 barrels of crude oil at a weighted average fixed price of $50.55 per barrel to offset commodity derivative swaps for the year ended December 31, 2022, it previously sold of 1,100,000 barrels of crude oil at a weighted average fixed price of $58.42 per barrel.following:

For the three and nine months ended September 30, 2019 and 2018, the effect of the derivative activity on the Company’s Condensed Consolidated Statements of Operations was as follows:



	March 31, 2020		December 31, 2019
	(In thousands)
Revenue receivable	$	15,604	$	34,518
Realized derivative receivable	5,586		273
Joint interest billings	84		95
Other	59		24
Accounts receivable	$	21,333	$	34,910

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2019			2018			2019			2018
	(In thousands)
Realized loss on derivatives
Commodity derivative options	$	1,809		$	—		$	3,144		$	19
Commodity derivative swaps	(4,293		)	(4,999		)	(11,997		)	(17,212		)
Interest rate swaps	132			—			132			—
Total realized loss on derivatives	$	(2,352	)	$	(4,999	)	$	(8,721	)	$	(17,193	)
Unrealized gain (loss) on derivatives
Commodity derivative options	$	20,643		$	(45,349	)	$	(1,706	)	$	(59,514	)
Commodity derivative swaps	21,209			(16,966		)	(26,267		)	(31,846		)
Interest rate swaps	(1,344		)	—			(1,344		)	—
Series B Preferred Stock bifurcated derivative	103			(104		)	126			53
Total unrealized gain (loss) on derivatives	$	40,611		$	(62,419	)	$	(29,191	)	$	(91,307	)

Note 8 – Derivative Instruments

~~The~~Commodity ~~gains~~derivatives. ~~and~~The ~~losses~~Company ~~resulting~~enters ~~from~~into ~~the~~various ~~cash~~derivative ~~settlement~~instruments ~~and~~primarily ~~mark-~~to~~-market~~ mitigate a portion of the exposure to potentially adverse market changes in oil and natural gas commodity ~~derivatives~~prices and the associated impact on cash flows. All contracts are ~~included~~entered ~~within~~into ~~“Gain~~for ~~(loss)~~other-than-trading onpurposes. Oil and natural gas commodity derivative instruments, ~~net”~~are inrecorded on the ~~Condensed~~condensed ~~Consolidated~~consolidated ~~Statements~~balance ofsheets ~~Operations.~~at ~~The~~fair ~~gains~~value ~~and~~as ~~losses~~either ~~resulting~~an ~~from~~asset ~~mark-to-market~~or ofa ~~the~~liability ~~Series~~with Bchanges ~~Preferred~~in ~~Stock~~fair ~~bifurcated~~value recognized in earnings. While commodity derivative instruments are ~~included~~utilized ~~within~~to ~~“Other~~manage ~~income~~the ~~(expense),~~price ~~net”~~risk inattributable to expected oil and natural gas production, the ~~Condensed~~Company’s ~~Consolidated~~commodity ~~Statements~~derivative ofinstruments ~~Operations.~~are ~~The~~not ~~gains~~designated ~~and~~as ~~losses~~accounting ~~resulting~~hedges ~~from~~under the ~~cash~~accounting ~~settlement~~guidance. ~~and~~The ~~mark-to-market~~related cash flow impact of the ~~interest~~commodity ~~rate~~derivative ~~swaps~~activities is reflected as cash flows from operating activities unless they are ~~included~~determined ~~within~~to ~~“Interest~~have ~~expense,~~a ~~net”~~significant financing element at inception, in ~~the~~which ~~Condensed~~case ~~Consolidated~~they ~~Statements~~are ofclassified ~~Operations~~within financing activities.

~~Note~~Interest 6rate –swaps ~~Fair~~- ~~Value~~The ~~Measurements~~Company utilizes interest rate swaps to reduce its exposure to adverse fluctuations in London Interbank Offered (“LIBO”) rates on a portion of its revolving credit facility outstanding borrowings. The realized and unrealized gains and losses on the interest rate swaps are recognized in “Interest expense”, net. Entering into interest rate swaps allows the Company to mitigate, but not eliminate, the negative effects of increases in the LIBO rate, but reduces the Company’s ability to benefit from any decreases in the LIBO rate.

~~Fair~~Series ~~value~~B isPreferred Stock bifurcated derivative. In the ~~price~~event ~~that~~of ~~would~~a bechange ~~received~~of tocontrol, ~~sell~~the anCompany ~~asset~~shall orredeem ~~paid~~in tocash ~~transfer~~all of the outstanding shares of Series B Preferred Stock out of funds legally available therefor, excluding Series B PIK Shares, each as defined in Note 14 - 10% Series B Redeemable Preferred Stock, for a ~~liability~~price per share equal to the Base Return Amount as defined in anNote ~~orderly~~14 ~~transaction~~- ~~between~~10% ~~market~~Series ~~participants~~B atRedeemable Preferred Stock. The Company assessed the ~~measurement~~change ~~date~~of ~~(exit~~control feature and determined that the redemption of the outstanding shares of Series B Preferred Stock, excluding Series B PIK Shares, for a price) per share equal to the Base Return Amount was a bifurcated derivative. ~~Fair~~See ~~value~~Note ~~measurements~~14 ~~are~~- ~~classified~~10% Series B Redeemable Preferred Stock for defined terms and ~~disclosed~~more ~~within~~detail. Because the ~~following~~Company ~~fair~~recorded the Series B Preferred Stock at its current redemption value ~~hierarchy:~~as of March 31, 2020, there was no value attributed to the bifurcated embedded derivative.

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are those in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that are valued using observable market data.

Level 3 – Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources. Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment.

Observable data is considered to be market data if it is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by multiple, independent sources that are actively involved in the relevant market. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on lowest level of input that is significant to the fair value measurement. The assessment

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

ofThe ~~the~~following ~~significance~~tables ofsummarize athe ~~particular~~location ~~input~~and ~~to the~~ fair value ~~measurement~~amounts inof ~~its~~all ~~entirety~~the ~~requires~~Company’s ~~judgment~~derivative ~~and~~instruments ~~considers~~in ~~factors~~the ~~specific~~Condensed toConsolidated ~~the~~Balance ~~investment. However~~Sheets, ~~the~~as ~~determination~~well ofas ~~what constitutes “observable” requires significant judgment. The categorization of an investment within~~ the ~~hierarchy~~gross isrecognized ~~based~~derivative ~~upon~~assets, ~~the~~liabilities ~~pricing transparency of the investment~~ and ~~does~~offset ~~not~~amounts ~~necessarily~~in ~~correspond to~~ the ~~perceived~~Condensed ~~risk~~Consolidated ofBalance ~~that investment.~~Sheets:

Financial Instruments



	March 31, 2020
	Gross Fair Value			Gross Amounts Offset (1)			Net Recognized Fair Value
	(In thousands)
Assets
Commodity derivatives - current	$	165,409		$	(85,502	)	$	79,907
Commodity derivatives - non-current	154,738			(93,954		)	60,784
Total assets	$	320,147		$	(179,456	)	$	140,691

Liabilities
Commodity derivatives - current	$	(85,502	)	$	85,502		$	—
Commodity derivatives - non-current	(93,954		)	93,954			—
Interest rate derivatives - current	(2,122		)	—			(2,122		)
Interest rate derivatives - non-current	(3,041		)	—			(3,041		)
Total liabilities	$	(184,619	)	$	179,456		$	(5,163	)

(1) The ~~financial~~Company ~~instruments~~has ~~measured~~agreements atin ~~fair~~place ~~value~~with onall aof ~~recurring~~its ~~basis~~counterparties ~~consist~~that ofallow for the ~~following:~~financial right of offset for derivative assets and liabilities.

	September 30,			December 31,
	December 31, 2019
	2019			2018
	Gross Fair Value			Gross Amounts Offset (1)			Net Recognized Fair Value
	(In thousands)
Derivative assets
Assets
Derivative assets - current	$	15,931		$	30,819
Commodity derivatives - current	$	28,512		$	(18,172	)	$	10,340
Derivative assets - non-current	46,027			58,314
Commodity derivatives - non-current	61,241			(28,136		)	33,105
Total derivative assets	61,958			89,133
Interest rate derivatives - current	10			(10		)	—
Derivative liabilities
Total assets	$	89,763		$	(46,318	)	$	43,445
Derivative liabilities - current	(117		)	—
Liabilities
Derivative liabilities - non-current	(1,797		)	(696		)
Commodity derivatives - current	$	(22,014	)	$	18,172		$	(3,842	)
Total derivative liabilities	(1,914		)	(696		)
Commodity derivatives - non-current	(28,528		)	28,136			(392		)
Total derivative assets, net	$	60,044		$	88,437
Interest rate derivatives - current	(184		)	10			(174		)
Interest rate derivatives - non-current	(492		)	—			(492		)
Series B Preferred Stock bifurcated derivative - non-current	(416		)	—			(416		)
Total liabilities	$	(51,634	)	$	46,318		$	(5,316	)

~~Derivative~~(1) assets and liabilities primarily represent unsettled amounts related to commodity derivative positions, including swaps, options, and interest rate swaps. Derivative liabilities also include the Series B Preferred Stock bifurcated derivative for the various redemption amounts that the Company could incur if a change of control event occurs. The Company ~~utilizes~~has ~~Level~~agreements 3in ~~assumptions~~place towith ~~estimate~~all ~~the probability~~ of aits ~~change~~counterparties ~~of control occurring and when~~ that ~~would~~allow ~~occur~~for as the ~~timing~~financial ~~impacts~~right ~~the~~of ~~Base~~offset ~~Return~~for ~~Amount~~derivative asassets ~~defined~~and ~~in Note 11 - 10% Series B Redeemable Preferred Stock~~liabilities.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of March 31, 2020, the open derivative positions with respect to future production and interest rates were as follows:

The tables below, set forth by level within the fair value hierarchy, represent the net components of the assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018. These net balances are intended solely to provide information on sources of inputs to fair value and proportions of fair value involving objective versus subjective valuations and do not represent either the actual credit exposure or net economic exposure.



		2020			2021			2022
Commodity derivative swaps
Oil:
	Notional volume (Bbls) (1)(2)	760,000			—			—
	Weighted average fixed price ($/Bbl)	$	67.46		$	—		$	—
Natural gas:
	Notional volume (MMBtu)	1,595,368			1,615,792			1,276,142
	Weighted average fixed price ($/MMbtu)	$	2.73		$	2.79		$	2.85

Commodity derivative three-way collars
Oil:
	Notional volume (Bbls)	2,475,000			4,200,000			2,000,000
	Weighted average ceiling price ($/Bbl)	$	70.29		$	60.40		$	61.45
	Weighted average floor price ($/Bbl)	$	57.50		$	54.49		$	55.00
	Weighted average sold put option price ($/Bbl)	$	47.50		$	45.51		$	45.00

Crude oil basis swaps
Midland / Cushing:
	Notional volume (Bbls)	3,905,000			4,200,000			2,100,000
	Weighted average fixed price ($/Bbl)	$	(0.85	)	$	0.49		$	0.54

Argus WTI roll:
	Notional volume (Bbls)	370,650			—			—
	Weighted average fixed price ($/Bbl)	$	0.40		$	—		$	—

NYMEX WTI roll:
	Notional volume (Bbls)	2,102,752			—			—
	Weighted average fixed price ($/Bbl)	$	0.42		$	—		$	—

Natural gas basis swaps
EP Permian:
	Notional volume (MMBtu)	1,617,388			—			—
	Weighted average fixed price ($/MMBtu)	$	(1.03	)	$	—		$	—

Interest rate swaps:
	Notional principal (3)	$	150,000,000		$	150,000,000		$	—
	Average fixed rate	1.721		%	1.721		%	—

	September 30, 2019
	Level 1		Level 2			Level 3			Total
	(In thousands)
Derivative assets
Commodity derivative assets - current	$	—	$	15,931		$	—		$	15,931
Commodity derivative assets - non-current	—		46,027			—			46,027
Total derivative assets	$	—	$	61,958		$	—		$	61,958
Derivative liabilities
Interest rate swaps - current	—		(117		)	—			$	(117	)
Interest rate swaps - non-current	—		(1,227		)	—			(1,227		)
Series B Preferred Stock bifurcated derivative - non-current	—		—			(570		)	(570		)
Total derivative liabilities	$	—	$	(1,344	)	$	(570	)	$	(1,914	)


(1)	During the second quarter of 2019, the Company entered into commodity derivative swaps where it bought 2,160,000 barrels of crude oil at a weighted average fixed price of $50.48 per barrel to offset commodity derivative swaps for the year ended December 31, 2021, it previously sold off 2,160,000 barrels of crude oil at a weighted average fixed price of $61.21 per barrel.

	December 31, 2018
	Level 1		Level 2		Level 3			Total
	(In thousands)
Derivative assets
Commodity derivative assets - current	$	—	$	30,819	$	—		$	30,819
Commodity derivative assets - non-current	—		58,314		—			58,314
Total derivative assets	$	—	$	89,133	$	—		$	89,133
Derivative liabilities
Series B Preferred Stock bifurcated derivative - non-current	$	—	$	—	$	(696	)	$	(696	)
Total derivative liabilities	$	—	$	—	$	(696	)	$	(696	)


(2)	During the second quarter of 2019, the Company entered into commodity derivative swaps where it bought 1,100,000 barrels of crude oil at a weighted average fixed price of $50.55 per barrel to offset commodity derivative swaps for the year ended December 31, 2022, it previously sold off 1,100,000 barrels of crude oil at a weighted average fixed price of $58.42 per barrel.

~~The~~(3) ~~table~~Interest ~~below~~rate ~~sets~~swaps ~~forth~~expire ~~a summary of changes~~ in ~~the~~August ~~fair value of the Company’s level 3 liabilities for the nine months ended September 30, 2019~~2022.

Balance at December 31, 2018	$	696
(Gains) losses reported in earnings	(126		)
Balance at September 30, 2019	$	570

Financial Instruments

The carrying amounts of the Company’s cash, cash equivalents, accounts receivable and accounts payable approximate their fair values because of the short-term maturities and/or liquid nature of these assets and liabilities. The Company’s revolving credit facility carrying value is representative of its fair value because the interest rate changes monthly based on the current market of the stated rates in the agreement. As of September 30, 2019 and December 31, 2018, the fair value of the 10% Senior Secured Second Lien Notes (the “Second Lien Notes”) was approximately $95.2 million, which was determined using quoted prices for similar instruments, a Level 2 classification in the fair value hierarchy.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Non-Financial~~The ~~Assets~~effect ~~and~~of ~~Liabilities~~the derivative activity on the Company’s Condensed Consolidated Statements of Operations for the following periods was as follows:

Non-financial assets and liabilities that are initially measured at fair value are comprised of asset retirement obligations and the corresponding increase to the related long-lived asset and are not remeasured at fair value in subsequent periods. Such initial measurements are classified as Level 3 because certain significant unobservable inputs are utilized in their determination. The fair value of additions to asset retirement obligation liability and certain changes in the estimated fair value of the liability are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs to the valuation include (i) estimated plug and abandonment cost per well based on historical experience and information from third-parties; (ii) estimated remaining life per well; (iii) future inflation factors; and (iv) average credit-adjusted risk-free rate. These inputs require significant judgments and estimates by management at the time of the valuation and are the most sensitive and subject to change.



	Three Months
	Ended March 31,
	2020			2019
	(In thousands)
Realized gain (loss) on derivatives
Commodity derivative options	$	2,033		$	1,500
Commodity derivative swaps	6,474			(2,523		)
Interest rate swaps	(14		)	—
Total realized gain (loss) on derivatives	$	8,493		$	(1,023	)

Unrealized gain (loss) on derivatives
Commodity derivative options	$	52,842		$	(25,566	)
Commodity derivative swaps	48,771			(77,982		)
Interest rate swaps	(4,497		)	—
Series B Preferred Stock bifurcated derivative	416			81
Total unrealized gain (loss) on derivatives	$	97,532		$	(103,467	)

IfThe ~~the~~gains ~~carrying amount of oil~~ and ~~natural~~losses ~~gas~~resulting ~~properties~~from ~~exceeds~~ the ~~estimated undiscounted future~~ cash ~~flows,~~settlement ~~the~~and ~~carrying~~mark-to-market ~~amount~~ of the ~~oil~~commodity ~~and~~derivatives ~~natural~~are ~~gas~~included ~~properties~~within ~~will~~“Gain be(loss) ~~adjusted~~on tocommodity ~~their~~derivative ~~fair~~instruments, ~~value.~~net” ~~The~~in ~~fair~~the ~~value~~Condensed ofConsolidated ~~oil~~Statements ~~and~~of ~~natural~~Operations. ~~gas~~The ~~properties~~gains isand ~~determined~~losses ~~using~~resulting ~~valuation~~from ~~techniques~~mark-to-market ~~consistent~~of ~~with~~ the ~~income~~Series ~~and~~B ~~market~~Preferred ~~approach.~~Stock ~~The~~bifurcated ~~factors~~derivative ~~used to determine fair value~~ are ~~subject~~included towithin ~~management’s~~“Other ~~judgment~~income ~~and expertise and include~~(expense), ~~but~~net” ~~are~~in ~~not~~the ~~limited~~Condensed ~~to,~~Consolidated ~~(i)~~Statements ~~recent sales prices~~ of ~~comparable~~Operations. ~~properties;~~The ~~(ii)~~gains ~~the~~and ~~present~~losses ~~value~~resulting offrom ~~future~~the cash ~~flows,~~settlement ~~net~~and mark-to-market of ~~estimated~~the ~~operating~~interest ~~and~~rate ~~development~~swaps ~~costs~~are ~~using~~included ~~estimates~~within of“Interest ~~proved~~expense, ~~oil~~net” ~~and~~in ~~natural~~the ~~gas~~Condensed ~~reserves;~~Consolidated ~~(iii)~~Statements ~~future~~of ~~commodity~~Operations. ~~prices;~~The ~~(iv)~~Company’s ~~future~~Proposed ~~production~~Plan ~~estimates;~~of ~~(v)~~Reorganization ~~anticipated~~as ~~capital~~discussed ~~expenditures;~~in ~~and~~Note ~~(vi)~~20 ~~various~~- ~~discount~~Subsequent ~~rates~~Events, ~~commensurate~~anticipates ~~with~~that the ~~risk~~Company ~~and~~will ~~current~~unwind ~~market~~its ~~conditions~~derivative ~~associated~~instruments ~~with~~to ~~the~~pay ~~projected~~down ~~cash~~on ~~flows.~~its ~~These~~Amended ~~assumptions~~and ~~represent~~Restated ~~“Level~~Credit ~~3” inputs~~Agreement.

Note 79 – ~~Property~~Fair ~~and~~Value ~~equipment, net~~Measurements

~~Property~~The ~~and~~financial ~~equipment,~~instruments ~~net~~measured isat ~~comprised~~fair value on a recurring basis consist of the following:

	September 30,			December 31,
	March 31,			December 31,
	2019			2018
	2020			2019
	(In thousands)
Proved oil and natural gas properties	$	972,089		$	777,558
Derivative assets
Unproved oil and natural gas properties	114,992			121,929
Derivative assets - current	$	79,907		$	10,340
Land	1,575			1,575
Derivative assets - non-current	60,784			33,105
Less: accumulated DD&A and impairment	(334,371		)	(234,265		)
Total derivative assets	140,691			43,445
Total oil and natural gas properties (successful efforts), net	754,285			666,797
Derivative liabilities
Other property and equipment	6,693			6,059
Derivative liabilities - current	(2,122		)	(4,016		)
Less: accumulated DD&A	(4,072		)	(3,467		)
Derivative liabilities - non-current	(3,041		)	(1,300		)
Total other property and equipment	2,621			2,592
Total derivative liabilities	(5,163		)	(5,316		)
Total property and equipment, net	$	756,906		$	669,389
Total derivative assets, net	$	135,528		$	38,129

~~Depreciation,~~Derivative ~~depletion~~assets and ~~amortization~~liabilities ~~(“DD&A”)~~primarily ~~related~~represent tounsettled ~~oil~~amounts ~~and~~related ~~natural~~to ~~gas~~commodity ~~properties~~derivative ~~was $34.1 million and $47.1 million for the three months ended September 30~~positions, ~~2019~~including ~~and 2018~~swaps, ~~respectively~~options, and ~~$101.9~~interest ~~million~~rate ~~and $103~~swaps.8 ~~million~~Derivative ~~for~~liabilities ~~the~~also ~~nine~~include ~~months ended September 30, 2019 and 2018, respectively. Depreciation and amortization expense related to other property and equipment was $0.2 million and $0.2 million for~~ the ~~three~~Series ~~months~~B ~~ended~~Preferred ~~September 30,~~Stock ~~2019~~bifurcated ~~and~~derivative ~~2018, respectively, and $0.6 million and $0.5 million~~ for the ~~nine~~various ~~months~~redemption ~~ended~~amounts ~~September 30,~~that ~~2019 and 2018, respectively. There were no impairment charges to proved oil and natural gas properties for~~ the ~~three~~Company ~~and~~could ~~nine~~incur ~~months~~if ~~ended~~a ~~September~~change ~~30,~~of ~~2019.~~control ~~There~~event ~~was $0~~occurs.4 ~~million~~The ofCompany ~~impairment~~utilizes ~~charges~~Level to3 ~~unproved~~assumptions ~~oil and natural gas properties related~~ to ~~non-operated~~estimate ~~leases for~~ the ~~three~~probability ~~and~~of ~~nine~~a ~~months~~change ~~ended~~of ~~September~~control ~~30,~~occurring ~~2019. There were no impairment charges related to proved~~ and ~~unproved~~when ~~oil~~that ~~and~~would ~~natural~~occur ~~gas~~as ~~properties~~the ~~recorded~~timing ~~for~~impacts the ~~three~~Base ~~and~~Return ~~nine~~Amount ~~months~~as ~~ended~~defined ~~September 30, 2018. Capitalized costs included~~ in ~~proved~~Note ~~oil~~14 ~~and~~- ~~natural~~10% ~~gas~~Series ~~properties~~B ~~not~~Redeemable ~~subject~~Preferred ~~to DD&A totaled $11~~Stock.~~9 million at September 30, 2019 and $87.1 million at December 31, 2018.~~

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Acquisitions~~The tables below, set forth by level within the fair value hierarchy, represent the net components of the assets and ~~Divestitures~~liabilities that were measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.

Pecos County, Texas Farm-in Agreement. On February 27, 2019, Rosehill gained approximately 2,200 net acres contiguous to its core areas in the Southern Delaware Basin subject to its obligation to drill and complete up to seven wells through 2020 and carrying 25% of the drilling and completion costs for each of the seven wells and the costs of facilities and equipment. See Note 16 - Commitments and Contingencies for more details on the commitments associated with the agreement.



	March 31, 2020
	Level 1		Level 2			Level 3		Total
	(In thousands)
Derivative assets
Commodity derivative assets - current	$	—	$	79,907		$	—	$	79,907
Commodity derivative assets - non-current	—		60,784			—		60,784
Total derivative assets	$	—	$	140,691		$	—	$	140,691

Derivative liabilities
Interest rate swaps - current	—		(2,122		)	—		$	(2,122	)
Interest rate swaps - non-current	—		(3,041		)	—		(3,041		)
Total derivative liabilities	$	—	$	(5,163	)	$	—	$	(5,163	)

Divestiture of Lea County, New Mexico Assets. On March 26, 2019, Rosehill signed a Purchase and Sale Agreement to sell all of its rights, title and interests to all leases, wells, facilities, easements and contracts located in Lea County, New Mexico for cash consideration of $22.0 million, along with the assumption by the purchaser of all abandonment obligations associated with the properties. On April 4, 2019, Rosehill closed the transaction, and the Company recorded a gain of approximately $11.1 million upon closing of the divestiture.



	December 31, 2019
	Level 1		Level 2			Level 3			Total
	(In thousands)
Derivative assets
Commodity derivative assets - current	$	—	$	10,340		$	—		$	10,340
Commodity derivative assets - non-current	—		33,105			—			33,105
Total derivative assets	$	—	$	43,445		$	—		$	43,445

Derivative liabilities
Commodity derivative liabilities - current	—		(3,842		)	—			(3,842		)
Commodity derivative liabilities - non-current	—		(392		)	—			(392		)
Interest rate swaps - current	—		(174		)	—			$	(174	)
Interest rate swaps - non-current	—		(492		)	—			(492		)
Series B Preferred Stock bifurcated derivative - non-current	$	—	$	—		$	(416	)	$	(416	)
Total derivative liabilities	$	—	$	(4,900	)	$	(416	)	$	(5,316	)

~~Note~~The 8table –below ~~Asset~~sets ~~Retirement~~forth ~~Obligations~~a summary of changes in the fair value of the Company’s level 3 derivatives for the three months ended March 31, 2020.

The change in asset retirement obligations for the nine months ended September 30, 2019 is set forth below (in thousands):



Balance at December 31, 2019	$	416
(Gains) losses reported in earnings	(416		)
Balance at March 31, 2020	$	—

Asset retirement obligations, beginning of period	$	13,524
Additional liabilities incurred	384
Dispositions	(194		)
Accretion expense	586
Liabilities settled upon plugging and abandoning wells	(7		)
Revision of estimates	(115		)
Asset retirement obligations, end of period	$	14,178

Financial Instruments

~~Note~~The 9carrying –amounts ~~Accrued~~of ~~Liabilities~~the Company’s cash, cash equivalents, accounts receivable and ~~Other~~accounts payable approximate their fair values because of the short-term maturities and/or liquid nature of these assets and liabilities. The Company’s revolving credit facility carrying value is representative of its fair value because the interest rate changes monthly based on the current market of the stated rates in the agreement. As of March 31, 2020 and December 31, 2019, the fair value of the Second Lien Notes was approximately $80.8 million and $98.5 million, respectively, which was determined using quoted prices for similar instruments, a Level 2 classification in the fair value hierarchy.

Accrued liabilities and other is comprised of the following as of the respective dates:

	September 30,		December 31,
	2019		2018
	(In thousands)
Accrued payroll	$	3,190	$	3,764
Royalties payable	11,479		11,511
Accrued lease operating expense	6,720		3,992
Preferred Stock dividends payable	3,951		3,362
Accrued interest expense	221		925
Accrued ad valorem taxes	2,671		1,066
Other	1,576		2,715
Total accrued liabilities and other	$	29,808	$	27,335

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Note 10 – Long~~Non-~~term~~Financial ~~debt,~~Assets ~~net~~and Liabilities

Non-financial assets and liabilities that are initially measured at fair value are comprised of asset retirement obligations (“ARO”), impairments, and stock-based compensation.

ARO. The initial measurement of ARO at fair value is calculated using discounted cash flow techniques and is based on internal estimates of future retirement costs associated with property and equipment. Significant “Level 3” inputs used in the calculation of ARO include plugging costs and reserve lives.

Proved oil and gas properties. If the carrying amount of oil and natural gas properties exceeds the estimated undiscounted future cash flows, the carrying amount of the oil and natural gas properties will be adjusted to their fair value. The fair value of oil and natural gas properties is determined using valuation techniques consistent with the income and market approach. The factors used to determine fair value are subject to management’s judgment and expertise and include, but are not limited to, (i) recent sales prices of comparable properties; (ii) the present value of future cash flows, net of estimated operating and development costs using estimates of proved oil and natural gas reserves; (iii) future commodity prices; (iv) future production estimates; (v) anticipated capital expenditures; and (vi) various discount rates commensurate with the risk and current market conditions associated with the projected cash flows. These assumptions represent “Level 3” inputs.

As a result of the decrease in commodity price forecasts at the end of the first quarter of 2020, specifically decreases in oil and NGL prices, the Company recorded impairment expense of $333.8 million to its proved oil and gas properties. The Company used a discount rate of 10% in its calculation of the present value of expected future cash flows based on it estimated average cost of capital as of March 31, 2020. The Company also used relevant commodity strip prices as of April 1, 2020 in its calculation.

Stock-based compensation. The Company measures stock-based compensation based on the fair value of the award on the date of grant. The fair value of the Company’s restricted stock, stock-settled time-based restricted stock units and cash-settled time-based restricted stock units are based on the Company’s trading stock price on the date of grant, which is a Level 1 input. The fair value of the Company’s market based performance share units is calculated using a Monte Carlo valuation model which performs an iterative run of likely outcomes of the performance metric based on assumptions such as expected volatility, correlation of coefficients, risk-free rates and expected dividend yields. These assumptions represent “Level 3” inputs. See Note 17 - Stock-Based Compensation for the weighted average of significant unobservable inputs used in the fair value measurement.

Note 10 – Property and equipment, net

Property and equipment, net is comprised of the following:



	March 31,			December 31,
	2020			2019
	(In thousands)
Proved oil and natural gas properties	$	1,056,236		$	1,013,952
Unproved oil and natural gas properties	97,726			97,706
Land	1,575			1,575
Less: accumulated DD&A and impairment	(746,215		)	(368,636		)
Total oil and natural gas properties (successful efforts), net	409,322			744,597
Other property and equipment	7,415			7,348
Less: accumulated DD&A	(4,676		)	(4,364		)
Total other property and equipment	2,739			2,984
Total property and equipment, net	$	412,061		$	747,581

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company recorded depreciation, depletion and amortization (“DD&A”) to property and equipment as follows:



	Three Months Ended March 31,
	2020		2019
	(in thousands)
Proved oil and natural gas properties	$	30,933	$	35,567
Other property and equipment	336		207
Total DD&A related to property and equipment	$	31,269	$	35,774

As a result of the decrease in commodity price forecasts at the end of the first quarter of 2020, specifically decreases in oil and NGL prices, the Company recorded impairment expense of $333.8 million to its proved oil and gas properties for the three months ended March 31, 2020. The Company recorded an impairment of approximately $12.8 million within Exploration costs for the three months ended March 31, 2020 related to actual and anticipated lease expirations, as well as anticipated losses on acreage due to title defects. There were no impairment charges to proved and unproved oil and natural gas properties for the three months ended March 31, 2019. Capitalized costs included in proved oil and natural gas properties not subject to DD&A totaled $24.8 million at March 31, 2020 and $19.9 million at December 31, 2019.

Note 11 – Asset Retirement Obligations

The following table summarizes the changes in the Company’s asset retirement obligation for the three months ended March 31, 2020 (in thousands):



Asset retirement obligations, beginning of period	$	14,431
Additional liabilities incurred	31
Accretion expense	217
Revision of estimates	(8		)
Asset retirement obligations, end of period	$	14,671

Note 12 – Accrued Liabilities and Other

Accrued liabilities and other is comprised of the following:



	March 31,		December 31,
	2020		2019
	(In thousands)
Accrued payroll	$	565	$	4,035
Accrued general and administrative expense	5,077		987
Royalties payable	5,676		9,592
Accrued lease operating expense	6,601		6,676
Operating lease liabilities	1,233		—
Preferred Stock dividends payable	—		3,951
Accrued interest expense	377		174
Accrued ad valorem taxes	990		—
Other	1,304		1,098
Total accrued liabilities and other	$	21,823	$	26,513

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13 – Long-term debt, net

The Company’s long-term debt is comprised of the following:

	September 30,		December 31,
	March 31,		December 31,
	2019		2018
	2020		2019
	(In thousands)
Second Lien Notes	$	100,000	$	100,000
Revolving credit facility	~~270~~340,000		~~194~~260,000
Total debt	~~370~~440,000		~~294~~360,000
Debt issuance cost on Second Lien Notes, net	2,~~706~~346		32,~~211~~528
Discount on Second Lien Notes, net	21,~~098~~820		21,~~491~~961
Total debt issuance cost and discounts	4,~~804~~166		54,~~702~~489
Total long-term debt, net	$	~~365~~435,~~196~~834	$	~~288~~355,~~298~~511

Revolving Credit Facility

On March 28, 2018, Rosehill Operating entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) by and among Rosehill Operating, as borrower, JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, “JPMorgan”), and certain other financial institutions party thereto, as lenders. The borrowings under the Amended and Restated Credit Agreement bear interest at an adjusted base rate plus an applicable margin ranging from 1% to 2% or at an adjusted LIBO rate plus an applicable margin ranging from 2% to 3%. As of ~~September~~March 3031, ~~2019~~2020, the weighted average interest rate of outstanding borrowings under the Amended and Restated Credit Agreement was 54.02%. Pursuant to the Amended and Restated Credit Agreement, the lenders party thereto have agreed to provide the Company with a $500 million secured reserve-based revolving credit facility. The maturity date of the Amended and Restated Credit Agreement is August 31, 2022 and automatically extends to March 2023 upon the payment in full of the Second Lien Notes. The borrowing base is re-determined semi-annually, with the lenders and the Company each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations. As of ~~September~~March 3031, ~~2019~~2020, the borrowing base was $340 million and the Company had ~~$270.0~~fully ~~million~~drawn ~~outstanding under~~ the ~~Amended~~$340 ~~and Restated Credit Agreement~~million.

~~The~~Please ~~amounts~~read ~~outstanding~~Note ~~under~~3 ~~the~~- ~~Amended~~Liquidity ~~and~~for ~~Restated~~details ~~Credit Agreement are secured by first priority liens~~ on ~~substantially all of Rosehill Operating’s property and all of~~ the ~~stock~~following ofitems ~~Rosehill~~under ~~Operating’s material operating subsidiaries that are guarantors of~~ the Amended and Restated Credit Agreement.: If(i) anForbearance Agreement, (ii) event of default ~~occurs~~related ~~under~~to the ~~Amended~~delivery ~~and~~of ~~Restated~~audited ~~Credit~~financial ~~Agreement,~~statements ~~JPMorgan~~(without ~~Chase~~a ~~Bank,~~going ~~N.A.~~concern ~~will~~qualification), ~~have~~(iii) the ~~right~~letter tofrom ~~proceed~~Nasdaq ~~against~~regarding ~~any pledged capital stock and take control of substantially all of~~ the ~~assets of Rosehill Operating and Rosehill Operating~~Company’s ~~material~~stock ~~operating~~price ~~subsidiaries~~trading ~~that~~below ~~are guarantors. There are currently no guarantors under~~ the ~~Amended~~minimum ~~and~~bid ~~Restated~~price ~~Credit~~requirement ~~Agreement.~~for ~~The~~continued ~~Company~~listing ~~is subject to certain limited restrictions under the Amended~~ and ~~Restated Credit Agreement, including~~ (~~without limitation~~iv) arestrictions ~~negative~~on ~~pledge~~cash ~~with~~distributions ~~respect~~on to its ~~equity~~Series ~~interests~~A inPreferred ~~Rosehill~~Stock ~~Operating~~ and aSeries ~~contingent~~B ~~obligation~~Preferred ~~to guarantee the borrowings upon request by the lenders in the event that the Company incurs debt obligations~~Stock.

The Amended and Restated Credit Agreement ~~contains~~requires ~~various~~Rosehill ~~affirmative~~Operating ~~and~~to ~~negative~~deliver ~~covenants~~unaudited financial statements to the lenders within 45 days after the end of each fiscal quarter. ~~These~~The ~~covenants~~Company ~~may~~can ~~limit~~satisfy this requirement by delivery of unaudited financial statements of Rosehill ~~Operating’s~~Resources ~~ability~~as ~~to,~~filed ~~among~~with ~~other~~the ~~things:~~SEC ~~incur~~within 45 ~~additional~~days ~~indebtedness;~~after ~~make~~the ~~loans~~end of each fiscal quarter. The Company failed to ~~others;~~provide ~~make~~the ~~investments;~~lenders ~~enter~~with ~~into~~unaudited ~~mergers;~~financial ~~make~~statements orand ~~declare~~other ~~dividends~~required orcertificates ~~distributions;~~and ~~enter~~operating ~~into~~reports ~~commodity~~within ~~hedges~~45 ~~exceeding~~days after March 31, 2020, which constituted a ~~specified~~default ~~percentage~~under ofthe ~~Rosehill~~Amended ~~Operating’s~~and ~~expected~~Restated ~~production;~~Credit ~~enter~~Agreement. ~~into~~The ~~interest~~Amended ~~rate~~and ~~hedges~~Restated ~~exceeding~~Credit Agreement gives the Company a ~~specified~~30-day ~~percentage~~cure period before it becomes an event of ~~Rosehill~~default ~~Operating’s~~that ~~outstanding~~will ~~indebtedness;~~allow ~~incur~~the ~~liens;~~lenders ~~sell~~to ~~assets;~~require ~~and~~the ~~engage~~Company into ~~certain~~repay ~~other~~a ~~transactions~~portion ~~without~~or all amounts outstanding. However, the ~~prior~~Company ~~consent~~was ofunable ~~JPMorgan~~to ~~Chase~~satisfy ~~Bank,~~these requirements Nwithin the cure period.A. ~~and/or~~As such, this represented an event of default under the ~~lenders~~Amended and Restated Credit Agreement.

The amounts outstanding under the Amended and Restated Credit Agreement ~~also~~are ~~requires~~secured ~~Rosehill~~by ~~Operating~~first topriority ~~maintain~~liens ~~the~~on ~~following~~substantially ~~financial~~all ~~ratios:~~of ~~(1) a~~Rosehill ~~current~~Operating’s ~~ratio,~~property ~~which~~and isall of the ~~ratio~~stock of ~~consolidated~~Rosehill ~~current~~Operating’s ~~assets~~material ~~(including~~operating ~~unused~~subsidiaries ~~commitments~~that ~~under~~are guarantors of the Amended and Restated Credit Agreement,. ~~but~~Subject ~~excluding non-cash assets)~~ to ~~consolidated~~the ~~current~~Forbearance ~~liabilities (excluding non-cash obligations~~Agreement, ~~current~~if ~~maturities~~an event of default occurs under the Amended and Restated Credit Agreement, ~~and~~JPMorgan ~~the~~Chase ~~Note Purchase Agreement (as defined below))~~Bank, ofN.A. ~~not~~will ~~less~~have ~~than~~the ~~1.0~~right to ~~1.0;~~proceed ~~(2) (x)~~against aany ~~leverage~~pledged ~~ratio,~~capital ~~which~~stock isand ~~the~~take ~~ratio~~control of ~~the~~substantially ~~sum~~all of the ~~all~~assets of Rosehill Operating and Rosehill Operating’s ~~Total~~material ~~Debt~~operating tosubsidiaries ~~Annualized~~that ~~EBITDAX~~are ~~(as~~guarantors. ~~such~~There ~~terms~~ are ~~defined~~currently inno guarantors under the Amended and Restated Credit Agreement). ~~for~~An ~~the~~event ~~four~~of ~~fiscal~~default ~~quarters~~can ~~then~~be ~~ended,~~triggered ofin ~~not~~a ~~greater~~number ~~than~~of ~~4.0~~circumstances, including failure to ~~1.0~~maintain ~~and~~listing ~~(y) commencing~~of the Company’s Class A Common Stock on ~~and~~a ~~after~~national ~~repayment~~securities inexchange ~~full~~or offailure ~~the~~to ~~Second~~timely ~~Lien~~repay ~~Notes~~deficiencies ~~(other~~in ~~than~~the ~~surviving~~Company’s borrowings.

20The Company is subject to certain restrictions under the Amended and Restated Credit Agreement, including (without limitation) a negative pledge with respect to its equity interests in Rosehill Operating and a contingent obligation to guarantee the borrowings upon request by the lenders in the event that the Company incurs debt obligations. The Amended and Restated Credit

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~contingent~~Agreement ~~indemnification~~contains ~~obligations)~~various affirmative and ~~the~~negative ~~repayment~~covenants. orThese ~~redemption~~covenants inmay ~~full~~limit ~~of the Series B Preferred Stock, a leverage ratio, which is the ratio of the sum of all of~~ Rosehill Operating’s ~~Net~~ability ~~Debt~~ to, ~~Annualized~~among ~~EBITDAX~~other ~~(as~~things: ~~such~~incur ~~terms~~additional ~~are~~indebtedness; ~~defined~~make inloans ~~the~~to ~~Amended~~others; ~~and~~make ~~Restated~~investments; ~~Credit~~enter ~~Agreement),~~into ofmergers; ~~not~~make ~~greater~~or ~~than~~declare ~~4.0~~dividends toor ~~1.0~~distributions; ~~and~~enter ~~(3)~~into ~~for~~commodity sohedges ~~long~~exceeding ~~as the Series B Preferred Stock remains outstanding,~~ a ~~coverage~~specified ~~ratio,~~percentage ~~which is the ratio~~ of ~~(i)~~Rosehill ~~EBITDAX~~Operating’s ~~(as~~expected ~~defined~~production; inenter ~~the~~into ~~Amended~~interest ~~and~~rate ~~Restated~~hedges ~~Credit~~exceeding ~~Agreement)~~a tospecified ~~(ii) the~~percentage ~~sum~~ of ~~(x) Interest~~Rosehill ~~Expense~~Operating’s ~~(as~~outstanding ~~defined~~indebtedness; inincur ~~the~~liens; ~~Amended~~sell ~~and~~assets; ~~Restated Credit Agreement) plus (y) the aggregate amount of Restricted Payments (as defined in the Amended~~ and ~~Restated~~engage ~~Credit Agreement) made~~ in ~~cash~~certain ~~pursuant~~other totransactions ~~Sections~~without ~~9.04(a)(iv) and (v) of~~ the ~~Amended~~prior ~~and~~consent ~~Restated~~of ~~Credit~~JPMorgan ~~Agreement~~Chase ~~during the preceding four fiscal quarters~~Bank, ~~of not less than 2~~N.~~5 to 1~~A.0. ~~The~~or ~~Company was in compliance with~~ the ~~financial covenants in the Amended and Restated Credit Agreement for the measurement period ended September 30, 2019~~lenders.

The Amended and Restated Credit Agreement also requires Rosehill Operating to maintain the following financial ratios: (1) a current ratio, which is the ratio of consolidated current assets (including unused commitments under the Amended and Restated Credit Agreement, but excluding non-cash assets) to consolidated current liabilities (excluding non-cash obligations, current maturities under the Amended and Restated Credit Agreement and the Note Purchase Agreement (as defined below)), of not less than 1.0 to 1.0; (2) (x) a leverage ratio, which is the ratio of the sum of all of Rosehill Operating’s Total Debt to Annualized EBITDAX (as such terms are defined in the Amended and Restated Credit Agreement) for the four fiscal quarters then ended, of not greater than 4.0 to 1.0 and (y) commencing on and after repayment in full of the Second Lien Notes (other than surviving contingent indemnification obligations) and the repayment or redemption in full of the Series B Preferred Stock, a leverage ratio, which is the ratio of the sum of all of Rosehill Operating’s Net Debt to Annualized EBITDAX (as such terms are defined in the Amended and Restated Credit Agreement), of not greater than 4.0 to 1.0 and (3) for so long as the Series B Preferred Stock remains outstanding, a coverage ratio, which is the ratio of (i) EBITDAX (as defined in the Amended and Restated Credit Agreement) to (ii) the sum of (x) Interest Expense (as defined in the Amended and Restated Credit Agreement) plus (y) the aggregate amount of Restricted Payments (as defined in the Amended and Restated Credit Agreement) made in cash pursuant to Sections 9.04(a)(iv) and (v) of the Amended and Restated Credit Agreement during the preceding four fiscal quarters, of not less than 2.5 to 1.0. The Company was in compliance with these financial ratios for the measurement period ended March 31, 2020. If the Company is not able to generate additional funds or if oil prices do not improve significantly, the Company will not be able to comply with its current ratio or leverage ratio under the Amended and Restated Credit Agreement in future periods.

Second Lien Notes

On December 8, 2017, Rosehill Operating issued and sold $100,000,000 in aggregate principal amount of 10.00% Senior Secured Second Lien Notes due January 31, 2023 to EIG Global Energy Partners, LLC (“EIG”) under and pursuant to the terms of that certain Note Purchase Agreement, dated as of December 8, 2017 (as amended by the Limited Consent and First Amendment to Note Purchase Agreement, dated as of March 28, 2018, the “Note Purchase Agreement”), among Rosehill Operating, the Company, the holders of the Second Lien Notes party thereto (the “Holders”) and U.S. Bank National Association, as agent and collateral agent on behalf of the Holders. The Second Lien Notes were issued and sold to the Holders in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended (such issuance and sale, the “Notes Purchase”).

Under the Note Purchase Agreement, Rosehill Operating may, at its option, redeem the Second Lien Notes in whole or in part, together with accrued and unpaid interest thereon, (i) at any time after December 8, 2019 but on or prior to December 8, 2020, at a redemption price equal to 103% of the principal ~~amount~~amounts of the Second Lien Notes being redeemed, (ii) at any time after December 8, 2020 but on or prior to December 8, 2021, at a redemption price equal to 101.5% of the principal amount of the Second Lien Notes being redeemed and (iii) at any time after December 8, 2021, at a redemption price equal to the principal amount of the Second Lien Notes being redeemed. On or prior to December 8, 2019, Rosehill Operating may, at its option, redeem the Second Lien Notes in whole or in part, together with accrued and unpaid interest thereon, at a redemption price equal to 103% of the principal amount of the Second Lien Notes being redeemed plus an additional make-whole premium set forth in the Note Purchase Agreement.

The Second Lien Notes may become subject to redemption under certain other circumstances, including upon the incurrence of non-permitted debt or, subject to various exceptions, reinvestments rights and prepayment or redemption rights with respect to other debt or equity of Rosehill Operating, upon an asset sale, hedge termination or casualty event. Rosehill Operating will be further required to make an offer to redeem the Second Lien Notes upon a Change in Control (as defined in the Note Purchase Agreement) at a redemption price equal to 101% of the principal amount being redeemed. Other than in connection with a Change in Control or casualty event, the redemption prices ~~and make-whole premium~~ described in the foregoing paragraph shall also apply, at such times and to the extent set forth therein, to any mandatory redemption of the Second Lien Notes or any acceleration of the Second Lien Notes prior to the stated maturity thereof upon the occurrence of an Event of Default (as defined in the Note Purchase Agreement).

The Note Purchase Agreement requires Rosehill Operating to maintain a leverage ratio, which is the ratio of the sum of all of Rosehill Operating’s Total Debt to Annualized EBITDAX (as such terms are defined in the Note Purchase Agreement) for the four fiscal quarters then ended, of not greater than 4.00 to 1.00. The Company was in compliance with the ~~financial~~leverage ~~covenants~~ratio infor the ~~Note~~measurement ~~Purchase~~period ~~Agreement~~ended ~~for~~March 31, 2020. If the ~~measurement~~Company ~~period~~is ~~ended~~not ~~September 30~~able to generate additional funds or if oil prices do not improve significantly, ~~2019~~the Company will not be able to comply with its leverage ratio under the Note Purchase Agreement in future periods.

The Note Purchase Agreement contains various affirmative and negative covenants, events of default and other terms and provisions that are based largely on the Amended and Restated Credit Agreement, with a number of important modifications reflecting the second lien nature of the Second Lien Notes and certain other terms that were agreed to with the Holders. The negative covenants may limit Rosehill Operating’s ability to, among other things, incur additional indebtedness (including under senior unsecured notes), make investments, make or declare dividends or distributions, redeem its preferred equity, acquire or dispose of oil and gas properties and other assets or engage in certain other transactions without the prior consent of the Holders, subject to various exceptions, qualifications and value thresholds. Rosehill Operating is also required to meet minimum commodity hedging levels based on its expected production on an ongoing basis.23

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~the~~Please read Note ~~Purchase~~3 ~~Agreement are secured on a second~~-~~lien~~ ~~basis~~Liquidity byfor ~~the~~details ~~same~~on ~~collateral that secures its first-lien obligations. In connection with~~ the ~~Notes~~event ~~Purchase,~~of ~~Rosehill~~default ~~Operating~~related ~~has granted second-lien security interests over additional collateral~~ to ~~meet~~ the ~~minimum~~delivery ~~mortgage~~of ~~requirements~~audited ~~under~~financial ~~the~~statements ~~Note~~(without ~~Purchase~~a ~~Agreement~~going concern qualification).

The Note Purchase Agreement requires the Company to deliver unaudited financial statements to the lenders within 45 days after the end of each fiscal quarter. The Company can satisfy this requirement by delivery of unaudited financial statements of Rosehill Resources as filed with the SEC within 45 days after the end of each fiscal quarter. The Company failed to provide the lenders with unaudited financial statements and other required certificates and operating reports within 45 days after March 31, 2020, which constituted a default under the Note Purchase Agreement. The Note Purchase Agreement gives the Company a 30-day cure period before it becomes an event of default that will allow the noteholders to require the Company to redeem a portion or all of the notes outstanding. However, the Company was unable to satisfy these requirements within the cure period. As such, this represented an event of default under the Note Purchase Agreement

The Company is subject to certain restrictions under the Note Purchase Agreement, including (without limitation) a negative pledge with respect to its equity interests in Rosehill Operating and a contingent obligation to guarantee the Second Lien Notes upon request by the Holders in the event that the Company incurs debt obligations. The obligations of Rosehill Operating under the Note Purchase Agreement are secured on a second-lien basis by the same collateral that secures its first-lien obligations. In connection with the Notes Purchase, Rosehill Operating has granted second-lien security interests over additional collateral to meet the minimum mortgage requirements under the Note Purchase Agreement.

Deferred Financing Costs and Debt Discount

The Company capitalizes discounts and certain direct costs associated with the issuance of debt and amortizes such costs over the lives of the respective debt instruments. The Company amortized debt issuance costs and discounts of $0.5 million and $0.4 million for the three months ended ~~September~~March 3031, ~~2019~~2020 and ~~2018, respectively, and $1.4 million and $1.7 million for the nine months ended September 30,~~ 2019 ~~and 2018~~, respectively. The deferred financing costs related to the Amended and Restated Credit Agreement are classified in prepaid assets and the deferred financing costs and discounts related to the Second Lien Notes are netted against the long-term debt. The following table summarizes the Company’s deferred financing costs and debt discounts:

	September 30,			December 31,
	2019			2018
	(In thousands)
Revolving credit facility
Debt issuance costs	$	3,167		$	2,368
Accumulated amortization of debt issuance costs	(897		)	(361		)
Net deferred costs - Revolving credit facility	$	2,270		$	2,007
Second Lien Notes
Debt discount	$	3,000		$	3,000
Accumulated amortization of debt discount	(902		)	(509		)
Debt issuance costs	3,868			3,868
Accumulated amortization of debt issuance costs	(1,162		)	(657		)
Net deferred costs - Second Lien Notes	4,804			5,702
Total deferred financing costs and debt discount, net	$	7,074		$	7,709

~~Note~~ROSEHILL 11RESOURCES ~~– 10% Series B Redeemable Preferred Stock~~INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the Company’s deferred financing costs and debt discounts:



	March 31,			December 31,
	2020			2019
	(In thousands)
Revolving credit facility
Debt issuance costs	$	3,167		$	3,167
Accumulated amortization of debt issuance costs	(1,286		)	(1,092		)
Net deferred costs - Revolving credit facility	$	1,881		$	2,075

Second Lien Notes
Debt discount	$	3,000		$	3,000
Accumulated amortization of debt discount	(1,180		)	(1,039		)
Debt issuance costs	3,868			3,868
Accumulated amortization of debt issuance costs	(1,522		)	(1,340		)
Net deferred costs - Second Lien Notes	4,166			4,489
Total deferred financing costs and debt discount, net	$	6,047		$	6,564

Note 14 – 10% Series B Redeemable Preferred Stock

On December 8, 2017, in connection with the acquisition of mineral rights, royalty interests and other associated assets in the Southern Delaware Basin (the “White Wolf Acquisition”), the Company entered into a Series B Redeemable Preferred Stock Purchase Agreement (the “Series B Preferred Stock Agreement”) to issue 150,000 shares of the Company’s 10.00% Series B Redeemable Preferred Stock, par value of $0.0001 per share (the “Series B Preferred Stock”), for an aggregate purchase price of $150.0 million, less transaction costs, advisory and up-front fees of approximately $10.0 million to certain private funds and accounts managed by EIG.

Holders of the Series B Preferred Stock are entitled to receive, when, as and if declared by the Board ~~of Directors of the Company (the “Board”~~ or a designated committee of the Board), cumulative dividends in cash, at a rate of 10.00% per annum on the $1,000 liquidation preference per share of Series B Preferred Stock, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on January 15, 2018. ~~With~~The ~~respect~~Company’s Amended and Restated Credit Agreement restricts its cash distributions to ~~dividends~~an ~~declared~~amount ~~for~~not to exceed $25.0 million on its Series B Preferred Stock in any ~~quarter~~fiscal ~~ending~~year. Such distributions on orits ~~prior~~Series toB ~~January~~Preferred ~~15,~~Stock ~~2019~~can only be made so long as both before and immediately following such distributions, (i) the Company ~~had~~is ~~the~~not ~~option,~~in any default under its Amended and ~~elected~~Restated Credit Agreement, to(ii) ~~pay~~its asunused ~~dividends~~borrowing ~~additional~~capacity ~~shares~~is ofequal ~~Series~~to Bor ~~Preferred~~greater ~~Stock~~than in20% ~~kind~~of (the ~~“Series~~committed Bborrowing ~~PIK~~capacity ~~Shares”~~and (iii) inits anratio ~~amount~~of upTotal Debt to ~~40%~~EBITDAX is not greater than 3.5 to 1.0. As of ~~that~~March ~~which~~31, ~~would~~2020, ~~have~~the ~~been~~Company ~~payable~~was fully drawn and had existing defaults under its Amended and Restated Credit Agreement and did not declare and pay cash dividends to the Series B Preferred Stock holders on April 15, 2020. Failure to pay dividends ~~been~~on ~~fully~~the ~~paid~~Series B Preferred Stock results in ~~cash.~~the following:

~~Holders~~• ofUpon the ~~Series~~occurrence Bof ~~Preferred~~not ~~Stock~~paying ~~have~~a ~~no voting rights~~dividend, ~~but~~the ~~have~~dividend ~~certain~~rate ~~consent~~will ~~rights~~increase ~~with respect~~ to ~~the~~12% ~~taking~~per ofannum ~~certain~~and ~~corporate~~will ~~actions~~remain byat ~~the~~12% ~~Company.~~per ~~Upon~~annum ~~the~~until ~~Company’s~~all ~~voluntary~~applicable orquarterly ~~involuntary~~dividends ~~liquidation,~~have ~~winding-up~~been orfully ~~dissolution,~~paid ~~each~~and ~~holder~~are ofcurrent, ~~Series~~at Bwhich ~~Preferred~~time ~~Stock~~a ~~will~~dividend berate ~~entitled~~of to10% ~~receive~~per ~~the~~annum ~~Base~~will ~~Return~~once ~~Amount~~again ~~(as defined in the Series B Preferred Stock Agreement) plus accrued and unpaid dividends~~apply.

22• Upon the occurrence of not paying a dividend with respect to three out of any four consecutive quarters or failing to pay a dividend six times (whether or not consecutive) at anytime the Series B Preferred Stock is outstanding will entitle the holders of the Series B Preferred Stock to a seat on the Board of Directors and the right to approve (a) all indebtedness by the Company if such indebtedness would cause the Company’s Leverage Ratio to exceed 3.25 to 1.00, (b) any budget or budget amendments and (c) any capital expenditures in excess of $0.5 million.


•	Upon the occurrence of not paying a dividend for a period of nine months consecutive months, the holders of the Series B Preferred Stock may elect to cause the Company to redeem all or a portion of the Series B Preferred Stock. The Company does not expect to be able to pay dividends on the Series B Preferred Stock within the nine consecutive months following April 15, 2020.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~The~~Holders ~~shares~~ of the Series B Preferred Stock ~~are~~have ~~redeemable~~no atvoting ~~the election of the holders on or after December 8~~rights, ~~2023~~but ~~and~~have ~~upon~~ certain ~~conditions~~consent ~~and~~rights atwith ~~any~~respect ~~time~~to at the ~~Company’s~~taking ~~option. As the holders~~ of ~~Series~~certain Bcorporate ~~Preferred~~actions ~~Stock~~by ~~have an option to redeem~~ the ~~Series~~Company. BUpon ~~Preferred Stock at a future date,~~ the ~~Series~~Company’s Bvoluntary ~~Preferred~~or ~~Stock~~involuntary ~~is included in temporary~~liquidation, winding-up or ~~“mezzanine” equity~~dissolution, ~~between~~ ~~total~~each ~~liabilities~~holder ~~and~~of ~~stockholders’ equity on the Condensed Consolidated Balance Sheets. The~~ Series B Preferred Stock, ~~while not currently redeemable at the option of the holders, are considered probable of becoming redeemable and therefore~~ will be ~~subsequently~~entitled ~~remeasured each reporting period by accreting the initial value~~ to ~~the~~receive ~~estimated redemption date of December 8, 2023 when~~ the ~~Series~~Base BReturn ~~Preferred~~Amount ~~Stock~~(as isdefined ~~redeemable~~ in ~~whole or in part at~~ the ~~election of the holders of~~ Series B Preferred Stock. ~~The~~Agreement) ~~accretion~~plus isaccrued ~~considered as a deemed dividend, which increases the carrying value of the Series B Preferred Stock on the Condensed Consolidated Balance Sheets~~ and isunpaid ~~included within preferred~~ dividends ~~on the Condensed Consolidated Statements of Operations~~.

In addition to the 10.00% per annum cumulative dividend holders of the Series B Preferred Stock are entitled to receive, upon redemption of the Series B Preferred Stock, ~~such~~a ~~holders are~~ guaranteed a base return on the initial 150,000 shares purchased in an amount equal to (1x) $1,~~250~~500 per share of Series B Preferred Stock ~~times~~and ~~the~~(y) ~~number~~an ofamount ~~outstanding~~necessary ~~shares~~to ofachieve ~~Series~~a B16% ~~Preferred~~internal ~~Stock~~rate ~~had~~of return (“IRR”) (the ~~Company~~“Base ~~redeemed~~Return ~~the~~Amount”) ~~shares~~with ~~prior~~respect to ~~the~~such ~~first~~shares ~~anniversary~~ of ~~the~~Series ~~date~~B ofPreferred ~~issuance~~Stock, ofminus ~~such~~all ~~share~~dividends paid on shares of Series B Preferred Stock;, ~~(2)~~including $1dividends paid-in-kind,~~350~~ ~~per~~and ~~share~~minus ofup-front ~~Series~~fees Bincurred ~~Preferred~~at ~~Stock~~issuance ~~times~~of the ~~number~~Series ofB ~~outstanding~~Preferred Stock. The shares of Series B Preferred Stock ifare redeemable at the ~~Company~~election ~~redeems~~of the ~~shares~~holders on or after ~~the~~December ~~first~~8, ~~anniversary~~2023 and ~~prior~~upon tocertain ~~the~~conditions ~~second~~and ~~anniversary~~at ofany ~~the~~time ~~date~~at ofthe ~~issuance~~Company’s ofoption. ~~such~~As ~~share~~the holders of Series B Preferred Stock; ~~and~~have ~~(3)~~an onoption orto ~~after~~redeem the ~~second~~Series ~~anniversary~~B ofPreferred ~~the~~Stock ~~date~~at ofa ~~issuance~~future ofdate, ~~such~~the ~~share of~~ Series B Preferred Stock, ~~the~~is ~~greater~~included ofin temporary, ~~(x)~~or $1“mezzanine” equity,~~500~~ between ~~per~~total ~~share~~liabilities ofand stockholders’ equity on the Condensed Consolidated Balance Sheets. The Series B Preferred Stock, ~~and~~while ~~(y)~~not ancurrently ~~amount~~redeemable ~~necessary~~at tothe ~~achieve~~option aof ~~16%~~the ~~internal~~holders, ~~rate~~is ofremeasured ~~return~~each ~~(“IRR”)~~reporting ~~(the~~period ~~“Base~~by ~~Return~~accreting ~~Amount”)~~the ~~with~~initial ~~respect~~value to ~~such~~the ~~shares~~estimated ofredemption ~~Series~~value Bthat ~~Preferred~~will ~~Stock,~~achieve ~~minus~~a ~~all~~16% ~~dividends~~IRR ~~paid~~ on ~~shares~~December of8, 2023 when the Series B Preferred Stock, ~~including~~is ~~dividends~~redeemable ~~paid-~~in~~-kind,~~ ~~and~~whole ~~minus~~or ~~up-front~~in ~~fees~~part ~~incurred~~ at ~~issuance~~the election of the ~~Series~~holders Bof ~~Preferred Stock. Since the~~ Series B Preferred Stock. ~~can~~The beaccretion ~~redeemed~~is byconsidered ~~the~~a ~~holders~~deemed ~~on or after December 8~~dividend, ~~2023~~which ~~and~~increases ~~management~~the ~~has~~carrying novalue ~~immediate~~of ~~plans~~the toSeries ~~redeem~~B ~~before~~Preferred ~~that~~Stock on ~~date,~~ the ~~Company~~Condensed ~~has~~Consolidated ~~accrued~~Balance aSheets ~~guaranteed~~and ~~return~~is ~~amount~~included inwithin ~~order~~preferred todividends ~~achieve~~on the ~~16%~~Condensed ~~IRR~~Consolidated Statements of Operations. If the Series B Preferred Stock would have been redeemed on ~~September~~March 3031, ~~2019~~2020, the Base Return Amount ~~would~~was ~~have~~approximately ~~been~~$195.2 million, which was higher than the redemption amount accrued, and will be reduced by subsequent dividend payments. Any redemption must be made out of funds legally available therefor.

In the event of a Change of Control (aswhich ~~defined~~includes infailure ~~the~~to ~~Certificate~~maintain ofthe ~~Designation~~listing of ~~the~~our ~~Series~~Class BA ~~Preferred~~Common Stock on a national securities exchange), the Company shall redeem in cash all of the outstanding shares of Series B Preferred Stock, excluding Series B PIK Shares, for a price per share equal to the Base Return Amount and all Series B PIK Shares at the purchase price of $1,000 per share. The Company assessed the Change of Control feature and determined that the redemption of the outstanding shares of Series B Preferred Stock, excluding Series B PIK Shares, for a price per share equal to the Base Return Amount was an embedded derivative that required bifurcation and was accounted for at fair value. Because the Company recorded the Series B Preferred Stock at its current redemption value as of March 31, 2020, there was no value attributed to the bifurcated embedded derivative.

The Company reflected the following activity in mezzanine equity for the Series B Preferred Stock for the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020:

	Series B Preferred Shares	Series B Preferred Stock Value		Guaranteed Return			Total
	(In thousands, except share data)
Total Series B Preferred Stock at December 31, 2018	156,746	$	147,603	$	7,508		$	155,111
Total Series B Preferred Stock at December 31, 2019	156,746	$	149,132	$	13,894		$	163,026
Return (16% IRR)	—	—		16,496			16,496
Discount - transaction costs	—	—		—			—
Dividends declared and paid or payable in cash	—	—		(11,725		)	(11,725		)
Base return amount	—	—		5,493			5,493
Accretion of discount - deemed dividend	—	1,130		—			1,130
Accrued dividends	—	4,677		(4,677		)	—
Total Series B Preferred Stock at September 30, 2019	156,746	$	148,733	$	12,279		$	161,012
Dividends declared and paid-in-kind	—	—		—			—
Accretion of discount - deemed dividend	—	405		—			405
Total Series B Preferred Stock at March 31, 2020	156,746	$	154,214	$	14,710		$	168,924

For the ~~quarters~~quarter ended ~~September~~March 3031, ~~2019,~~2020 ~~June~~the ~~30,~~Company ~~2019~~did ~~and~~not ~~March~~declare cash dividends on the Series B Preferred Stock. For the quarter ended March 31, 2019, dividends per share on the Company’s Series B Preferred Stock was $~~25.21, $~~24.~~93 and $24.~~66~~, respectively, which was the same as the comparative periods in 2018~~.

23The Company’s Proposed Plan of Reorganization as discussed in Note 20 - Subsequent Events, anticipates that in exchange for all of the Series B Preferred Stock, holders of the Series B Preferred Stock will receive their pro rata share of 1.48% of the New Common Shares of the reorganized entity.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1215 – Income Taxes

In 2017, the Company became the sole managing member of Rosehill Operating, the Company’s accounting predecessor. Rosehill Operating is a limited liability company that is treated as a partnership for U.S. federal income tax purposes and is not generally subject to U.S. federal income tax at the entity level. Any taxable income or loss generated by Rosehill Operating is passed through to and included in the taxable income or loss of its members, including the Company. The Company is a C corporation and is subject to U.S. federal income tax and state and local income taxes.

The Company’s income tax provision was aan ~~benefit~~expense of $937.0 million and an expense of $223.93 million for the three months ended ~~September~~March 3031, ~~2019~~2020 and ~~2018~~2019, respectively,. ~~and~~The aCompany’s ~~benefit~~effective oftax ~~$4.2~~rate ~~million~~was (19)% and an(3)% ~~expense of $5.5 million~~ for the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020 and ~~2018~~2019, respectively. The ~~Company’s~~ effective tax rate ~~was~~differs ~~20%~~from ~~and~~the 37enacted statutory rate of 21% ~~for~~in ~~the~~2020 ~~three~~primarily ~~months~~due ~~ended~~to ~~September 30,~~the ~~2019~~allocation of profits and ~~2018,~~losses ~~respectively,~~to Rosehill and ~~55%~~the ~~and~~noncontrolling 7%interest ~~for~~holder ~~the~~in ~~nine~~accordance ~~months~~with ~~ended~~the ~~September 30~~LLC Agreement, the ~~2019~~impact ~~and~~of ~~2018~~state income taxes, ~~respectively~~and effects of the valuation allowance. The effective tax rate differs from the enacted statutory rate of 21% in 2019 ~~and 2018~~ primarily due to the allocation of profits and losses to Rosehill and the noncontrolling interest holder in accordance with the LLC ~~Agreement~~agreement and the impact of state income taxes.

As of ~~September~~March 3031, ~~2019~~2020, the Company had approximately $3555.17 million of U.S. federal net operating loss carryovers, which will begin to expire in ~~2035~~2037. The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred tax assets, including NOL carry forwards. A valuation allowance for deferred tax assets is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. As of ~~September~~March 3031, ~~2019~~2020, wethe ~~have~~Company nohad a full valuation allowance to offset its net deferred tax assets in excess of deferred tax liabilities because the Company thinks it is more likely than not that its deferred tax ~~assets~~ will not be realized prior to their expiration. Indue ~~making~~to ~~this~~uncertainty ~~determination,~~of the ~~Company~~market, ~~considers~~the ~~all~~significant ~~available~~decline ~~positive~~in ~~and~~oil ~~negative~~prices ~~evidence~~that ~~and~~began ~~makes~~during ~~certain~~the ~~assumptions.~~first ~~The~~quarter ~~Company~~of ~~considers,~~2020 ~~among~~and ~~other~~the ~~things,~~Company ~~its~~having ~~deferred~~substantial ~~tax~~doubt ~~liabilities,~~about ~~the overall business environment,~~ its ~~historical~~ability ~~earnings~~to ~~and~~continue ~~losses,~~as ~~current~~a ~~industry~~going ~~trends and its outlook for future years~~concern.

The Company is subject to the following material taxing jurisdictions: the United States, ~~Texas~~ and ~~New Mexico~~Texas. As of ~~September~~March 3031, ~~2019~~2020, the Company has no current tax years under audit. The Company remains subject to examination for federal income taxes and state income taxes for tax years ~~2015~~2016 to present.

The Company has evaluated all tax positions for which the statute of limitations remains open and believes that the material positions taken would more likely than not be sustained upon examination. Therefore, as of ~~September~~March 3031, ~~2019~~2020, the Company had not established any reserves for, nor recorded any unrecognized benefits related to, uncertain tax positions. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense.

Tax Receivable Agreement

InOn ~~connection~~April ~~with~~27, ~~the Transaction~~2017, the Company entered into a tax receivable agreement (“Tax Receivable Agreement”) with the noncontrolling interest holder, Tema. The Tax Receivable Agreement provides that the Company will pay to Tema 90% of the net cash savings, if any, in U.S. federal, state and local income tax that the Company realizes (or is deemed to realize in certain circumstances) in periods beginning with and after the closing of the Transaction as a result of the following: (i) any tax basis increases in the assets of Rosehill Operating resulting from the distribution to Tema of $35 million in cash, the shares of Class B Common Stock and the issuance of 4,000,000 warrants to Rosehill Operating exercisable for shares of its Class A Common Stock, all in connection with the Transaction, and resulting from the assumption of Tema liabilities in connection with the Transaction, (ii) the tax basis increases in the assets of Rosehill Operating resulting from a redemption by Rosehill Operating with respect to Tema and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under the Tax Receivable Agreement.

The estimation of liability under the Tax Receivable Agreement is by its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable income. The Company is not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated with the transaction that gave rise to the payment obligation are realized. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If the Company does not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then the Company would not be required to make the related Tax Receivable Agreement payment. As of September 30, 2019 and December 31, 2018, the Company recognized a Tax Receivable Agreement liability of approximately $3.5 million after concluding that it was probable that it would have sufficient future taxable income to utilize the related tax benefits.

24On December 26, 2019, Tema exercised its right to cause the Company to redeem all or a portion of its Rosehill Operating Common Units, by exchanging 14,100,000 out of its 29,807,692 Rosehill Operating Common Units then outstanding at the time.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

IfA ~~and when Tema exercises its right to cause the Company to redeem all or a portion of its Rosehill Operating Common Units, a~~ liability under the Tax Receivable Agreement relating to such redemption ~~will~~was be recorded. ~~The~~in the amount of ~~liability~~$50.1 ~~will~~million beas ~~based~~of onthe ~~90%~~date of the ~~estimated~~redemption, ~~future~~increasing ~~cash tax savings that~~ the ~~Company~~Tax ~~will~~Receivable ~~realize~~Agreement liability as ~~a result~~ of ~~increases~~December in31, ~~the~~2019 ~~basis~~to of$53.8 ~~Rosehill~~million. ~~Operating’s~~Due ~~assets attributed~~ to the ~~Company~~uncertainty ~~resulting~~of ~~from~~the ~~such~~market, ~~redemption.~~the ~~The~~significant ~~amount~~decrease ofin ~~the~~oil ~~increase~~prices inthat ~~asset~~began ~~basis,~~during the ~~related~~first ~~estimated~~quarter ~~cash~~of ~~tax~~2020 ~~savings~~ and the ~~attendant~~Company ~~Tax~~having ~~Receivable~~substantial ~~Agreement~~doubt ~~liability~~about ~~will~~its ~~depend,~~ability into ~~part,~~continue onas ~~the~~a ~~price~~going ofconcern, the ~~Class~~Tax AReceivable ~~Common~~Agreement ~~Stock~~liability atwas ~~the~~revalued ~~time~~to $0.2 million as of ~~the~~March ~~relevant~~31, ~~redemption.~~2020 ~~Due~~because toit ~~the~~is ~~uncertainty~~not ~~surrounding~~probable that the ~~amount~~Company ~~and~~will ~~timing~~have ofsufficient future ~~redemptions~~taxable ofincome ~~Rosehill Operating~~to ~~Common~~utilize ~~Units~~all bythe ~~Tema,~~tax ~~the~~benefits ~~Company~~related ~~does~~to ~~not~~the ~~believe~~Tax itReceivable isAgreement ~~appropriate~~liability. toThe ~~record~~revaluation ~~additional~~of the Tax Receivable Agreement liability ~~until~~resulted ~~such~~in ~~time~~income ~~that~~of ~~Rosehill~~$53.6 ~~Operating~~million ~~Common~~recognized ~~Units~~in ~~are~~‘Other ~~redeemed~~Income, ~~for~~net’ ~~shares~~on ofthe ~~Class~~Condensed AConsolidated ~~Common~~Statement ~~Stock~~of ~~or cash~~Operations.

Note 1316 – Stockholders’ Equity

Class A Common Stock. Holders of the Company’s Class A Common Stock are entitled to one vote for each share held on all matters to be voted on by the stockholders. Holders of the Class A Common Stock and holders of the Class B Common Stock voting together as a single class have the exclusive right to vote for the election of directors and on all other matters properly submitted to a vote of the stockholders.

Class B Common Stock. Shares of Class B Common Stock may be issued only to Tema, their respective successors and assignees, as well as any permitted transferees of Tema. A holder of Class B Common Stock may transfer shares of Class B Common Stock to any transferee (other than the Company) only if such holder also simultaneously transfers an equal number of such holder’s Rosehill Operating Common Units to such transferee in compliance with the LLC Agreement. Holders of the Company’s Class B Common Stock will vote together as a single class with holders of the Company’s Class A Common Stock on all matters properly submitted to a vote of the stockholders.

Holders of Class B Common Stock generally have the right to cause the Company to redeem all or a portion of their Rosehill Operating Common Units in exchange for shares of the Company’s Class A Common Stock on a one-to-one basis or, at the Company’s option, an equivalent amount of cash. The Company may, however, at its option, affect a direct exchange of cash or Class A Common Stock for such Rosehill Operating Common Units in lieu of such a redemption. Upon the future redemption or exchange of Rosehill Operating Common Units, a corresponding number of shares of Class B Common Stock will be canceled.

In8% ~~the~~Series ~~Transaction,~~A ~~the~~Cumulative ~~Company~~Perpetual ~~issued~~Convertible toPreferred ~~Rosehill~~Stock. ~~Operating~~Each 29share of Series A Preferred Stock has a liquidation preference of $1,~~807~~000 per share and is convertible,~~692~~ at the holder’s option at any time, initially into 86.9565 shares of ~~its~~the Company’s Class BA Common Stock ~~and~~(which ~~4,000,000~~is ~~warrants~~equivalent ~~exercisable~~to ~~for~~an ~~shares~~initial conversion price of ~~its~~approximately $11.50 per share of Class A Common Stock), subject to specified adjustments and limitations as set forth in ~~exchange~~the ~~for~~Certificate ~~4,000,000~~of ~~warrants~~Designation ~~exercisable~~of ~~for~~Series ~~Rosehill~~A ~~Operating~~Preferred ~~Common~~Stock ~~Units~~(the “Certificate of Designation”). ~~Rosehill~~In ~~Operating~~the ~~immediately~~event ~~distributed~~of a Fundamental Change (as defined in the ~~warrants~~Certificate ~~and~~of ~~shares~~Designation of the Series A Preferred Stock, which includes failure to maintain the listing of the Company’s Class BA Common Stock toon ~~Tema~~a national securities exchange), the Company will increase the conversion rate. Please read Note 3 - Liquidity for details on the letter from The Nasdaq Stock Market LLC regarding the Company’s stock price trading below the minimum bid price requirement for continued listing.

8%The ~~Series~~Company Areflected ~~Cumulative Perpetual Convertible Preferred Stock. Each share of Series A Preferred Stock has a liquidation preference of $1,000 per share and is convertible, at~~ the ~~holder’s~~following ~~option~~in atequity ~~any~~for ~~time, initially into 86.9565 shares of~~ the Company’s Class A Common Stock (which is equivalent to an initial conversion price of approximately $11.50 per share of Class A Common Stock), subject to specified adjustments and limitations as set forth in the Certificate of Designation of Series A Preferred Stock ~~(the~~for ~~“Certificate of Designation”). Under certain circumstances,~~ the ~~Company~~following ~~will increase the conversion rate upon a “fundamental change” as described in the Certificate of Designation.~~periods:

Future issuances of Series A Preferred Stock resulting from dividends paid-in-kind may, depending on the trading price per share of the Company’s Class A Common Stock on the dividend date, contain a beneficial conversion feature determined on the same basis as described above and, thus, result in additional non-cash deemed dividends which will reduce net income attributable to the Company’s common stockholders when such paid-in-kind shares of Series A Preferred Stock are granted.



	Three Months Ended March 31,
	2020		2019
	(In thousands)
Series A Preferred Stock paid-in-kind	$	2,102	$	—
Series A Preferred Stock paid or payable in cash	—		2,006
Series A Preferred Stock dividends	$	2,102	$	2,006

~~The~~For ~~Company~~the ~~will~~quarters ~~ratably~~ended ~~recognize additional non-cash deemed dividends~~March ~~attributable~~31, to2020 ~~the Series A Preferred Stock discount which was created by the issuance of the warrants exercisable for shares of Class A Common Stock~~ and ~~the~~2019, ~~contribution~~dividends ofper ~~the~~share ~~Class~~on ~~A Common Stock, as~~ the Company’s Series A Preferred Stock iswas ~~converted to Class A Common Stock~~$19.89 ~~Such~~and ~~non-cash deemed dividends will reduce net income attributable to Rosehill Resources Inc~~$19.73, ~~common stockholders~~respectively.

25The Company’s Proposed Plan of Reorganization as discussed in Note 20 - Subsequent Events, anticipates that in exchange for all of the Series A Preferred Stock, holders of the Series A Preferred Stock will receive their pro rata share of 1.48% of the New Common Shares of the reorganized entity.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Warrants. Each of the Company’s warrants entitles the registered holder to purchase one share of the Company’s Class A Common Stock at a price of $11.50 per share, subject to adjustment pursuant to the terms of the warrant agreement. The ~~table~~warrants ~~below~~have ~~summarizes~~a five-year term which commenced on April 27, 2017. As of March 31, 2020, there were 25,594,158 warrants exercisable for shares of Class A Common Stock outstanding at a price of $11.50. The Company may call 17,185,320 warrants for redemption if the ~~Series~~reported last sale price of the Class A ~~Preferred~~Common Stock ~~dividends~~equals ~~reflected~~or inexceeds $21.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company’s ~~Condensed~~sends ~~Consolidated~~the ~~Statements~~notice of ~~Operations:~~redemption to the warrant holders. The remaining 8,408,838 warrants are not redeemable by the Company and are exercisable on a cashless basis so long as they are held by the initial holders or their permitted transferees. Otherwise, such warrants may be redeemed on terms and provisions that are identical to those described above.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Series A Preferred Stock paid-in-kind	$	2,048	$	1,006	$	2,048	$	2,955
Series A Preferred Stock paid or payable in cash	—		1,005		4,033		2,952
Series A Preferred Stock dividends	$	2,048	$	2,011	$	6,081	$	5,907

Noncontrolling Interest. Noncontrolling interest represents the membership interest in Rosehill Operating held by Tema. The Company has consolidated the financial position and results of operations of Rosehill Operating and reflected the proportionate interest held by Tema as a noncontrolling interest. The noncontrolling interest will change if warrants are exercised for Class A Common Stock, when shares of Series A Preferred Stock are converted into shares of Class A Common Stock, when shares of Class A Common Stock are issued in connection with the Company’s LTIP and if Tema elects to exchange the Class B Common Stock received in connection with the Transaction for shares of Class A Common Stock. At March 31, 2020, Tema held an approximate 35.3% noncontrolling interest in Rosehill Operating. On December 26, 2019, Tema redeemed 14,100,000 shares of its Rosehill Operating Common Units in exchange for an equivalent number of shares of Class A Common Stock, which significantly decreased Tema’s noncontrolling interest in Rosehill Operating. After the exchange, Tema holds 15,707,692 shares of Class B Common Stock.

~~For~~Note ~~the~~17 ~~quarters~~- ~~ended September 30, 2019, June 30, 2019 and March 31, 2019, dividends per share on the Company’s Series A Preferred~~ Stock-Based ~~was $20.16, $19.95 and $19.73, respectively, which was the same as the comparative periods in 2018.~~Compensation

Of the outstanding exercisable warrants, there were 588,276 warrants issued in connection with the formation of the Company, 7,597,044 public warrants (the “Public Warrants”) issued in connection with KLRE’s initial public offering, 5,000,000 warrants issued to certain qualified institutional buyers and accredited investors in connection with the Transaction, and 4,000,000 warrants issued to Tema in connection with the Transaction. The Company may call the warrants for redemption if the reported last sale price of the Class A Common Stock equals or exceeds $21.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders.

Of the outstanding warrants exercisable, there were 8,408,838 warrants issued to the Sponsor and EarlyBirdCapital Inc. pursuant to a private placement (the “Private Placement Warrants”) in connection with the Company’s initial public offering. The Private Placement Warrants are not redeemable by the Company and are exercisable on a cashless basis so long as they are held by the initial holders or their permitted transferees. Otherwise, the Private Placement Warrants have terms and provisions that are identical to those of the warrants described above.

Noncontrolling Interest. Noncontrolling interest represents the membership interest in Rosehill Operating held by holders other than the Company. The Company has consolidated the financial position and results of operations of Rosehill Operating and reflected the proportionate interest held by Tema as a noncontrolling interest. The noncontrolling interest will change if warrants are exercised for Class A Common Stock, when shares of Series A Preferred Stock are converted into shares of Class A Common Stock, when shares of Class A Common Stock are issued in connection with the Company’s LTIP and if Tema elects to exchange the Class B Common Stock received in connection with the Transaction for shares of Class A Common Stock. At September 30, 2019, Tema held an approximate 67.3% noncontrolling interest in Rosehill Operating.

Note 14 - Stock-Based Compensation

Long-Term Incentive Plan

The LTIP permits the grant of a number of different types of equity, equity-based and cash awards to employees, directors and consultants, including grant options, SARs, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, substitute awards, performance awards or any combination of the foregoing, as determined by the Compensation Committee of the Board (the “Compensation Committee”), in its sole discretion. The purpose of the LTIP is to provide a means to attract and retain qualified employees, directors and consultants by affording such individuals a means to acquire and maintain stock ownership or awards, the value of which is tied to the performance of the Company. The LTIP also provides additional incentives and reward opportunities designed to strengthen such individuals’ concern for the welfare of the Company and their desire to remain in its employ. At the plan’s inception, 7,500,000 shares of Class A Common Stock were reserved for issuance under the LTIP.

The Company has granted restricted stock, restricted stock units and performance share units under the LTIP. Stock-based compensation expense for restricted stock and restricted stock units is recognized on a straight-line basis over the requisite service period for each separately vesting tranche of the award as if the award was, in substance, multiple awards. Stock-based compensation is included in general and administrative expense on the Company’s Condensed Consolidated Statements of Operations and forfeitures are recognized as they occur. The stock-based compensation expense recognized was less than $0.1 million and $1.0 million for the three months ended March 31, 2020 and 2019, respectively. Stock-based compensation expense decreased significantly during the three months ended March 31, 2020 primarily due to forfeitures related to the termination of 52 full-time employees announced on March 26, 2020. As of March 31, 2020, 4,912,178 shares of Class A Common Stock remained available for issuance under the LTIP, subject to adjustment pursuant to the plan. The Company’s Proposed Plan of Reorganization as discussed in Note 20 - Subsequent Events, anticipates that all unvested shares under the LTIP plan will be cancelled and receive no recovery.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company has granted restricted stock, restricted stock units and performance share units under the LTIP. Stock-based compensation expense for restricted stock and restricted stock units is recognized on a straight-line basis over the requisite service period for each separately vesting tranche of the award as if the award was, in substance, multiple awards. Stock-based compensation is included in general and administrative expense on the Company’s Condensed Consolidated Statements of Operations and forfeitures are recognized as they occur. The stock-based compensation expense recognized was $1.7 million and $2.1 million for the three months ended September 30, 2019 and 2018, respectively, and $4.6 million and $5.4 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, 3,408,368 shares of Class A Common Stock remained available for issuance under the LTIP, subject to adjustment pursuant to the plan.

Restricted Stock

Restricted stock granted under the LTIP is issued on the grant date, but is restricted as to transferability until vesting. These restricted shares generally vest on the first anniversary of the date of grant. The following table sets forth the restricted stock transactions for the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020:

	Restricted Stock		Weighted-Average Grant Date Fair Value
Nonvested - December 31, 2018	246,653		$	6.24
Nonvested - December 31, 2019	428,984		$	3.12
Granted	~~428,984~~—		~~3.12~~—
Vested	(~~156~~403,~~653~~816	)	73.5713
Forfeited	—		—
Nonvested - September 30, 2019	518,984		$	3.26
Nonvested - March 31, 2020	25,168		$	2.98

As of ~~September~~March 3031, ~~2019~~2020, there was less than $0.71 million of unrecognized compensation cost related to nonvested restricted stock which is expected to be recognized over a weighted-average period of 0.52 years.

Stock-Settled Time-Based Restricted Stock Units

Stock-settled time-based restricted stock units entitle the holder to receive one share of Class A Common Stock for each restricted stock unit when such restricted stock unit vests. These stock-settled time-based restricted stock units generally vest in three substantially equal installments on the first three anniversaries of the date of grant. The following table sets forth stock-settled time-based restricted stock unit transactions for the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020:

	Restricted Stock Units		Weighted-Average Grant Date Fair Value
Nonvested - December 31, 2018	713,558		$	8.13
Nonvested - December 31, 2019	1,360,070		$	4.28
Granted	~~1,194,624~~—		~~3.28~~—
Vested	(~~331~~339,~~008~~001	)	83.4496
Forfeited	(~~212~~374,~~804~~367	)	54.0535
Nonvested - September 30, 2019	1,364,370		$	4.28
Nonvested - March 31, 2020	646,702		$	4.40

As of ~~September~~March 3031, ~~2019~~2020, there was $41.48 million of unrecognized compensation cost related to nonvested stock-settled time-based restricted stock units which is expected to be recognized over a weighted-average period of 21.07 years.

27Market Based Performance Share Units

The Company granted a target number of market based performance share units to certain employees. The market based performance share units will be settled in stock, provided that certain performance criteria are met. The performance criteria applicable to such awards is relative total shareholder return, which measures the Company’s total shareholder return as compared to the total shareholder return of the peer group identified by the Compensation Committee. The Company recognizes compensation expense for the performance share units subject to market conditions regardless of whether it becomes probable that these conditions will be achieved or not and compensation expense is not reversed if vesting does not actually occur. The following table sets forth market based performance share unit transactions for the three months ended March 31, 2020:

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Market Based Performance Share Units



	Performance Restricted Stock Units		Weighted-Average Grant Date Fair Value
Nonvested - December 31, 2019	961,055		$	5.18
Granted	—		—
Vested	—		—
Forfeited	(338,259	)	5.40
Nonvested - March 31, 2020	622,796		$	5.06

	Performance Restricted Stock Units		Weighted-Average Grant Date Fair Value
Nonvested - December 31, 2018	284,415		$	8.99
Granted	845,680		4.17
Vested	—		—
Forfeited	(169,040	)	6.49
Nonvested - September 30, 2019	961,055		$	5.18

The grant-date fair value was estimated using a Monte Carlo valuation model. The Monte Carlo valuation model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Expected volatility was calculated based on the historical volatility of the Class A Common Stock, and the risk-free interest rate is based on U.S. Treasury yield curve rates with maturities consistent with the three-year vesting period. The following weighted-average assumptions were used to value the market based performance awards:

	Nine Months Ended September 30,
	Three Months EndedMarch 31, 2019
	2019		2018
Expected volatility	68.1	%
Expected volatility	68.9	%	89.5	%
Risk-free interest rate	2.2	%
Risk-free interest rate	2.2	%	2.4	%
Dividend yield	—	%
Dividend yield	—	%	—	%
Expected life (years)	2.77
Expected life (years)	2.49		2.77

~~There were no grants of market based performance share units during the three months ending September 30, 2019 and 2018.~~ As of ~~September~~March 3031, ~~2019~~2020, there was $31.34 million of unrecognized compensation cost related to shares of market based performance units which is expected to be recognized over a weighted average period of 1.83 years.

Cash-Settled Time-Based Restricted Stock Units

The Company grants cash-settled time-based restricted stock units to certain employees. Cash-settled time-based restricted stock units entitle the holder to receive the cash equivalent of one share of Class A Common Stock for each restricted stock unit when such restricted stock unit vests. These cash-settled time-based restricted stock units generally vest in three substantially equal installments on the first three anniversaries of the date of grant. Cash-settled time-based restricted stock units are classified as liabilities and are remeasured at each reporting date until settled. The stock-based compensation expense for cash-settled time-based restricted stock units is recognized on a straight-line basis over the requisite service period for each separately vesting tranche of the award as if the award was, in substance, multiple awards. The following table sets forth cash-settled restricted stock unit transactions for the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020:



	Cash-Settled Restricted Stock Units		Weighted-Average Grant Date Fair Value
Nonvested - December 31, 2019	412,921		$	3.47
Granted	—		—
Vested	(136,730	)	3.59
Forfeited	(182,249	)	3.40
Nonvested - March 31, 2020	93,942		$	3.46

As of March 31, 2020, the Company had a liability for cash-settled time-based restricted stock units of $0.1 million based on a closing price of $0.41 on March 31, 2020. As of March 31, 2020, there was less than $0.1 million of unrecognized compensation cost related to shares of cash-settled time-based restricted stock units which is expected to be recognized over a weighted average period of 1.9 years.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Cash-Settled Restricted Stock Units		Weighted-Average Grant Date Fair Value
Nonvested - December 31, 2018	78,224		$	6.63
Granted	409,390		3.12
Vested	(28,123	)	6.63
Forfeited	(46,570	)	3.75
Nonvested - September 30, 2019	412,921		$	3.47

As of September 30, 2019, the Company had a liability for cash-settled time-based restricted stock units of $0.2 million based on a closing price of $1.95 on September 30, 2019. As of September 30, 2019, there was $0.7 million of unrecognized compensation cost related to shares of cash-settled time-based restricted stock units which is expected to be recognized over a weighted average period of 2.4 years.

Retirement Benefits

The Company has not maintained, and does not currently maintain, a defined benefit pension plan or nonqualified deferred compensation plan. The Company currently maintains a retirement plan pursuant to which employees are permitted to contribute portions of their base compensation to a tax-qualified retirement account. ~~For~~The ~~the periods ending on and before December 31, 2018, the~~ Company provided matching contributions equal to 100% of elective deferrals up to 3% of eligible compensation and 50% of elective deferrals from 3% to a maximum of 5% of eligible compensation, subject to the applicable contributions limits. Beginning on January 1, 2019, the Company changed its matching contributions to 100% of elective deferrals up to 6% of eligible compensation. Matching contributions are immediately fully vested. The Company’s matching contributions under the plan totaled $0.1 million and $0.12 million for the three months ended ~~September~~March 3031, ~~2019~~2020 and ~~2018, respectively, and $0.5 million and $0.2 million for the nine months ended September 30,~~ 2019 ~~and 2018~~, respectively.

Note 1518 – Transactions with Related Parties

The Company is not entitled to compensation for its services as managing member of Rosehill Operating. The Company is entitled to reimbursement by Rosehill Operating for any costs, fees or expenses incurred on behalf of Rosehill Operating (including costs of securities offerings not borne directly by members, board of directors’ compensation and meeting costs, cost of periodic reports to its stockholders, litigation costs and damages arising from litigation, accounting and legal costs); provided that the Company will not be reimbursed for any of its income tax obligations.

~~Transition~~Gateway ~~Service~~Gathering ~~Agreement.~~and OnMarketing ~~April~~- ~~27,~~Crude ~~2017~~oil ingathering ~~connection~~and ~~with~~transportation. ~~the~~Rosehill ~~closing~~Operating ofhas ~~the~~a ~~Transaction,~~Crude ~~the~~Oil ~~Company~~Gathering ~~entered~~Agreement ~~into~~with aGateway ~~Transition~~Gathering ~~Service~~and ~~Agreement~~Marketing (“~~TSA~~Gateway”), ~~with~~a ~~Tema~~subsidiary toof ~~provide~~Rosemore ~~certain~~Holdings, ~~services~~Inc., tofor ~~each~~a ~~other~~portion ~~following~~of ~~the~~its ~~closing~~oil ofproduction. ~~the~~There ~~Transaction.~~were ~~Pursuant~~no tocosts ~~the~~incurred ~~terms,~~under the ~~Company~~Crude ~~agreed~~Oil toGathering ~~provide~~Agreement ~~to Tema (i) operation services~~ for the ~~assets~~three ~~excluded~~months ~~from~~ended ~~the~~March ~~Transaction~~31, ~~(ii)~~2020 ~~divestment~~because ~~assistance and (iii) office space to~~ Gateway ~~Gathering~~bills ~~and~~the ~~Marketing~~purchasers ~~(“Gateway”).~~of ~~Tema agreed to provide to~~ the Company’s ~~(i)~~oil ~~human~~production ~~resources~~directly ~~and~~for ~~benefits~~the ~~administration,~~transportation ~~(ii) information technology and telecommunications, (iii) general business insurance and (iv) legal~~ services. ~~The~~For ~~TSA~~the ~~terminated~~three onmonths ~~October~~ended 27March 31, ~~2018.~~2019, ~~Rosehill~~the ~~Operating~~Company ~~did~~incurred ~~not~~approximately $0.6 ~~incur~~million of ~~significant~~transportation costs ~~related~~under to the ~~TSA~~Crude ~~for~~Oil ~~the~~Gathering ~~three and nine months ended September 30, 2018~~Agreement.

Gateway Gathering and Marketing. ~~Gateway~~- isNatural agas ~~subsidiary~~gathering ofand ~~Rosemore~~transportation. ~~A portion of~~ Rosehill Operating’s ~~oil~~has ~~production~~a ~~was~~Gas ~~sold~~Gathering toAgreement with Gateway ~~through~~for ~~September~~a ~~30,~~portion ~~2018.~~of ~~There~~its ~~were~~liquids-rich nonatural ~~revenues~~gas ~~from~~ production ~~sold~~(the to“Gas ~~Gateway~~Gathering ~~for~~Agreement”). ~~the~~Costs ~~three~~incurred ~~and~~under ~~nine~~the ~~months~~Gas ~~ended~~Gathering ~~September 30,~~Agreement ~~2019.~~for ~~For~~ the three ~~and nine~~ months ended ~~September 30~~March 31, ~~2018,~~2020 ~~revenues~~and ~~from~~2019, ~~production sold to Gateway~~ were approximately $562.70 million and $~~181~~1.23 million, respectively., ~~There~~As of March 31, 2020 and December 31, 2019, there was no ~~revenue~~amount ~~receivable~~in Accounts payable due ~~from~~to Gateway asrelated to the Gas Gathering Agreement. As of ~~September~~March 3031, ~~2019~~2020 and December 31, ~~2018~~2019, there was approximately $0.7 million and $0.6 million, respectively, in Accrued liabilities and other related to the Gas Gathering Agreement.

~~Rosehill~~KLR ~~Operating~~Sponsor. ~~had~~In aOctober ~~Crude~~2018, ~~Oil~~Rosehill ~~Gathering~~Operating ~~Agreement~~entered ~~with~~into ~~Gateway for~~ a ~~portion~~Water ofPurchase ~~its~~Agreement ~~oil production. Effective~~ with ~~May~~Seawolf ~~2019~~Water ~~production~~Resources, ~~such~~LP ~~oil~~(“Seawolf”), ~~production~~an ~~continued~~affiliate ~~being~~of ~~gathered~~KLR ~~and transported with the pipeline owned by Gateway; however~~Sponsor, ~~the~~to ~~Crude~~purchase ~~Oil~~water ~~Gathering~~from ~~Agreement between Rosehill Operating and Gateway was terminated and Gateway~~Seawolf’s ~~gathering~~water ~~and~~wells ~~transportation~~for ~~services~~use ~~are~~in ~~now~~well ~~being~~completion ~~provided~~operations. toFor the ~~purchaser~~three ofmonths ~~such~~ended ~~oil~~March ~~production~~31, ~~which~~2020 ~~ownership~~and of2019, ~~such~~Rosehill ~~oil~~Operating ~~production~~incurred ~~transfers~~costs toof ~~the~~$1.1 ~~purchaser~~million atand ~~the lease~~$0.2 ~~All~~million, ofrespectively, ~~the~~related ~~costs~~to ~~incurred~~this ~~under~~agreement. ~~the~~As ~~Crude~~of ~~Oil~~March 31, ~~Gathering~~2020 ~~Agreement during the three~~ and ~~nine~~December ~~months~~31, ~~ended September 30~~2019, ~~2018~~there ~~were~~was ~~netted~~$0.5 ~~against~~million ~~the~~and ~~revenues~~$0.2 ~~received~~million, ~~from Gateway due to Gateway being the purchaser~~respectively, in ~~addition~~Accounts topayable ~~being~~due ~~the~~to ~~gatherer~~Seawolf and ~~transporter,~~as of ~~the~~March 31, ~~oil~~2020 ~~production~~and ~~during~~December ~~this~~31, ~~period.~~2019 ~~There~~there ~~were~~was no$0.2 ~~costs~~million ~~incurred~~included ~~under~~in ~~the~~accrued ~~Crude~~capital ~~Oil~~expenditures ~~Gathering Agreement for the three months ended September 30, 2019~~ due to ~~the termination of the Crude Oil Gathering~~ Seawolf.

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Agreement effective with May 2019 oil production. Costs incurred for the nine months ended September 30, 2019 under the Crude Oil Gathering Agreement was $0.8 million. As of September 30, 2019 and December 31, 2018, there was no amount and $0.3 million, respectively, in Accounts payable due to Gateway under the Crude Oil Gathering Agreement.

Rosehill Operating has a Gas Gathering Agreement with Gateway for a portion of its liquids-rich natural gas production. Costs incurred under the Gas Gathering Agreement with Gateway for the three months ended September 30, 2019 and 2018, were approximately $1.4 million and $0.9 million, respectively, and approximately $4.2 million and $2.5 million, respectively, for the nine months ended September 30, 2019 and 2018. As of September 30, 2019 and December 31, 2018, there was no amount in Accounts payable due to Gateway related to the Gas Gathering Agreement. As of September 30, 2019, there was approximately $0.5 million in Accrued liabilities and other related to the Gas Gathering Agreement.

In 2018, Rosehill Operating entered into a Crude Oil Marketing Consulting Agreement with Gateway to, among other things, develop marketing strategies aimed at increasing realized prices from the sale of Rosehill Operating’s production. The Crude Oil Marketing Consulting Agreement was terminated in February 2019. For the nine months ended September 30, 2019, the Company incurred costs of $0.1 million related to the Crude Oil Marketing Consulting Agreement. The Company did not incur any costs related to the Crude Oil Marketing Consulting Agreement during the three or nine months ended September 30, 2018.

KLR Sponsor. In October 2018, Rosehill Operating entered into a Water Purchase Agreement with Seawolf Water Resources, LP (“Seawolf”), an affiliate of KLR Sponsor, to purchase water from Seawolf’s water wells for use in well completion operations. For the three and nine months ended September 30, 2019, Rosehill Operating incurred costs of $1.8 million and $2.5 million, respectively, related to this agreement. As of September 30, 2019 there was $1.1 million in Accounts payable due to Seawolf and at December 31, 2018 there was $0.6 million included in accrued capital expenditures due to Seawolf.

Distributions. The LLC Agreement requires Rosehill Operating to make a corresponding cash distribution to the Company at any time a dividend is to be paid by the Company to the holders of its Series A Preferred Stock and Series B Preferred Stock. The LLC Agreement allows for distributions to be made by Rosehill Operating to its members on a pro rata basis in accordance with the number of Rosehill Operating Common Units owned by each member out of funds legally available therefor. The Company expects Rosehill Operating may make distributions out of distributable cash periodically to the extent permitted by the Amended and Restated Credit Agreement as necessary to enable the Company to cover its operating expenses and other obligations, as well as to make dividend payments, if any, to the holders of its Class A Common Stock. In addition, the LLC Agreement generally requires Rosehill Operating to make (i) pro rata distributions (in accordance with the number of Rosehill Operating Common Units owned by each member) to its members, including the Company, in an amount at least sufficient to allow the Company to pay its taxes and satisfy its obligations under the Tax Receivable Agreement and (ii) tax advances, which will be repaid upon a redemption, in an amount sufficient to allow each of the members of Rosehill Operating to pay its respective taxes on such holder’s allocable share of Rosehill Operating’s taxable income after taking into account certain other distributions or payments received by the unitholder from Rosehill Operating or the Company.

~~Note 16 – Commitments and Contingencies~~32

Commitments

Rosehill Operating Common Unit Redemption Right. The LLC Agreement provides Tema with a redemption right, which entitles Tema to cause Rosehill Operating to redeem, from time to time, all or a portion of its Rosehill Operating Common Units (and a corresponding number of shares of Class B Common Stock) for, at Rosehill Operating’s option, newly issued shares of Class A Common Stock on a one-for-one basis or a cash payment equal to the average of the volume-weighted closing price of one share of Class A Common Stock for the twenty trading days prior to the date Tema delivers a notice of redemption for each Rosehill Operating Common Units redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications). In the event of a reclassification event (as defined in the LLC Agreement), the Company as managing member is required to ensure that each Rosehill Operating Common Unit (and a corresponding share of Class B Common Stock) is redeemable for the same amount and type of property, securities or cash that a share of Class A Common Stock becomes exchangeable for or converted into as a result of such reclassification event. Upon the exercise of the redemption right, Tema will surrender its Rosehill Operating Common Units (and a corresponding number of shares of Class B Common Stock) to Rosehill Operating and (i) Rosehill Operating shall cancel such Rosehill Operating Common Units and issue to the Company a number of Rosehill Operating Common Units equal to the number of surrendered Rosehill Operating Common Units and (ii) the Company shall cancel the surrendered shares of Class B Common Stock. The LLC Agreement requires that the Company contribute cash or shares of Class A Common Stock to Rosehill Operating in exchange for the issuance to the Company described in clause (i). Rosehill Operating will then distribute such cash or shares of Class A Common Stock to Tema to complete the redemption. Upon the exercise

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

ofNote ~~the~~19 ~~redemption~~– ~~right,~~Commitments ~~the~~and ~~Company may, at its option, affect a direct exchange of cash or its Class A Common Stock for such Rosehill Operating Common Units in lieu of such a redemption.~~Contingencies

Commitments

Maintenance of One-to-One Ratios. The LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between (a) (i) the number of outstanding shares of Class A Common Stock and (ii) the number of Rosehill Operating Common Units owned by the Company (subject to certain exceptions for certain rights to purchase equity securities of the Company under a “poison pill” or similar shareholder rights plan, if any, certain convertible or exchangeable securities issued under the Company’s equity compensation plans and certain equity securities issued pursuant to the Company’s equity compensation plans (other than a stock option plan) that are restricted or have not vested thereunder) and (b) (i) the number of other outstanding equity securities of the Company (including the Series A Preferred Stock and the warrants exercisable for shares of Class A Common Stock) and (ii) the number of corresponding outstanding equity securities of Rosehill Operating. These provisions are intended to result in Tema having a voting interest in the Company that is identical to Tema’s economic interest in Rosehill Operating.

Pecos County, Texas Farm-in Agreement. On February 27, 2019, Rosehill gained the right to earn approximately 2,200 net acres contiguous to its core areas in the Southern Delaware Basin subject to its obligations to drill and complete up to seven wells through 2020 and to carry 25% of the drilling and completion costs for each of the seven wells and the costs of facilities and equipment and subject to the Company’s ability to obtain certain lease modifications. AsThe ~~of September 30, 2019, the~~ Company ~~had~~ drilled and completed ~~one~~two ~~well~~wells ~~and~~under ~~was~~the farm-in ~~the~~agreement, ~~process~~which ofearned ~~drilling~~ the ~~second well. If the~~ Company ~~fails~~935 tonet ~~drill~~acres. ~~and~~On ~~complete~~March ~~any~~23, ~~of the remaining wells or obtain certain lease modifications~~2020, the Company ~~may~~re-conveyed ~~be required to reassign~~ the net acres associated with those remaining wells back to ~~its partner in~~ the ~~farm-in agreement or pay liquidated damages~~partner.

Contingencies

Legal. In the ordinary course of business, the Company is party to various legal actions, which arise primarily from its activities as operator of oil and natural gas wells. In management’s opinion, the outcome of any such currently pending legal actions will not have a material adverse effect on the Company’s financial position or results of operations. There is no material litigation, arbitration or governmental proceeding currently pending against the Company or any members of its management team in their capacity as such requiring a contingent liability to be recognized as of the date of the condensed consolidated financial statements.

~~Note 17— Revenue from Contracts with Customers~~33

The Company recognizes oil, natural gas and NGL revenue at the point in time when control of the product transfers to the customer, which differs depending on the contractual terms of each of the Company’s arrangements. Transfer of control drives the presentation of gathering, transportation, processing and other post-production expenses (“gathering and transportation expense”) within the Company’s Condensed Consolidated Statements of Operations. In these scenarios below, the Company evaluates whether it is the principal or the agent in the transaction and the analysis includes considerations of product redelivery, take-in-kind rights and risk of loss. For those contracts where the Company has concluded that control of the product transfers at the tailgate of the plant, meaning that the Company is the principal and the ultimate third party purchaser is its customer, the Company recognizes revenue on a gross basis, with transportation, processing and gathering expenses presented within the Gathering and transportation line item on the Company’s Condensed Consolidated Statements of Operations. Alternatively, for those contracts where the Company has concluded control of the product transfers at or near the wellhead or inlet of the plant, meaning that the Company is the agent and the midstream processing company is the Company’s customer, the Company recognizes natural gas and NGL revenues based on the net amount of proceeds received from the midstream processing company. The Company has the following categories under which oil, natural gas and NGL revenue is generated:

• The Company sells its crude oil and condensate production at the wellhead or further downstream at a contractually-specified delivery point. Revenue is recognized when control transfers to the customer based on contract terms, which reflects an agreed-upon index price, net of basis, quality and transportation differentials. Gathering and transportation fees incurred prior to control transfer are recorded within the Gathering and transportation line item on the Company’s Condensed Consolidated Statements of Operations, while gathering and transportation fees incurred subsequent to control transfer are recorded as a reduction of oil revenues.

• The Company sells its liquids rich natural gas to a midstream processor at or near the wellhead. The midstream processor gathers and processes the liquids rich natural gas and remits the proceeds to the Company from the ultimate sale of the residue gas and NGLs to third parties. In such arrangements, the midstream processor obtains control of the product at the wellhead and is considered the customer. Proceeds received for the residue gas and NGLs from the midstream processor are reflected

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

asNote ~~natural~~20 ~~gas~~– ~~and~~Subsequent ~~NGL revenue, respectively, and are recorded net of processing, gathering and transportation fees incurred by the midstream processor after control has transferred.~~Events

•Please ~~The~~read ~~Company~~Note ~~sells~~3 ~~its~~- ~~liquids~~Liquidity ~~rich~~for ~~natural~~information ~~gas~~regarding tocertain aevents ~~midstream~~subsequent ~~processor at the inlet~~ to ~~the~~March midstream processing facility. The midstream processor gathers and processes the liquids rich natural gas and remits the proceeds to the Company from the ultimate sale of the residue gas and NGLs to third parties. In such arrangements31, ~~the~~2020 ~~midstream~~that ~~processor~~relate ~~obtains control of the product at the inlet~~ to the ~~processing~~events ~~facility~~described ~~and~~in isthis ~~considered~~Note ~~the customer~~20. Gathering and transportation fees incurred by the Company to deliver its liquids rich natural gas to the inlet of the facility occurs prior to the transfer of control to the customer and are recognized within the Gathering and transportation line item on the Company’s Condensed Consolidated Statements of Operations. Proceeds received for the residue gas and NGLs from the midstream processor are reflected as natural gas and NGL revenue, respectively, and are recorded net of processing, gathering and transportation fees incurred by the midstream processor after control has transferred.

•Restructuring ~~The~~Support Company has the option in certain midstream processing arrangements where liquids rich natural gas is delivered to the midstream processing facility, the midstream processor gathers and processes the liquids rich natural gas and then the processed residue gas and NGLs are redelivered to the Company in-kind at the tailgate of the processing facility. The Company sells its in-kind residue gas and NGLs to its customer at the tailgate of the processing facility. Gathering and transportation fees incurred prior to transfer of control at the tailgate of the processing facility are recognized within the Gathering, processing and transportation line item on the Company’s Condensed Consolidated Statements of Operations. Proceeds received for the residue gas and NGLs from the customer are reflected as natural gas and NGL revenue, respectively, and are recorded net of gathering and transportation fees incurred by the customer after control has transferred.Agreement

~~The~~On ~~implementation~~June 30, of2020, ~~ASC~~the ~~606~~Company ~~resulted~~and inRosehill ~~changes~~Operating to(together with the ~~presentation~~Company, the “Company Parties”) entered into the RSA, which includes the term sheet attached thereto as Exhibit A (the “Term Sheet”), with (i) Tema, as (a) the holder of ~~Revenues~~approximately 66.8% of the voting equity interests of the Company and ~~Gathering~~35.2% of the equity interests in Rosehill Operating and ~~transportation~~(b) onparty to the ~~Company’s~~Tax ~~Condensed~~Receivable ~~Consolidated~~Agreement, ~~Statements~~(ii) certain beneficial holders of, ~~Operations~~or investment advisors, ~~but~~sub-advisors, itor ~~did~~managers ~~not~~of ~~have~~discretionary ~~any~~accounts ~~impact~~that are beneficial holders of claims under the Amended and Restated Credit Agreement among the Company Parties, JPMorgan and the lenders from time to ~~net~~time ~~income~~party thereto (~~loss~~the “Consenting Lenders”), and (iii) certain beneficial holders of, or ~~cash~~the ~~flows~~investment ~~from~~advisors, ~~operations.~~sub-advisors, ~~The~~or ~~impacts~~managers on behalf of discretionary funds, accounts or entities that are beneficial holders of claims under the ~~adoption~~Note Purchase Agreement, and 100% of ~~ASU~~the ~~2014-09~~Company’s ~~for~~issued Series B Preferred Stock (the ~~three~~“Consenting Noteholders,” and ~~nine~~together ~~months~~with ~~ended~~Tema ~~September 30,~~and ~~2019~~the Consenting Lenders, ~~were~~the as“Consenting ~~follows:~~Creditors”).

	Three Months Ended							Nine Months Ended
	September 30, 2019							September 30, 2019
	As Reported		Amounts Without Adoption of ASU 2014-09		Effect of Change			As Reported		Amounts Without Adoption of ASU 2014-09		Effect of Change
	(In thousands)
Revenues:
Oil sales	$	73,747	$	73,747	$	—		$	206,440	$	205,624	$	816
Natural gas sales	390		837		(447		)	1,215		2,803		(1,588		)
Natural gas liquids sales	2,122		2,638		(516		)	9,847		10,628		(781		)
Total revenues	$	76,259	$	77,222	$	(963	)	$	217,502	$	219,055	$	(1,553	)
Operating expenses:
Gathering and transportation	$	881	$	1,844	$	(963	)	$	4,562	$	6,115	$	(1,553	)

The RSA contemplates that the Company Parties will (i) file voluntary cases (the “Chapter 11 Filings”) under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) to effect a restructuring through a prepackaged chapter 11 plan of reorganization (the “Plan”) to be filed with the Bankruptcy Court on or before July 15, 2020 at 11:59 p.m. (prevailing Central Time) and (ii) enter into a proposed junior convertible debtor in possession delayed draw term loan facility (the “DIP Facility”), as evidenced by the DIP Credit Agreement (as defined in the RSA).

~~Performance~~The RSA contains certain covenants on the part of each of the Company Parties and the Consenting Creditors including that the Consenting Creditors use commercially reasonable efforts to support the Restructuring Transactions (as defined in the RSA), to vote in favor of the Plan and to otherwise use good faith when negotiating the forms of the Definitive Documents (as defined in the RSA) with the Company Parties. The RSA also provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including without limitation, the failure to achieve certain milestones and certain breaches or other actions by the parties under the RSA.

~~The~~Proposed ~~Company’s~~Plan ~~contractual 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 customer at the wellhead, inlet, or tailgate of the midstream processor’s processing facility, or other contractually specified delivery point. For all commodity products, the Company records revenue in the month production is delivered to the customer. Settlement statements for certain natural gas and NGL sales may not be received for 30 to 90 days after the date production volumes are delivered and for oil, generally within 30 days after delivery has occurred. However, payment is unconditional once the performance obligations have been satisfied. At this time, the volume and price can be reasonably estimated and amounts due from customers are accrued in Accounts receivable, net in the Condensed Consolidated Balance Sheets. As of September 30, Reorganization

32The Plan as contemplated by the RSA will provide for the following, among other things:


•	after the time on which all conditions to the effectiveness of the Plan have been satisfied or waived in accordance with the terms thereof and the Plan becomes effective (the “Effective Date”), either a reorganized Rosehill Operating or a newly created legal entity that would be the successor to the Company Parties (either entity constituting “New Rosehill”) will be established;


•	the entry by New Rosehill into an exit RBL credit agreement to refinance indebtedness under the Amended and Restated Credit Agreement (the “Revolving Credit Facility”), with a term of 4 years and a maximum initial borrowing base of $235.0 million;

•

the principal of the DIP Facility will be converted to 24.15% of the shares of the equity of New Rosehill (the “New Common Shares”), and the backstop fee earned in connection with the DIP Facility will be converted to 1.69% of the New Common Shares, in each case, subject to dilution from the post-emergence management incentive plan that will be adopted by the board of directors of New Rosehill (the “MIP”);


•	each Consenting Noteholder will receive its pro rata share of 68.60% of the New Common Shares, subject to dilution from the MIP, in exchange for all of the Secured Note Claims (as defined in the Term Sheet);


•	Tema, as the holder of claims under that Tax Receivable Agreement, will receive its pro rata share of 4.08% of the New Common Shares, subject to dilution from the MIP, in exchange for all of the TRA Claims (as defined in the Term Sheet);

•

subject to specific conditions, including acceptance of the Plan by and lack of any objection to confirmation of the Plan by the holders of Series A Preferred Stock and Series B Preferred Stock (each as defined in the Term Sheet) (collectively, the “Preferred Holders”), the Preferred Holders will receive their pro rata share of 1.48% of the New Common Shares, subject to dilution from the MIP, in exchange for all of the Series A Preferred Stock and Series B Preferred Stock;

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~2019 and December 31,~~• ~~2018,~~the ~~such~~Existing ~~receivable~~Common ~~balances~~Stock ~~were $36.0~~(which ~~million~~ includes the Company’s Class A Common Stock) and ~~$28.9~~ ~~million,~~Other ~~respectively,~~Existing Interests (each as ~~disclosed~~defined in ~~Note~~the 4Term -Sheet) ~~Accounts~~will ~~Receivable.~~be cancelled and receive no recovery;

~~The~~• ~~Company~~the ~~records~~RSA ~~any~~requires ~~differences~~that ~~between~~Tema ~~its estimates~~ and the ~~actual~~Consenting ~~amounts~~Noteholders ~~received~~work ~~for product sales~~ in ~~the~~good ~~month~~faith ~~that~~to ~~payment~~finalize issubstantially ~~received~~final ~~from~~forms ~~the~~of ~~purchaser.~~governance ~~Historically,~~documents ~~any~~or ~~identified~~term ~~differences~~sheets ~~between~~in ~~revenue~~respect ~~estimates~~thereof ~~and~~before ~~actual~~the ~~revenue~~date ~~received have not been significant. For~~ the ~~three~~Chapter ~~and~~11 ~~nine~~Cases ~~months~~are ~~ended~~filed ~~September 30, 2019, revenue recognized in~~ (the ~~reporting~~“Petition ~~period related to performance obligations satisfied in prior reporting periods was not material.~~Date”);

~~Transaction~~• ~~price~~certain ~~allocated~~claims relating to ~~remaining~~borrowings ~~performance~~outstanding ~~obligations~~under the Amended and Restated Credit Agreement are to be paid with net cash proceeds from the orderly unwind of all of the Company’s existing commodity hedging and derivative instruments, which is anticipated to occur between the execution of the RSA and the Petition Date; and

~~For~~• the ~~Company’s~~Gas ~~product~~Gathering ~~sales~~Agreement ~~that~~will ~~have~~be aamended ~~contract~~after ~~term greater than one year,~~ the ~~Company~~execution ~~has~~of ~~utilized~~ the ~~practical~~RSA expedient in ASC Topic 606 which states the Company is not required to disclose the transaction price allocated to the remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, monthly sales of a product generally represent a separate performance obligation; therefore, future commodity volumes to be delivered and ~~sold~~before ~~are wholly unsatisfied and disclosure of~~ the ~~transaction~~Petition ~~price allocated to such unsatisfied performance obligations is not required~~Date.

33The terms of the Plan are subject to approval by, among other parties, the Consenting Creditors (pursuant to the terms set forth in the RSA) and the Company, as well as the Bankruptcy Court, among other conditions to the effectiveness of the Plan. The Company Parties intend to solicit votes from the Consenting Creditors with respect to the Plan prior to the Petition Date, and to commence solicitation of votes from the Preferred Holders prior to the Petition Date but to receive such votes after the Petition Date. Accordingly, no assurance can be given that the transactions described herein will be consummated. If a termination of the Plan occurs prior to the Chapter 11 Filings, then the Company’s lenders and noteholders could exercise remedies for Events of Default (as defined in the respective agreements) (including accelerating debt, sweeping cash and foreclosing on its assets). During the Chapter 11 proceedings, a termination of the RSA may result in the loss of support for the Plan, which would adversely affect the Company’s ability to confirm and consummate the Plan. If the Plan is not consummated, there can be no assurance that the Company could achieve a restructuring alternative and its Chapter 11 proceedings could become protracted or terminate, which would have a material adverse effect on the Company’s liquidity and ability to continue as a going concern.

Following the Chapter 11 Filings, the Company and Rosehill Operating (together, the “Debtors”) expect to operate the business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Subject to certain exceptions under the Bankruptcy Code, the Chapter 11 Filings will automatically enjoin or stay the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Under the Plan, the Company intends to ask the Bankruptcy Court to grant certain relief requested by the Debtors enabling the Company to conduct its business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorization to pay employee wages and benefits, to pay certain taxes and governmental fees and charges, to continue to operate our cash management system in the ordinary course, to secure debtor-in-possession financing, to remit funds we hold from time to time for the benefit of third parties (such as royalty owners), and to pay the prepetition claims of certain of our vendors that hold liens under applicable non-bankruptcy law.

Debtor-in-Possession Financing

The RSA contemplates that the Company Parties will file a motion with the Bankruptcy Court (the “DIP Motion”) seeking, among other things, interim and final approval of debtor-in-possession financing on the terms and conditions set forth in the DIP Credit Agreement. If approved by the Bankruptcy Court, the RSA provides that the DIP Credit Agreement will provide for the following, among other things:


•	the DIP Facility, in the aggregate amount of $17.5 million, shall be junior to the Adequate Protection Liens (as defined in the Term Sheet), superpriority liens securing postpetition hedges, the Revolving Credit Facility and the Note Purchase Agreement but senior to all other Claims (as defined in the Term Sheet) and Interests (as defined in the Term Sheet);


•	$15.0 million of the DIP Facility will be backstopped by the Consenting Noteholders, and $2.5 million shall be backstopped by Tema;


•	Tema will have the right to subscribe to provide up to $7.5 million of the DIP Facility;


•	the Company Parties will draw half of the DIP Facility within three business days after the entry of the Interim Order, and the remaining half of the DIP Facility within three business days after the entry of the Final Order;

•

the DIP Facility will mature at the earliest of (i) six months after the Petition Date , (ii) the Effective Date; (iii) the closing of a sale of substantially all of the equity interests or assets of the Company Parties (unless done pursuant to the Plan); (iv) the date of prepayment in cash in full by the Company of all claims under the DIP Facility and termination of all commitments in respect of the DIP Facility in accordance with the terms of the DIP Credit Agreement; and (v) the date of termination of

ROSEHILL RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the commitments in respect of the DIP Facility and/or acceleration of any outstanding extensions of credit following the occurrence and during the continuance of an event of default under the DIP Facility;


•	borrowings under the DIP Facility will bear interest at 8% per annum, paid, in kind monthly, with an additional 2% per annum default rate paid in kind, provided that such interest may only be paid in cash upon the Effective Date subject to certain conditions;


•	the Company Parties will pay an upfront fee of 100 bps, paid-in-kind, provided that such upfront fee may only be paid in cash upon the Effective Date subject to certain conditions;


•	the DIP Credit Agreement will provide for certain customary covenants applicable to the Company;

•

the DIP Credit Agreement will require that the Company Parties (a) enter into commodity hedge transactions pursuant to standards agreed in advance by the Company, the Majority DIP Lenders (as defined in the Term Sheet), and JPMorgan in their reasonable discretion such that, as soon as practical after the Petition Date (and in any case no later than ten (10) Business Days after the Petition Date), the notional volumes of such commodity hedge transactions represent at least 70% of reasonably anticipated projected production from oil and gas properties constituting proved developed producing reserves of Rosehill Operating for each of the following 24 months (August 2020 to July 2022 based on the most recent reserve report) for each of crude oil and natural gas, calculated separately, (b) receive prior written consent from Majority DIP Lenders and JPMorgan (acting at the direction of the Required Revolving Credit Agreement Lenders (as defined in the Term Sheet)) for any asset sales or dispositions outside the ordinary course of business in excess of $200,000 in the aggregate or investments in excess of $200,000 in the aggregate, and (c) provide certain periodic reporting packages and budgets to the Majority DIP Lenders and JPMorgan; and


•	the DIP Credit Agreement will provide for certain customary conditions for debtor-in-possession facilities of this type and certain other conditions as required by the Majority DIP Lenders.

Despite the liquidity that may be provided by the DIP Credit Agreement, the Company’s ability to maintain normal credit terms with our suppliers and vendors may become impaired. The Company may be required to pay cash in advance to certain vendors and may experience restrictions on the availability of trade credit, which would further reduce its liquidity. If liquidity problems persist, suppliers could refuse to provide key products and services in the future. In addition to the cash requirements to fund ongoing operations, the Company has incurred significant professional fees and other costs in connection with the RSA and expect that it will continue to incur significant fees and costs throughout the Chapter 11 proceedings.

Even if the Company obtains financing under the DIP Credit Agreement, it is uncertain the Company’s liquidity will be sufficient to allow it to satisfy its obligations related to the Chapter 11 proceedings or that it will be able to confirm a Plan with the Bankruptcy Court that allows it to emerge from bankruptcy. In addition, the Company will be required to comply with the covenants and conditions of our DIP Credit Agreement in order to continue to access borrowings thereunder.

In connection with the Chapter 11 Filings, as contemplated by the Term Sheet, the Company intends to delist its Class A Common Stock, Class A Common Stock Public Units and Class A Common Stock Public Warrants from Nasdaq. The Company also expects to terminate and suspend its reporting obligations under the Exchange Act when it is eligible to do so.

If the Chapter 11 Filing is not completed or the Plan is not consummated within the timeframe expected, the Company does not expect to have sufficient liquidity to fund capital expenditures. The Chapter 11 Filings will constitute an Event of Default under the credit agreement and Second Lien Notes and the delisting of the Class A Common Stock will constitute an Event of Default under the Second Lien Notes. The creditors under these debt agreements are subject to a forbearance under the RSA and, after the Chapter 11 Filings, will be stayed from taking any action against the Company as a result of an event of default.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside of our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil, natural gas and NGLs, production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and in our Annual Report on Form 10-K, particularly in “Item 1A. Risk Factors” and below in “Cautionary Statement Concerning Forward-Looking Statements,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “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, other than statements of historical fact included in this report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on management’s current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 (our "Annual Report on Form 10-K"), and the risk factors and other cautionary statements contained in our other filings with the SEC. These forward-looking statements are based on management’s current beliefs as of the date of this Quarterly Report on Form 10-Q, based on currently available information, as to the outcome and timing of future events.

Forward-looking statements may include statements about:


•	the timing and results of the RSA, the Chapter 11 Filings, including our ability to obtain confirmation of the Plan or an alternative restructuring transaction;


•	our ability to consummate the transactions contemplated by the RSA, including the Plan and the DIP Credit Agreement, on the terms described or at all;


•	our ability to obtain the approval of the Bankruptcy Court with respect to motions or other requests made to the Bankruptcy Court in the Chapter 11 Filings, including maintaining strategic control as debtor-in-possession;


•	the effects of the RSA and the Chapter 11 Filings on our operations and financial condition and on the interests of the various constituents, including holders of our common stock and indebtedness;


•	the length of time that we will operate under Chapter 11 protection and the continued availability of capital during the pendency of the proceedings;


•	the adequacy and availability of capital resources, credit and liquidity, including, but not limited to, debt refinancing or extensions, exchanges or repurchases of debt, issuances of debt or equity securities, access to additional borrowing capacity and our ability to generate sufficient cash flow from operations to fund our capital expenditures and meeting working capital needs;


•	delisting our common stock and terminating our SEC reporting obligations;


•	our future financial performance;

• our ability to ~~realize~~continue ~~the~~as ~~anticipated~~a ~~benefits~~going ~~of acquired mineral rights and other associated assets and interests in the Southern Delaware Basin in December 2017 (the “White Wolf Acquisition”)~~concern;


•	the impact of the COVID-19 pandemic;


•	our ability to successfully complete strategic initiatives, including potential refinancings, restructuring or deleveraging;


•	potential actions of our stakeholders and lenders, including before and after the Chapter 11 Filings;


•	our ability to cure defaults under our debt agreements;


•	our business strategy;


•	our reserves;


•	our liquidity and capital resources;


•	our ability to comply with covenants and obligations under our financing agreements;


•	the future of our operations;


•	our drilling prospects, inventories, projects and programs;


•	our ability to replace the reserves we produce through drilling and property acquisitions;


•	our ability to realize the anticipated benefits of the White Wolf Acquisition;


•	our financial strategy, liquidity and capital required for our development program;


•	benefits from changes in our capital program and development strategy;


•	our realized oil, natural gas and natural gas liquids (“NGL”) prices;


•	the timing and amount of our future production of oil, natural gas and NGLs;


•	our hedging strategy and results;


•	our future drilling plans;


•	our expansion plans and future opportunities;


•	our competition and government regulations;


•	our ability to obtain permits and governmental approvals;


•	our pending legal or environmental matters;


•	our marketing of oil, natural gas and NGLs;


•	our leasehold or business acquisitions;


•	our costs of developing our properties;


•	general economic conditions;


•	credit markets;


•	uncertainty regarding our future operating results; and

• our plans, objectives, expectations and intentions contained in ~~the~~this Quarterly Report on Form 10-Q that are not historical.

You should not place undue reliance on these forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including but not limited to actions taken by our stakeholders (including those not party to the RSA), our creditors, our debt holders and our customers and litigation and disputes (both before and after the Chapter 11 Filings), our ability to have sufficient liquidity to consummate the Plan (particularly if the Plan is not consummated within our expected timeframe), our ability to continue as a going concern and the impact of the COVID-19 pandemic and the actions by governments, businesses and individuals in response to the pandemic, as well as the risks described under “Risk Factors” in our Annual Report on Form 10-K, many of which may be aggravated by the effects of the COVID-19 pandemic. Moreover, we operate in a very competitive and rapidly changing environment, particularly in light of the COVID-19 pandemic and the recent significant decline in commodity prices. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.

business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.

Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil and natural gas that are ultimately recovered.

Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements.

All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.

Overview

We are an independent oil and natural gas company focused on the acquisition, exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves in the Permian Basin. Our assets are concentrated in the Delaware Basin, a sub-basin of the Permian Basin. We have drilling locations in ten distinct formations in the Delaware Basin in: the Brushy Canyon, Upper Avalon, Lower Avalon, 2nd Bone Spring Shale, 2nd Bone Spring Sand, 3rd Bone Spring Sand, 3rd Bone Spring Shale, Wolfcamp A (X/Y), Lower Wolfcamp A and Wolfcamp B, and our goal is to build a premier development and acquisition company focused on horizontal drilling in the Delaware Basin.

We have no direct operations and no significant assets other than our ownership interest in Rosehill Operating, an entity of which we act as the sole managing member and of whose common units we currently own approximately 32.7% (or 43.9% assuming the conversion of Rosehill Operating Series A Preferred Units into Rosehill Operating Common Units). 38

~~How~~ We ~~Evaluate~~have ~~Our~~no ~~Operations~~direct operations and no significant assets other than our ownership interest in Rosehill Operating, an entity of which we act as the sole managing member and of whose common units we currently own approximately 64.7% (or 70.8% assuming the conversion of Rosehill Operating Series A Preferred Units into Rosehill Operating Common Units).

WeRestructuring ~~use~~Support aAgreement ~~variety of financial~~ and ~~operational~~Related ~~metrics~~Recent ~~to assess the performance of our oil and natural gas operations, including:~~Developments

•Restructuring ~~production~~Support ~~volumes;~~Agreement

•On ~~operating~~June 30, ~~expenses~~2020, onthe aCompany ~~per~~Parties ~~Barrel~~entered ofinto ~~oil~~the ~~equivalent~~RSA, ~~(“Boe”);~~which includes the Term Sheet with the Consenting Creditors.

•The ~~cost~~RSA ofcontemplates ~~reserve~~that ~~additions~~the ~~from~~Company ~~drilling~~Parties ~~operations;~~will (i) file the Chapter 11 Filings with the Bankruptcy Court to effect the Plan, which will be filed with the Bankruptcy Court on or before July 15, 2020 at 11:59 p.m. (prevailing Central Time) and (ii) enter into the DIP Facility as evidenced by the DIP Credit Agreement (as defined in the RSA).

•The ~~Adjusted~~RSA ~~EBITDAX~~contains certain covenants on the part of each of the Company Parties and the Consenting Creditors including that the Consenting Creditors use commercially reasonable efforts to support the Restructuring Transactions (as defined ~~under~~in the RSA), to vote in favor of the plan of reorganization contemplated by the RSA (the “~~Non-GAAP~~Plan”) ~~Financial~~and ~~Measure~~to otherwise use good faith when negotiating the forms of the Definitive Documents (as defined in the RSA) with the Company Parties.” The RSA also provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including without limitation, the failure to achieve certain milestones and certain breaches or other actions by the parties under the RSA.

35Proposed Plan of Reorganization

The Plan as contemplated by the RSA will provide for the following, among other things:


•	after the Effective Date, New Rosehill will be established;


•	the entry by New Rosehill into an exit RBL credit agreement to refinance the Revolving Credit Facility, with a term of 4 years and a maximum initial borrowing base of $235.0 million;


•	the principal of the DIP Facility will be converted to 24.15% of the New Common Shares, and the backstop fee earned in connection with the DIP Facility will be converted to 1.69% of the New Common Shares, in each case subject to dilution from the MIP;


•	each Consenting Noteholder will receive its pro rata share of 68.60% of the New Common Shares, subject to dilution from the MIP, in exchange for all of the Secured Note Claims (as defined in the Term Sheet);


•	Tema, as the holder of claims under the Tax Receivable Agreement, will receive its pro rata share of 4.08% of the New Common Shares, subject to dilution from the MIP, in exchange for all of the TRA Claims (as defined in the Term Sheet);


•	subject to specific conditions, including acceptance of the Plan and lack of any objection to the confirmation of the Plan by the Preferred Holders, the Preferred Holders will receive their pro rata share of 1.48% of the New Common Shares, subject to dilution from the MIP, in exchange for all of the Series A Preferred Stock and Series B Preferred Stock;


•	the Existing Common Stock (which includes the Company’s Class A Common Stock) and Other Existing Interests (each as defined in the Term Sheet) will be cancelled and receive no recovery;


•	the RSA requires that Tema and the Consenting Noteholders work in good faith to finalize substantially final forms of governance documents or term sheets in respect thereof before the Petition Date;


•	certain claims relating to borrowings outstanding under the Amended and Restated Credit Agreement are to be paid with net cash proceeds from the orderly unwind of all of the Company’s existing commodity hedging and derivative instruments, which is anticipated to occur between the execution of the RSA and the Petition Date; and


•	the Gas Gathering Agreement will be amended after the execution of the RSA and before the Petition Date.

The terms of the Plan are subject to approval by, among other parties, the Consenting Creditors (pursuant to the terms set forth in the RSA) and the Company, as well as the Bankruptcy Court, among other conditions to the effectiveness of the Plan. The Company Parties intend to solicit votes from the Consenting Creditors with respect to the Plan prior to the Petition Date, and to commence solicitation of votes from the Preferred Holders prior to the Petition Date but to receive such votes after the Petition Date. Accordingly, no assurance can be given that the transactions described herein will be consummated. During the Chapter 11 proceedings, a termination of the RSA may result in the loss of support for the Plan, which would adversely affect our ability to confirm and consummate the Plan. If the Plan is not consummated, there can be no assurance that we could achieve a restructuring alternative and our Chapter 11 proceedings could become protracted or terminate, which would have a material adverse effect on our liquidity and ability to continue as a going concern.

The foregoing summary of the terms of the Plan does not purport to be complete and is qualified in its entirety by the full text of the RSA (including the Term Sheet), which is attached as an exhibit hereto and incorporated herein by reference.

Debtor-in-Possession Financing

The RSA contemplates that the Company Parties will file the DIP Motion seeking, among other things, interim and final approval of debtor-in-possession financing on the terms and conditions set forth in the DIP Credit Agreement. If approved by the Bankruptcy Court, the RSA provides that the DIP Credit Agreement will provide for the following, among other things:


•	the DIP Facility, in the aggregate amount of $17.5 million, shall be junior to the Adequate Protection Liens (as defined in the Term Sheet), superpriority liens securing postpetition hedges, the Revolving Credit Facility and the Note Purchase Agreement but senior to all other Claims (as defined in the Term Sheet) and Interests (as defined in the Term Sheet);


•	$15.0 million of the DIP Facility will be backstopped by the Consenting Noteholders, and $2.5 million shall be backstopped by Tema;


•	Tema will have the right to subscribe to provide up to $7.5 million of the DIP Facility;


•	the Company Parties will draw half of the DIP Facility within three business days after the entry of the Interim Order, and the remaining half of the DIP Facility within three business days after the entry of the Final Order;

•

the DIP Facility will mature at the earliest of (i) six months after the Petition Date, (ii) the Effective Date; (iii) the closing of a sale of substantially all of the equity interests or assets of the Company Parties (unless done pursuant to the Plan); (iv) the date of prepayment in cash in full by the Company of all claims under the DIP Facility and termination of all commitments in respect of the DIP Facility in accordance with the terms of the DIP Credit Agreement; and (v) the date of termination of the commitments in respect of the DIP Facility and/or acceleration of any outstanding extensions of credit following the occurrence and during the continuance of an event of default under the DIP Facility;


•	borrowings under the DIP Facility will bear interest at 8% per annum, paid-in-kind monthly, with an additional 2% per annum default rate paid-in-kind, provided that such interest may only be paid in cash upon the Effective Date subject to certain conditions;


•	the Company Parties will pay an upfront fee of 100 bps, paid-in-kind, provided that such upfront fee may only be paid in cash upon the Effective Date subject to certain conditions;


•	the DIP Credit Agreement will provide for certain customary covenants applicable to the Company;

•


•	the DIP Credit Agreement will provide for certain customary conditions for debtor-in-possession facilities of this type and certain other conditions as required by the Majority DIP Lenders.

The terms of the DIP Credit Agreement are subject to approval by the DIP Lenders, the Company, and the Bankruptcy Court , among other conditions. Accordingly, the terms of the DIP Credit Agreement are subject to change and there can be no assurance that the DIP Credit Agreement will be consummated. The Company anticipates closing the DIP Credit Agreement promptly following approval by the Bankruptcy Court of the DIP Motion. If a termination occurs prior to the Chapter 11 Filings, then our lenders and noteholders could exercise remedies for Events of Default (as defined in the respective agreements) (including accelerating debt, sweeping cash and foreclosing on our assets).

The foregoing summary of the terms of the proposed DIP Facility does not purport to be complete and is qualified in its entirety by the full text of the RSA (including the Term Sheet) which is attached as an exhibit and incorporated herein by reference.

For information regarding certain events leading up to the execution of the RSA, please read Note 3 - Liquidity and Chronology of Events and Going Concern Assessment within this MD&A.

Risks Associated with Chapter 11 Filings

There can be no assurance that we will make the Chapter 11 Filings in accordance with the RSA, that the RSA will not be terminated or that we will consummate the Plan as contemplated. In any event, the preparation of the RSA and the Chapter 11 Filings have and will continue to result in material expenses for the Company and the attention of management. For the duration of our Chapter 11 Cases, our operations and our ability to develop and execute our business plan are subject to the risks and uncertainties associated with the reorganization process under the Bankruptcy Code as described in Part II, Item 1A. “Risk Factors” in this quarterly report on Form 10-Q. Due to these risks and uncertainties, the description of our operations, properties and capital plans included in this quarterly report on Form 10-Q may not accurately reflect our operations, properties and capital plans following the conclusion of the Chapter 11 proceedings.

Delisting of Class A Securities

In connection with the Chapter 11 Filings, as contemplated by the Term Sheet, the Company intends to delist its Class A Common Stock, Class A Common Stock Public Units and Class A Common Stock Public Warrants from Nasdaq June 30, 2020. The Company also expects to suspend its reporting obligations under the Exchange Act when it is eligible to do so.

Market Conditions

~~The~~Irrespective ~~oil and natural gas industry is cyclical and commodity prices are highly volatile. In the second half~~ of ~~2014,~~our ~~oil~~balance ~~prices~~sheet ~~began a rapid and significant decline as the global oil supply began to outpace demand. During 2015~~constraints, ~~2016 and early 2017, the global oil supply continued to outpace demand, resulting in a~~ sustained ~~decline~~periods inof ~~realized~~low prices for oil ~~production.~~or Innatural ~~general,~~gas ~~this~~have ~~imbalance between supply~~ and ~~demand~~could ~~reflected~~materially ~~the significant supply growth achieved in the United States as a result of shale drilling~~ and ~~oil~~adversely ~~production~~affect ~~increases~~our byfinancial ~~certain other countries~~position, ~~including~~our ~~the~~results ~~efforts~~ of ~~Russia and Saudi Arabia to retain market share~~operations, ~~combined with only modest demand growth in~~ the ~~United~~quantities ~~States and less-than-expected demand in other parts~~ of ~~the~~oil ~~world, particularly in Europe~~ and ~~China. NGL prices generally correlate to the price of oil. Prices for domestic~~ natural gas ~~began~~reserves to decline during the third quarter of 2014 and continued to be weak during 2015 through 2017. This decline was primarily due to an imbalance between supply and demand across North America. Throughout 2018 and 2019, commodity prices improved, yet remained volatile, and it is likely that ~~commodity~~we ~~prices~~can ~~will~~economically ~~continue~~produce ~~to fluctuate due to global supply~~ and ~~demand,~~our ~~inventory~~access ~~supply levels, weather conditions, geopolitical and other factors. Due~~ to ~~these and other factors, commodity prices cannot be accurately predicted~~capital.

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The adverse economic effects of the COVID-19 outbreak have materially decreased demand for oil based on the restrictions implemented by governments trying to slow the spread of the outbreak and changes in consumer behavior and this decrease in demand has generated a surplus of oil supply that has created a saturation of storage. The surplus in supply in turn has led to a significant decrease in oil prices. In addition, in March 2020, members of OPEC+ failed to agree on oil production levels and Saudi Arabia responded by increasing its production, which resulted in an increased supply of oil and further contributed to the substantial decline in oil prices and an increasingly volatile market. The members of OPEC+ reached a tentative agreement to cut oil production in April 2020; however, the announcement of the tentative agreement did not result in increased commodity prices, and these production cuts, if effected, may not offset near-term demand loss attributable to the COVID-19 pandemic and related economic slowdown.

We have certain commodity derivative instruments in place to mitigate the effects of such price declines as detailed in Note 8 - Derivative Instruments; however, the derivatives will not entirely mitigate the effects of lower oil prices. The depressed pricing environment has led us to halt our drilling and completion activities for the remainder of 2020 and has led to (i) a reduction in reserves, including the removal of proved undeveloped reserves, (ii) an impairment of proved and unproved oil and gas properties, (iii) curtailment of production during the second quarter of 2020, (iv) recognition of a full valuation allowance on our net deferred

tax assets and (v) a reduction of our Tax Receivable Agreement liability. Production has continued to be adversely impacted during the second quarter of fiscal 2020 and we expect this to continue into the third quarter of fiscal 2020 and possibly beyond.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report and will depend on various factors, including the duration and spread of the outbreak, its severity, the actions by governments, businesses and individuals in response to the situation, how the pandemic and measures taken in response to its impact demand for oil, the availability of personnel, equipment and services critical to our ability to operate our properties, and how quickly and to what extent normal economic and operating conditions can resume, each of which is highly uncertain and cannot be predicted. Moreover, if workers at one of our offices become ill or are quarantined and in either or both events are therefore unable to work, our operations could be subject to disruption. Further, if our vendors become unable to obtain necessary raw materials or components, we may incur higher supply costs or our vendors may be required to reduce service or production levels, either of which may negatively affect our financial condition or results of operations. As such, it is uncertain as to the full magnitude of the impact that the pandemic will have on our financial condition, liquidity, and future results of operations. Management continues to actively monitor the impact of the global situation on our financial condition, liquidity, operations, suppliers, industry, and workforce.

Realized Prices

Our revenue, profitability and future growth are highly dependent on the prices we receive for our oil and natural gas production, as well as NGLs that are extracted from our natural gas during processing. The following table presents our average realized commodity prices before the effects of commodity derivative settlements:

	Three Months				~~Nine Months~~
	Ended September 30,				Ended September 30,
	Ended March 31,
	2019		2018		2019		2018
	2020		2019
Crude oil (per Bbl)	$	5244.9084	$	5548.0792	$	~~52.22~~	$	~~58.32~~
Natural gas (per Mcf)	$	0.2705	$	10.8285	$	~~0.26~~	$	~~1.87~~
NGLs (per Bbl)	$	87.1059	$	2815.1626	$	~~11.95~~	$	~~23.98~~

~~Lower~~The oil and natural gas industry is cyclical and commodity prices inare highly volatile. As discussed above, the ~~future~~impact ~~could~~of ~~result~~the COVID-19 outbreak and the failure of OPEC+ to agree on oil production levels caused oil prices to decline significantly in ~~impairments~~the second half of March 2020. The impact of the lower oil prices led us to production curtailment and suspension of our ~~properties~~drilling and completion activity and was the primary driver for the Company recording an impairment to proved property of $333.8 million as of March 31, 2020. If oil prices remain depressed for the remainder of 2020, it may further materially and adversely affect our ~~future~~ business, financial condition, results of operations, operating cash flows, liquidity, or ability to finance planned capital expenditures. Lower oil, natural gas and NGL prices may also reduce the borrowing base under our Amended and Restated Credit Agreement, which may be ~~determined~~redetermined at the discretion of the lenders and is based on the collateral value of our proved reserves that have been mortgaged to the lenders. We entered into a forbearance agreement with the lenders under our Amended and Restated Credit Agreement on May 4, 2020, which postponed the scheduled redetermination of the borrowing base that was scheduled to occur on or about April 1, 2020. We expected such borrowing base redetermination to result in a borrowing base deficiency. Alternatively, higher oil, natural gas and NGL prices may result in significant losses being incurred on our commodity derivatives, which could cause us to experience net losses when oil and natural gas prices rise. ~~For~~We ~~2019,~~received ~~we have realized~~ low prices for our natural gas due to lower NYMEX gas prices, and wider gas price differentials ~~and~~but ~~due~~because ~~to the adoption of ASC 606. Because~~ we receive revenue from NGLs, we have and may continue to produce and sell our natural gas at a low, or negative, realized sales price. The widening gas price differentials were due to pipeline takeaway capacity constraints in the Permian Basin, but the industry expects new pipelines to come online to help with this constraint and that it will help provide relief to the widening gas price differentials.

A 10% change in our realized oil, natural gas and NGL prices would have changed revenue by the following amounts for the periods indicated:

Three Months

~~Nine Months~~

Ended September 30,

Ended March 31,

2019

2018

2019

2018

2020

2019

(In thousands)

Oil sales

75,~~375~~775

76,~~280~~585

~~20,644~~

~~19,741~~

Natural gas sales

3910

~~263~~147

~~122~~

~~669~~

NGL sales

~~212~~234

~~713~~453

~~985~~

~~1,477~~

Total revenues

76,~~626~~019

87,~~256~~185

~~21,751~~

~~21,887~~

The prices we receive for our products are based on benchmark prices and are adjusted for quality, energy content, transportation fees and regional price differentials. See “Results of Operations” below for an analysis of the impact changes in realized prices had on our revenues.

Sources of Our Revenues

Our revenues are derived from the sale of our oil and natural gas production, as well as the sale of NGLs that are extracted from our natural gas during processing. The following table shows the ~~the~~ percentage each component contributed to total revenue:

	Three Months				~~Nine Months~~
	Ended September 30,				Ended September 30,
	Ended March 31,
Commodity Revenues (1):	~~2019~~2020		~~2018~~2019		~~2019~~		~~2018~~
Oil sales	96	%	8892	%	95	%	90	%
Natural gas sales	1—		32		1		3
NGL sales	34		96		4		7
	100	%	100	%	~~100~~	%	~~100~~	%


(1)	The percentages exclude the effects of commodity derivatives.

Operational and Financial Highlights for the Three ~~and Nine~~ Months Ended ~~September~~March 3031, ~~2019~~2020 and ~~2018~~2019

Production Results

The following table presents production volumes for our properties for the periods indicated:

	Three Months		~~Nine Months~~
	Ended September 30,		Ended September 30,
	Ended March 31,
	2019	2018	2019	2018
	2020	2019
Oil (MBbls)	1,~~394~~288	1,~~322~~346	~~3,953~~	~~3,385~~
Natural gas (MMcf)	1,~~424~~921	1,~~450~~739	~~4,625~~	~~3,577~~
NGLs (MBbls)	~~262~~308	~~253~~297	~~824~~	~~616~~
Total (MBoe)	1,~~893~~916	1,~~817~~933	~~5,548~~	~~4,597~~
Average daily net production (Boe/d)	2021,~~576~~055	1921,~~750~~478	~~20,322~~	~~16,839~~

As reservoir pressures decline, production from a given well or formation decreases. Growth in our future production and reserves will depend on our ability to continue to add proved reserves in excess of our production. Accordingly, we plan to maintain our focus on adding reserves through drilling as well as acquisitions. Our ability to add reserves through development projects and acquisitions is dependent on many factors, including our ability to borrow or raise capital, obtain regulatory approvals, procure contract drilling rigs and personnel and successfully identify and consummate acquisitions.

Derivative Activity

To achieve a more predictable cash flow and reduce exposure to adverse fluctuations in commodity prices, we have historically used commodity derivative instruments, such as swaps, two-way costless collars and three-way costless collars, to hedge price risk associated with a portion of our anticipated oil, natural gas and NGL production. By removing a significant portion of the price volatility associated with our ~~oil and natural gas~~ production, we will mitigate, but not eliminate, the potential negative effects of declines in benchmark oil, ~~and~~ natural gas and NGL prices on our cash flow from operations for those periods. However, for a portion of our current positions, hedging activity may also reduce our ability to benefit from increases in oil, ~~and~~ natural gas and NGL prices. We will sustain losses to the extent our commodity derivative contract prices are lower than market prices and, conversely, we will sustain gains to the extent our commodity derivative contract prices are higher than market prices. In certain circumstances, where we have unrealized gains in our commodity derivatives portfolio, we may choose to restructure existing commodity derivative contracts or enter into new transactions to modify the terms of current contracts in order to realize the current value of our existing positions.

We utilize interest rate swaps to reduce our exposure to adverse fluctuations in LIBO rates on a portion of our revolving credit facility outstanding borrowings. The gains and losses on our interest rate swaps are recognized in interest expense. Entering into interest rate swaps allows us to mitigate, but not eliminate, the negative effects of increases in the LIBO rate, but reduces our ability to benefit from any decreases in the LIBO rate. In July 2019, we entered into interest rate swaps that extend through August 2022 on a notional amount of $150.0 million of our outstanding borrowings under our revolving credit facility at an average fixed rate of 1.721%.43

38We had a net current asset of $79.9 million and a net non-current asset of $60.8 million related to the following open commodity derivative instrument positions as of March 31, 2020:

We had a net current asset of $15.9 million and a net non-current asset of $46.0 million related to the following open commodity derivative instrument positions as of September 30, 2019:



		2020			2021		2022
Commodity derivative swaps
Oil:
	Notional volume (Bbls) (1)(2)	760,000			—		—
	Weighted average fixed price ($/Bbl)	$	67.46		$	—	$	—
Natural gas:
	Notional volume (MMBtu)	1,595,368			1,615,792		1,276,142
	Weighted average fixed price ($/MMbtu)	$	2.73		$	2.79	$	2.85

Commodity derivative three-way collars
Oil:
	Notional volume (Bbls)	2,475,000			4,200,000		2,000,000
	Weighted average ceiling price ($/Bbl)	$	70.29		$	60.40	$	61.45
	Weighted average floor price ($/Bbl)	$	57.50		$	54.49	$	55.00
	Weighted average sold put option price ($/Bbl)	$	47.50		$	45.51	$	45.00

Crude oil basis swaps
Midland / Cushing:
	Notional volume (Bbls)	3,905,000			4,200,000		2,100,000
	Weighted average fixed price ($/Bbl)	$	(0.85	)	$	0.49	$	0.54

Argus WTI roll:
	Notional volume (Bbls)	370,650			—		—
	Weighted average fixed price ($/Bbl)	$	0.40		$	—	$	—

NYMEX WTI roll:
	Notional volume (Bbls)	2,102,752			—		—
	Weighted average fixed price ($/Bbl)	$	0.42		$	—	$	—

Natural gas basis swaps
EP Permian:
	Notional volume (MMBtu)	1,617,388			—		—
	Weighted average fixed price ($/MMBtu)	$	(1.03	)	$	—	$	—

		2019			2020			2021		2022
Commodity derivative swaps
Oil:
	Notional volume (Bbls) (1)(2)	666,000			1,000,000			—		—
	Weighted average fixed price ($/Bbl)	$	53.59		$	67.69		$	—	$	—
Natural gas:
	Notional volume (MMBtu)	662,389			1,970,368			1,615,792		1,276,142
	Weighted average fixed price ($/MMbtu)	$	2.87		$	2.75		$	2.79	$	2.85
Ethane:
	Notional volume (Gallons)	3,552,696			—			—		—
	Weighted average fixed price ($/Gallons)	$	0.28		$	—		$	—	$	—
Propane:
	Notional volume (Gallons)	2,368,422			—			—		—
	Weighted average fixed price ($/Gallons)	$	0.79		$	—		$	—	$	—
Pentanes:
	Notional volume (Gallons)	789,516			—			—		—
	Weighted average fixed price ($/Gallons)	$	1.47		$	—		$	—	$	—
Commodity derivative two-way collars
Oil:
	Notional volume (Bbls)	105,000			—			—		—
	Weighted average ceiling price ($/Bbl)	$	60.03		$	—		$	—	$	—
	Weighted average floor price ($/Bbl)	$	53.14		$	—		$	—	$	—
Commodity derivative three-way collars
Oil:
	Notional volume (Bbls)	595,364			3,294,000			4,200,000		2,000,000
	Weighted average ceiling price ($/Bbl)	$	66.19		$	70.29		$	60.40	$	61.45
	Weighted average floor price ($/Bbl)	$	60.56		$	57.50		$	54.49	$	55.00
	Weighted average sold put option price ($/Bbl)	$	45.52		$	47.50		$	45.51	$	45.00
Crude oil basis swaps
Midland / Cushing:
	Notional volume (Bbls)	1,366,364			5,254,000			4,200,000		2,100,000
	Weighted average fixed price ($/Bbl)	$	(4.76	)	$	(0.83	)	$	0.49	$	0.54
Argus WTI roll:
	Notional volume (Bbls)	700,000			—			—		—
	Weighted average fixed price ($/Bbl)	$	0.56		$	—		$	—	$	—
Natural gas basis swaps
EP Permian:
	Notional volume (MMBtu)	690,805			2,096,160			—		—
	Weighted average fixed price ($/MMBtu)	$	(1.10	)	$	(1.03	)	$	—	$	—

(1)

During the second quarter of 2019, the Company entered into commodity derivative swaps where it bought 2,160,000 barrels of crude oil at a weighted average fixed price of $50.48 per barrel to offset commodity derivative swaps for the year ended December 31, 2021, it previously sold of 2,160,000 barrels of crude oil at a weighted average fixed price of $61.21 per barrel, effectively locking in a gain of approximately $23.2 million that the Company expects to recognize in 2021 when the swaps settle.

(2)

During the second quarter of 2019, the Company entered into commodity derivative swaps where it bought 1,100,000 barrels of crude oil at a weighted average fixed price of $50.55 per barrel to offset commodity derivative swaps for the year ended December 31, 2022, it previously sold of 1,100,000 barrels of crude oil at a weighted average fixed price of $58.42 per barrel, effectively locking in a gain of approximately $8.7 million that the Company expects to recognize in 2022 when the swaps settle.

If there are no changes in the forward curve market prices as of September 30, 2019, we would incur a realized loss of $1.9 million in 2019, a realized gain of $22.6 million in 2020, a realized gain of $29.7 million in 2021 and a realized gain of $11.5 million in 2022. See Note 5 - Derivative Instruments in the condensed consolidated financial statements under Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information about our derivatives.44

If there were no changes in the forward curve market prices as of March 31, 2020, we would recognize a realized gain of $63.9 million in 2020, a realized gain of $54.8 million in 2021 and a realized gain of $22.0 million in 2022 related to our commodity derivatives. Our commodity derivative portfolio had a mark-to-market net asset value of approximately $125.8 million as of April 30, 2020. See Note 8 - Derivative Instruments in the condensed consolidated financial statements under Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information about our derivatives.

We utilize interest rate swaps to reduce our exposure to adverse fluctuations in LIBO rates on a portion of our revolving credit facility outstanding borrowings. The gains and losses on our interest rate swaps are recognized in interest expense. Entering into interest rate swaps allows us to mitigate, but not eliminate, the negative effects of increases in the LIBO rate, but reduces our ability to benefit from any decreases in the LIBO rate. We have interest rate swaps that extend through August 2022 on a notional amount of $150.0 million of our outstanding borrowings under our revolving credit facility at an average fixed rate of 1.721%. We had a net current liability of $2.1 million and a net non-current liability of $3.0 million related to our interest rate swaps as of March 31, 2020.

Income Taxes

Rosehill Operating is a limited liability company that is treated as a partnership for U.S. federal income tax purposes and is not subject to U.S. federal income tax. Rosehill Resources is a C corporation and is subject to U.S. federal, state and local income taxes. Any taxable income or loss generated by Rosehill Operating is passed through to and included in Rosehill Resources and the noncontrolling interest taxable income or loss. On a consolidated basis, our effective tax rate will differ from the enacted statutory rate of 21% and will fluctuate from period to period primarily due to the allocation of profits and losses to Rosehill Resources and the noncontrolling interest holder in accordance with the LLC Agreement and the impact of state income taxes.

40We periodically assesses whether it is more likely than not that we will generate sufficient taxable income to realize our deferred tax assets, including NOL carry forwards or carry backs. A valuation allowance for deferred tax assets is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. As of March 31, 2020, we had a full valuation allowance to offset our net deferred tax assets in excess of deferred tax liabilities because we believe it is more likely than not that our deferred tax will not be realized prior to their expiration due to uncertainty of the market, the significant decline in oil prices that began during the first quarter of 2020 and the Company having substantial doubt about its ability to continue as a going concern.

How We Evaluate Our Operations

We use a variety of financial and operational metrics to assess the performance of our oil and natural gas operations, including:


•	production volumes;


•	Adjusted EBITDAX as defined under “Non-GAAP Financial Measure”; and


•	operating expenses on a per barrel of oil equivalent (“Boe”), as discussed in “Results of Operations.”

Non-GAAP Financial Measure

Adjusted EBITDAX is a supplemental non-GAAP financial measure that is used by our management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We define Adjusted EBITDAX as net income (loss) before interest expense, net, income tax expense (benefit), DD&A, accretion, impairment of oil and natural gas properties, exploration costs, stock-settled stock-based compensation, (gains) losses on commodity derivatives excluding net cash receipts (payments) on settled commodity derivatives, ~~one-time costs incurred in connection with the Transaction,~~ (gains) losses from the ~~sale~~disposition of property and equipment, (gains) losses on asset retirement obligation settlements and other non-cash operating items. Adjusted EBITDAX is not a measure of net income (loss) as determined by ~~United States generally accepted accounting principles (“~~U.S. GAAP”).

Management believes Adjusted EBITDAX is useful because it allows them to more effectively evaluate operating performance and compare our results of operations from period to period against our peers without regard to financing methods or capital structure. We exclude the items listed above from net income (loss) in arriving at Adjusted EBITDAX because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, and the method by which the assets were acquired. Adjusted EBITDAX should not be considered as an alternative to, or more meaningful than, net income (loss) as determined in accordance with U.S. GAAP or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDAX are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDAX. Our presentation of Adjusted EBITDAX should not be construed as an inference that its results will be unaffected by unusual or non-recurring items. Our computations of Adjusted EBITDAX may not be comparable to other similarly titled measures of other companies.

We have provided below a reconciliation of Adjusted EBITDAX to net income (loss), the most directly comparable U.S. GAAP financial measure.

	Three Months						~~Nine Months~~
	Ended September 30,						Ended September 30,
	Ended March 31,
	2019			2018			2019			2018
	2020			2019
	(In thousands)
Net income (loss)	$	55,108		$	(84,890	)	$	(3,442	)	$	(83,982	)
Net loss	$	(230,328	)	$	(104,072	)
Interest expense, net	710,~~950~~814			5,~~363~~600			~~19,560~~			~~13,892~~
Income tax expense (benefit)	(837,~~995~~027		)	223,~~923~~306			~~(4,172~~		)	~~5,523~~
Depreciation, depletion, amortization and accretion	3431,~~533~~486			4735,~~469~~964			~~103,158~~			~~104,784~~
Unrealized (gain) loss on commodity derivatives, net	(41,852		)	62,315			27,973			91,360
Impairment of oil and natural gas properties	333,840			—
Stock settled stock-based compensation	1,710			2,052			4,449			5,274
Unrealized (gain) loss on commodity derivatives, net	(101,613		)	103,548
Exploration costs	788			1,348			3,156			3,659
Stock settled stock-based compensation	118			974
(Gain) loss on disposition of property and equipment	8			29			(11,106		)	325
Exploration costs	13,720			1,255
Other non-cash (income) expense, net	(103		)	105			(126		)	(52		)
(Gain) loss on disposition of property and equipment	18			9
Adjusted EBITDAX	$	49,147		$	56,714		$	139,450		$	140,783
Other non-cash (income) expense, net (1)	(54,060		)	(81		)
Adjusted EBITDAX	$	41,022		$	46,503

41(1) Includes a $53.6 million non-cash adjustment to our Tax Receivable Agreement liability.

Results of Operations

Three Months Ended ~~September~~March 3031, ~~2019~~2020 Compared to Three Months Ended ~~September~~March 3031, ~~2018~~2019

Oil, Natural Gas and NGL Sales Revenues. The following table provides the components of our revenues for the periods indicated, as well as each period’s respective average sales prices and volumes:

	Three Months Ended September 30,
	Three Months Ended March 31,
	2019		2018		Change			Change %
	2020		2019		Change			Change %
	(Dollars in thousands, except price data)
Revenues:
Oil sales	$	7357,~~747~~752	$	7265,~~799~~853	$	~~948~~(8,101	)	1(12	)%
Natural gas sales	~~390~~104		21,~~633~~474		(21,~~243~~370		)	(8593	)
NGL sales	2,~~122~~338		74,~~125~~533		(52,~~003~~195		)	(7048	)
Total revenues	$	7660,~~259~~194	$	8271,~~557~~860	$	(611,~~298~~666	)	(816	)%
Average sales price (1):
Oil (per Bbl)	$	5244.9084	$	5548.0792	$	(24.1708	)	(48	)%
Natural gas (per Mcf)	0.2705		10.8285		(10.5580		)	(8594	)
NGLs (per Bbl)	87.1059		2815.1626		(207.0667		)	(7150	)
Total (per Boe)	$	4031.2842	$	4537.4418	$	(5.1676	)	(1115	)%
Total, including effects of gain (loss) on settled
commodity derivatives, net (per Boe)	$	3835.9786	$	4236.6865	$	(30.7179	)	(92	)%
Net production:
Oil (MBbls)	1,~~394~~288		1,~~322~~346		72(58		)	5(4	)%
Natural gas (MMcf)	1,~~424~~921		1,~~450~~739		~~(26~~182		)	(210	)
NGLs (MBbls)	~~262~~308		~~253~~297		911			4
Total (MBoe)	1,~~893~~916		1,~~817~~933		76(17		)	4(1	)%
Average daily net production volume:
Oil (Bbls/d)	1514,~~152~~154		14,~~370~~956		~~782~~(802		)	(5	)%
Natural gas (Mcf/d)	1521,~~478~~110		1519,~~761~~322		~~(283~~1,788		)	(29	)
NGLs (Bbls/d)	23,~~848~~385		23,~~750~~300		9885			43
Total (Boe/d)	2021,~~576~~055		1921,~~750~~478		~~826~~(423		)	4(2	)%


(1)	Excluding the effects of settled and unsettled commodity derivative transactions unless noted otherwise.

The decrease in total revenues was due to a decrease in average sales price, ~~partially~~and ~~offset by an increase in~~ sales volume. The decrease in average sales price contributed to approximately $109.62 million of the decrease in total revenues and ~~was~~the ~~partially~~decrease ~~offset~~in bysales ~~the~~volume contributed to approximately $42.35 million ~~impact~~ of the ~~increase~~decrease into ~~sales~~total ~~volume~~revenues. The decrease in average sales price is ~~due~~primarily todriven by lower ~~price~~benchmark ~~indices~~commodity prices for ~~WTI crude~~ oil, ~~prices~~gas, and ~~Mont~~NGL. ~~Belvieu~~Our ~~liquid~~production ~~prices~~remained ~~and~~relatively ~~less~~consistent ~~favorable~~period ~~pricing~~over ~~differentials~~period ~~for~~as ~~natural~~we ~~gas.~~were ~~The~~able ~~increase~~to inbring ~~sales~~on ~~volumes~~new isproduction ~~primarily~~to ~~due~~offset todeclines ~~new~~in more mature wells. ~~coming~~We ~~online~~have ~~without~~halted ~~any~~all ~~significant~~drilling ~~offsetting~~and ~~decrease~~completion inactivities ~~production~~so ~~from~~we ~~natural~~expect ~~well~~to see production ~~declines~~decline throughout 2020.

We adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) on January 1, 2019. The adoption of ASC 606 resulted in the Company recording less total revenue by approximately $1.0 million. There was no impact on our net income; the impact was a change in presentation between revenues and gathering and transportation expense based on where control of our oil, natural gas and NGL production transfers to the customer. The change did not significantly impact 47

our reported average sales for each product. See Note 17 - Revenue from Contracts with Customers of this Quarterly Report on Form 10-Q in Part I, Item 1 for more detail on our revenue recognition under ASC 606.

Operating expenses. The following table summarizes our operating expenses for the periods indicated:

	Three Months Ended September 30,
	Three Months Ended March 31,
	2019		2018		Change			Change %
	2020		2019		Change			Change %
	(In thousands, except per Boe data)
Operating expenses:
Lease operating expenses	$	12,~~207~~095	$	9,~~205~~635	$	32,~~002~~460		3326	%
Production taxes	3,516		4,034		(518		)	(13	)
Production taxes and ad valorem taxes	3,759		4,238		(479		)	(11	)
Gathering and transportation	~~881~~1,371		12,~~327~~361		(~~446~~990		)	(3442	)
Depreciation, depletion, amortization and accretion	3431,~~533~~486		4735,~~469~~964		(124,~~936~~478		)	(2712	)
Exploration costs	788		1,348		(560		)	(42	)
Impairment of oil and natural gas properties	333,840		—		333,840			100
General and administrative, excluding stock-based compensation	7,162		6,266		896			14
Exploration costs	13,720		1,255		12,465			993
Stock-based compensation	1,705		2,076		(371		)	(18	)
General and administrative, excluding stock-based compensation	10,602		8,044		2,558			32
Loss on disposition of property and equipment	8		29		(21		)	(72	)
Stock-based compensation	18		1,011		(993		)	(98	)
Total operating expenses	$	60,800	$	71,754	$	(10,954	)	(15	)%
Loss on disposition of property and equipment	18		9		9			100
Total operating expenses	$	406,909	$	62,517	$	344,392		551	%
Operating expenses per Boe:
Lease operating expenses	$	6.4531	$	54.0798	$	1.3833		27	%
Production taxes	1.86		2.22		(0.36		)	(16	)
Production taxes and ad valorem taxes	1.96		2.19		(0.23		)	(11	)
Gathering and transportation	0.4772		01.7322		(0.2650		)	(3641	)
Depreciation, depletion, amortization and accretion	1816.2443		2618.1261		(72.8818		)	(3012	)
Exploration costs	0.42		0.74		(0.32		)	(43	)
Impairment of oil and natural gas properties	174.24		—		174.24			100
General and administrative, excluding stock-based compensation	3.78		3.45		0.33			10
Exploration costs	7.16		0.65		6.51			1,002
Stock-based compensation	0.90		1.14		(0.24		)	(21	)
General and administrative, excluding stock-based compensation	5.53		4.16		1.37			33
Loss on disposition of property and equipment	—		0.02		(0.02		)	(100	)
Stock-based compensation	0.01		0.52		(0.51		)	(98	)
Total operating expenses per Boe	$	32.12	$	39.49	$	(7.37	)	(19	)%
Loss on disposition of property and equipment	0.01		—		0.01			100
Total operating expenses per Boe	$	212.37	$	32.33	$	180.04		557	%

Lease operating expenses (“LOE”). LOE for the three months ended ~~September 30~~March 31, ~~2019~~2020 increased compared to the three months ended ~~September~~March 3031, ~~2018~~2019. WeThe ~~incurred~~increase ~~higher~~in ~~workover,~~LOE ~~repair~~per ~~and~~Boe ~~maintenance~~rate ~~activity~~contributed ~~compared~~ to approximately $2.5 million of the ~~previous~~increase ~~period~~in ~~due~~LOE topartially ~~our~~offset ~~increased~~by ~~well~~a ~~count~~decrease ~~and~~of ~~our~~less ~~well~~than ~~count,~~$0.1 ~~increased~~million asrelated to a ~~result~~decrease ofin ~~our~~sales ~~drilling program~~volume. InOur ~~addition,~~LOE weper ~~incurred~~Boe rate increased due to higher ~~costs~~workovers, ~~associated~~repair ~~with~~and maintenance activity, and equipment rentals utilized for gas lift ~~compared~~for to the ~~previous~~three ~~period.~~months ~~The~~ended ~~increase~~March in31, ~~our~~2020 ~~LOE~~compared ~~per Boe rate (“LOE Rate”) is due~~ to the ~~higher~~three ~~costs~~months ~~discussed~~ended ~~above~~March 31, 2019.

Production and ad valorem taxes. Production taxes for the three months ended ~~September 30~~March 31, ~~2019~~2020 decreased by $0.7 million, or 21%, compared to the three months ended ~~September~~March 3031, ~~2018~~2019. Production taxes are primarily based on the market value of our wellhead production. The decrease was primarily due to a decrease in total revenues. Our total revenues decreased by 816% and production taxes decreased by 1321%. Production taxes as a percentage of total revenues were 4.6% and 4.9% for the three months ended ~~September~~March 3031, ~~2019~~2020 and ~~2018~~2019, respectively. Ad valorem taxes for the three months ended March 31, 2020 increased by $0.2 million compared to the three months ended March 31, 2019 due to an increase in producing wells.

Gathering and transportation (“G&T”). G&T for the three months ended ~~September 30~~March 31, ~~2019~~2020 decreased compared to the three months ended ~~September 30~~March 31, ~~2018~~2019. ~~For~~Approximately ~~the~~$0.7 ~~three~~million ~~months~~of ~~ended~~the ~~September~~decrease ~~30,~~in ~~2019 and 2018,~~ G&T ~~costs~~is primarily ~~relates~~related to ~~gathering,~~oil transportation costs in Loving County. During the three months ended March 31, ~~and~~2020, ~~processing~~control of our ~~liquids-rich~~oil ~~natural~~production ~~gas~~in ~~production.~~Loving ~~G&T~~County ~~decreased~~transferred byto ~~$0.5~~the ~~million~~customer ~~due~~at tothe alease ~~decrease~~and inoil ~~G&T~~transportation ~~per~~costs ~~Boe~~were ~~rate~~netted ~~(“G&T~~against ~~Rate”)~~revenue ~~and~~in ~~was~~accordance ~~relatively~~with ~~flat~~ASC ~~compared~~606. toDuring the three months ended ~~September 30~~March 31, 2019, ~~prior~~control of our oil production in Loving County transferred to the ~~adoption~~customer ofat ~~ASC~~a ~~606.~~delivery ~~The~~point ~~G&T~~downstream ~~Rate~~from ~~was~~the ~~lower~~lease ~~due~~and the transportation costs to transport the ~~adoption~~oil ofproduction ~~ASC~~from ~~606,~~the ~~which~~lease ~~resulted~~to in the ~~Company~~delivery ~~recording~~point ~~costs~~were ofrecorded ~~approximately~~to $1G&T.0 ~~million~~The ~~previously~~remaining ~~classified~~decrease asto G&T asprimarily anrelates ~~offset~~ to ~~total~~a ~~revenues~~lower realized G&T per Boe rate.

4348

Depreciation, depletion, amortization and accretion expense (“DD&A”). See the following table for a breakdown of DD&A:

	Three Months Ended September 30,
	Three Months Ended March 31,
	2019		2018		Change			Change %
	2020		2019		Change			Change %
	(In thousands, except per Boe data)
Components of DD&A and Accretion
Depreciation, depletion and amortization of oil and gas properties	$	3430,~~102~~933	$	4735,~~108~~567	$	(134,~~006~~634	)	(2813	)%
Depreciation of other property and equipment	~~230~~336		~~201~~207		29129			1462
Accretion expense	~~201~~217		~~160~~190		4127			2614
	$	3431,~~533~~486	$	4735,~~469~~964	$	(124,~~936~~478	)	(2712	)%
DD&A and Accretion per Boe
Depreciation, depletion and amortization of oil and gas properties	$	1816.0114	$	2518.9340	$	(72.9226	)	(3112	)%
Depreciation of other property and equipment	0.1218		0.11		0.0107			964
Accretion expense	0.11		0.0910		0.0201			2210
Total DD&A and Accretion per Boe	$	1816.2443	$	2618.1361	$	(72.8918	)	(3012	)%

The decrease in DD&A for our oil and gas properties ~~decreased~~was ~~by $15.0 million~~ due to a decrease in ~~the~~ DD&A per Boe ~~rate~~ (“DD&A Rate”) and sales volume. The decrease in the DD&A Rate ~~was~~contributed ~~higher~~to ~~during~~approximately ~~the~~$4.3 ~~three~~million ~~months~~of ~~ended~~the ~~September~~decrease ~~30,~~in ~~2018~~DD&A ~~compared~~for toour ~~the~~oil ~~three~~and ~~months~~natural ~~ended~~gas ~~September~~properties ~~30,~~and ~~2019~~the ~~due~~decrease toin asales ~~higher~~volume ~~level~~contributed ofto ~~infrastructure~~approximately ~~costs~~$0.3 ~~being~~million ~~added~~of to the ~~depletion~~decrease ~~group~~to ~~without~~DD&A ~~associated~~for ~~proved~~our ~~reserves~~oil ~~being~~and ~~added~~gas properties. ~~This~~The ~~decrease~~DD&A Rate was ~~partially~~lower ~~offset~~for bythe anthree ~~increase~~months ofended ~~$2.0~~March 31, ~~million~~2020 incompared ~~DD&A~~to ~~for~~the ~~our~~three ~~oil~~months ~~and~~ended ~~gas~~March 31, ~~properties~~2019 primarily due to anadding ~~increase~~only indrilling ~~production~~and ~~primarily~~completion ~~attributable~~costs related to ~~new~~the ~~wells~~proved ~~coming~~reserves ~~online~~added ~~without~~at ~~any~~March ~~significant~~31, ~~offsetting~~2020, ~~decrease~~whereas induring ~~production~~the ~~from~~three ~~natural~~months ~~well~~ended ~~production~~March ~~declines~~31, 2019 a higher level of infrastructure costs were being added to the depletion group without associated proved reserves being added.

~~Exploration~~Impairment ~~costs. Exploration~~of ~~costs~~oil ~~include~~and ~~exploratory~~natural ~~seismic~~gas ~~expenditures,~~properties. ~~other~~Impairment ~~geological~~of oil and ~~geophysical~~natural ~~costs,~~gas ~~lease~~properties ~~rentals~~for ~~and~~the ~~drilling~~three ~~costs~~months ofended ~~exploratory~~March 31, ~~wells~~2020 ~~that~~increased ~~are~~compared ~~determined~~ to bethe ~~unsuccessful~~three months ended March 31, 2019. ~~Exploration~~As ~~costs~~a ~~for~~result of the ~~three~~decrease ~~months~~in ~~ended~~commodity ~~September~~price ~~30,~~forecasts ~~2019~~at ~~decreased~~the ~~compared~~end toof the ~~three~~first ~~months~~quarter ~~ended~~of ~~September~~2020, 30specifically decreases in oil and NGL prices, ~~2018~~and ~~primarily~~the removal of proved undeveloped reserves due tous ~~lower~~having ~~fees~~substantial ~~incurred~~doubt ~~related~~about our ability to ~~our~~continue ~~ongoing~~as ~~seismic~~a ~~studies~~going concern, we recorded impairment expense of $333.8 million to its proved oil and gas properties for the ~~acreage~~three wemonths ~~acquired~~ended inMarch 31, 2020. We did not have any impairments to proved property during the ~~Southern~~three ~~Delaware~~months ~~Basin~~ended inMarch ~~December~~31, ~~2017~~2019.

~~General~~Exploration ~~and administrative, excluding stock-based compensation (“G&A”)~~costs. Exploration ~~G&A~~costs for the three months ended ~~September 30~~March 31, ~~2019~~2020 increased compared to the three months ended ~~September 30~~March 31, ~~2018~~2019. ~~The~~During ~~increase~~March 2020, we announced that we halted our drilling and completion activity and as a result we expect to ~~G&A~~lose ~~expense~~a ~~was~~portion ~~primarily~~of ~~due~~our undeveloped acreage through lease expirations, which led to ~~incurring~~us recording an impairment to unproved property of approximately $012.8 million. ofWe ~~increased~~did ~~fees~~not ~~for~~have ~~certain~~any ~~outside~~impairments ~~advisers~~to ~~and~~unproved ~~consultants~~property during the three months ended March 31, 2019.

~~Stock~~General and administrative, excluding stock-based compensation (“G&A”). ~~Stock-based~~ ~~compensation~~G&A for the three months ended ~~September 30~~March 31, ~~2019~~2020 ~~decreased~~increased compared to the three months ended ~~September 30~~March 31, ~~2018~~2019. ~~primarily~~As ~~due~~a toresult ~~forfeitures.~~of ~~Because~~the wereduction ~~account~~of ~~for~~52 ~~forfeitures~~full-time employees as ~~they~~announced ~~occur~~on byMarch ~~reversing~~26, ~~compensation~~2020, ~~cost~~we ~~previously~~recorded ~~recognized~~an ~~and~~accrual ~~associated~~for ~~with~~severance ~~unvested~~payments ~~awards~~of ~~when~~approximately ~~the~~$3.3 ~~award~~million. isThis ~~forfeited,~~increase wewas ~~expect~~partially ~~volatility~~offset by a decrease in our ~~stock~~short-~~based~~term ~~compensation;~~incentive ~~however,~~bonus weaccrual doof ~~not~~approximately ~~expect~~$1.3 ~~such~~million. ~~volatility~~We toimplemented bea ~~significant~~new bonus incentive program in April 2020 and therefore no expense was record during the first quarter of 2020.

Stock-based compensation. Stock-based compensation for the three months ended March 31, 2020 decreased compared to the three months ended March 31, 2019 primarily due to forfeitures. Because we account for forfeitures as they occur by reversing compensation cost previously recognized and associated with unvested awards when the award is forfeited, we expect volatility in our stock-based compensation. Stock-based compensation expense decreased significantly during the three months ended March 31, 2020 due to forfeitures related to the reduction of 52 full-time employees announced on March 26, 2020 and other employee departures in the quarter.

Other income and expenses. The following table summarizes our other income and expense for the periods indicated:

	Three Months Ended September 30,
	Three Months Ended March 31,
	2019			2018			Change			Change %
	2020			2019			Change			Change %
	(In thousands)
Other income (expense):
Interest expense, net	$	(710,~~950~~814	)	$	(5,~~363~~600	)	$	(25,~~587~~214	)	4893	%
Gain (loss) on commodity derivative instruments, net	39110,~~368~~120			(67104,~~314~~571		)	~~106~~214,~~682~~691			(~~158~~205	)
Other expense, net	(764		)	(93		)	(671		)	722
Other income, net	54,108			62			54,046			87,171
Total other income (expense), net	$	30153,~~654~~414		$	(72110,~~770~~109	)	$	~~103~~263,~~424~~523		(~~142~~239	)%

44Interest expense, net. Interest expense, net for the three months ended March 31, 2020 increased compared to the three months ended March 31, 2019. In July 2019, we entered into interest rate swaps that extend through August 2022 on a portion of our outstanding borrowing under our revolving credit facility. The increase in interest expense for the three months ended March 31, 2020 primarily relates to an unrealized mark-to-market loss of approximately $4.5 million on our interest rate swaps. In addition, the interest expense related to our revolving credit facility increased by $0.5 million during the three months ended March 31, 2020 compared to the same period in 2019 as a result of an increase in borrowings outstanding.

~~Interest~~Gain ~~expense~~(loss) on commodity derivative instruments, net. ~~Interest~~ ~~expense,~~Net ~~net~~gains ~~for~~and ~~the~~losses ~~three~~on ~~months~~our ~~ended~~commodity ~~September~~derivatives ~~30,~~are ~~2019~~a ~~increased~~function ~~compared~~of tofluctuations in the ~~three~~underlying ~~months~~commodity ~~ended~~prices ~~September~~versus 30fixed hedge prices, ~~2018.~~time Indecay ~~July~~associated ~~2019,~~with weoptions ~~entered~~and ~~into~~the ~~interest~~monthly ~~rate~~settlement ~~swaps~~of ~~that~~the ~~extend~~instruments. ~~through~~The ~~August~~total ~~2022~~net ongain afor ~~notional~~the ~~amount~~three months ended March 31, 2020 is comprised of net gains of $~~150~~8.05 million ofon ~~our~~cash ~~outstanding~~settlements ~~borrowing~~and ~~under~~net ~~our~~gains ~~revolving~~of ~~credit facility~~$101.6 ~~The~~million on mark-to-market adjustments on ~~the~~unsettled ~~interest~~positions. ~~rate~~The ~~swaps~~total ~~was~~net a loss ~~of $1.3 million~~ for the three months ended ~~September 30~~March 31, 2019. Inis ~~addition,~~comprised ~~the~~of ~~interest~~net ~~expense~~losses ~~related~~of ~~to our revolving credit facility increased by~~ $1.20 million ~~during~~on ~~the~~cash ~~three~~settlements ~~months~~and ~~ended~~net ~~September~~losses ~~30,~~of ~~2019~~$103.5 ~~compared~~million on mark-to-market ~~the~~adjustments ~~same~~on ~~period~~unsettled ~~in 2018 as a result of an increase in borrowings outstanding~~positions.

~~Gain~~Other ~~(loss)~~income, onnet. ~~commodity~~Other ~~derivative instruments~~income, net. ~~Net~~for ~~gains~~the ~~and~~three ~~losses~~months onended ~~our~~March 31, ~~commodity~~2020 ~~derivatives~~increased ~~are~~compared ato ~~function~~the ofthree ~~fluctuations~~months inended ~~the~~March 31, ~~underlying~~2019. ~~commodity~~The ~~prices~~increase ~~versus~~is ~~fixed~~primarily ~~hedge~~related ~~prices,~~to ~~time~~our ~~decay~~revaluation ~~associated~~of ~~with~~the ~~options~~Tax ~~and~~Receivable ~~the~~Agreement ~~monthly~~liability, ~~settlement~~which resulted in an adjustment of ~~the~~$53.6 ~~instruments~~million. ~~The~~We ~~total~~account ~~net~~for ~~gain~~amounts ~~for~~payable under the ~~three~~Tax ~~months~~Receivable ~~ended~~Agreement ~~September 30,~~in ~~2019~~accordance iswith ~~comprised~~ASC ofTopic ~~net~~450, ~~losses~~Contingencies. Due to the uncertainty of ~~$2.5~~the ~~million~~market, onthe ~~cash~~significant ~~settlements~~decrease ~~and~~in ~~net~~oil ~~gains~~prices ofthat ~~$41.9~~began ~~million~~during onthe ~~mark-to-market~~first ~~adjustments~~quarter onof ~~unsettled~~2020 ~~positions.~~and ~~The~~having ~~total~~substantial ~~net~~doubt ~~loss~~about ~~for~~our ~~the~~ability ~~three~~to ~~months~~continue ~~ended~~as ~~September 30~~a going concern, ~~2018~~it is ~~comprised~~not ofprobable ~~net~~that ~~losses~~we ofwill ~~$5.0~~have ~~million~~sufficient onfuture ~~cash~~taxable ~~settlements~~income ~~and~~to ~~net~~utilize ~~losses~~all ofthe ~~$62.3~~tax ~~million~~benefits ongenerated ~~mark-to-market~~from ~~adjustments~~the onTax ~~unsettled~~Receivable ~~positions~~Agreement.

Other expense, net. Other expense, net for the three months ended September 30, 2019 increased compared to the three months ended September 30, 2018 primarily due to the write-off of $1.0 million of debt issuance costs.50

Results of Operations

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Oil, Natural Gas and NGL Sales Revenues. The following table provides the components of our revenues for the periods indicated, as well as each period’s respective average sales prices and volumes:

	Nine Months Ended September 30,
	2019		2018		Change			Change %
	(Dollars in thousands, except price data)
Revenues:
Oil sales	$	206,440	$	197,414	$	9,026		5	%
Natural gas sales	1,215		6,686		(5,471		)	(82	)
NGL sales	9,847		14,770		(4,923		)	(33	)
Total revenues	$	217,502	$	218,870	$	(1,368	)	(1	)%
Average sales price (1):
Oil (per Bbl)	$	52.22	$	58.32	$	(6.10	)	(10	)%
Natural gas (per Mcf)	0.26		1.87		(1.61		)	(86	)
NGLs (per Bbl)	11.95		23.98		(12.03		)	(50	)
Total (per Boe)	$	39.20	$	47.61	$	(8.41	)	(18	)%
Total, including effects of gain (loss) on settled
commodity derivatives, net (per Boe)	$	37.61	$	43.87	$	(6.26	)	(14	)%
Net production:
Oil (MBbls)	3,953		3,385		568			17	%
Natural gas (MMcf)	4,625		3,577		1,048			29
NGLs (MBbls)	824		616		208			34
Total (MBoe)	5,548		4,597		951			21	%
Average daily net production volume:
Oil (Bbls/d)	14,480		12,399		2,081			17	%
Natural gas (Mcf/d)	16,941		13,103		3,838			29
NGLs (Bbls/d)	3,018		2,256		762			34
Total (Boe/d)	20,322		16,839		3,483			21	%

(1) Excluding the effects of settled and unsettled commodity derivative transactions unless noted otherwise.

The decrease in total revenues was due to a decrease in average sales price, partially offset by an increase in sales volume. The decrease in average sales price contributed to approximately $36.8 million of the decrease in total revenues and was partially offset by the $35.4 million impact of the increase in sales volume. The decrease in average sales price is due to lower price indices for WTI crude oil prices and Mont Belvieu liquid prices and less favorable pricing differentials for natural gas. The increase in sales volumes is primarily due to new wells coming online without any significant offsetting decrease in production from natural well production declines.

We adopted ASC 606 on January 1, 2019. The adoption of ASC 606 resulted in the Company recording less total revenue of approximately $1.6 million. There was no impact on our net loss; the impact was a change in presentation between revenues and G&T expense based on where control of our oil, natural gas and NGL production transfers to the customer. The change did not significantly impact our reported average sales for each product. See Note 17 - Revenue from Contracts with Customers of this Quarterly Report on Form 10-Q in Part I, Item 1 for more detail on our revenue recognition under ASC 606.

Operating expenses. The following table summarizes our operating expenses for the periods indicated:

	Nine Months Ended September 30,
	2019			2018		Change			Change %
	(In thousands, except per Boe data)
Operating expenses:
Lease operating expenses	$	31,012		$	29,315	$	1,697		6	%
Production taxes	10,011			10,515		(504		)	(5	)
Gathering and transportation	4,562			3,246		1,316			41
Depreciation, depletion, amortization and accretion	103,158			104,784		(1,626		)	(2	)
Exploration costs	3,156			3,659		(503		)	(14	)
General and administrative, excluding stock-based compensation	22,637			18,005		4,632			26
Stock-based compensation	4,629			5,364		(735		)	(14	)
(Gain) loss on disposition of property and equipment	(11,106		)	325		(11,431		)	(3,517	)
Total operating expenses	$	168,059		$	175,213	$	(7,154	)	(4	)%
Operating expenses per Boe:
Lease operating expenses	$	5.59		$	6.38	$	(0.79	)	(12	)%
Production taxes	1.80			2.29		(0.49		)	(21	)
Gathering and transportation	0.82			0.71		0.11			15
Depreciation, depletion, amortization and accretion	18.59			22.79		(4.20		)	(18	)
Exploration costs	0.57			0.80		(0.23		)	(29	)
General and administrative, excluding stock-based compensation	4.08			3.92		0.16			4
Stock-based compensation	0.83			1.17		(0.34		)	(29	)
(Gain) loss on disposition of property and equipment	(2.00		)	0.07		(2.07		)	(2,957	)
Total operating expenses per Boe	$	30.28		$	38.13	$	(7.85	)	(21	)%

Lease operating expenses. LOE for the nine months ended September 30, 2019 increased compared to the nine months ended September 30, 2018. We incurred higher workover, repair and maintenance activity compared to the previous period due to our increased well count and our well count increased as a result of our drilling program. In addition, we incurred higher costs associated with equipment rentals utilized for gas lift compared to the previous period. The decrease in our LOE Rate is due to a lower level of water disposal costs now that we have facilities in place to handle produced waste water.

Production taxes. Production taxes for the nine months ended September 30, 2019 decreased compared to the nine months ended September 30, 2018. Production taxes are primarily based on the market value of our wellhead production. The decrease was primarily due to a decrease in total revenues. Our total revenues decreased by 1% and production taxes decreased by 5%. Production taxes as a percentage of total revenues were 4.6% and 4.8% for the nine months ended September 30, 2019 and 2018, respectively.

Gathering and transportation. G&T for the nine months ended September 30, 2019 increased compared to the nine months ended September 30, 2018. G&T increased by approximately $1.0 million due to an increase in sales volume and $0.3 million due to an increase in the G&T Rate. Although the G&T Rate increased, the increase was partially offset by the adoption of ASC 606, which resulted in the Company recording costs of approximately $1.6 million previously classified as G&T as an offset to total revenues. The increase in sales volumes is primarily due to new wells coming online without any significant offsetting decrease in production from natural well production declines.

Depreciation, depletion, amortization and accretion expense. See the following table for a breakdown of DD&A:

	Nine Months Ended September 30,
	2019		2018		Change			Change %
	(In thousands, except per Boe data)
Components of DD&A and Accretion
Depreciation, depletion and amortization of oil and gas properties	$	101,927	$	103,823	$	(1,896	)	(2	)%
Depreciation of other property and equipment	645		519		126			24
Accretion expense	586		442		144			33
	$	103,158	$	104,784	$	(1,626	)	(2	)%
DD&A and Accretion per Boe
Depreciation, depletion and amortization of oil and gas properties	$	18.37	$	22.58	$	(4.21	)	(19	)%
Depreciation of other property and equipment	0.12		0.11		0.01			9
Accretion expense	0.11		0.10		0.01			10
Total DD&A and Accretion per Boe	$	18.60	$	22.79	$	(4.19	)	(18	)%

DD&A for our oil and gas properties decreased by $23.4 million due to a decrease in the DD&A Rate. The DD&A Rate was higher during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2019 due to a higher level of infrastructure costs being added to the depletion group without associated proved reserves being added. This decrease was partially offset by an increase of $21.5 million in DD&A for our oil and gas properties due to an increase in production primarily attributable to new wells coming online without any significant offsetting decrease in production from natural well production declines.

Exploration costs. Exploration costs include exploratory seismic expenditures, other geological and geophysical costs, lease rentals and drilling costs of exploratory wells that are determined to be unsuccessful. Exploration costs for the nine months ended September 30, 2019 decreased compared to the nine months ended September 30, 2018 primarily due to lower fees incurred related to our ongoing seismic studies of the acreage we acquired in the Southern Delaware Basin in December 2017.

General and administrative, excluding stock-based compensation. G&A for the nine months ended September 30, 2019 increased compared to the nine months ended September 30, 2018. The increase to G&A expense was primarily due to an increase in payroll and payroll related costs of $4.6 million as a result of an increase in full-time employees.

Stock-based compensation. Stock-based compensation for the nine months ended September 30, 2019 decreased compared to the nine months ended September 30, 2018 primarily due to forfeitures. Because we account for forfeitures as they occur by reversing compensation cost when the award is forfeited, we expect some volatility in our stock-based compensation; however, we do not expect such volatility to be significant.

(Gain) loss on disposition of property and equipment. The gain on disposition of property and equipment for the nine months ended September 30, 2019 primarily relates to the sale of all of our rights, title and interests to all leases, wells, facilities, easements and contracts located in Lea County, New Mexico (the “Tatanka Assets”) and recognizing a gain of approximately $11.1 million upon closing the sale in April 2019.

Other income and expenses. The following table summarizes our other income and expense for the periods indicated:

	Nine Months Ended September 30,
	2019			2018			Change			Change %
	(In thousands)
Other income (expense):
Interest expense, net	$	(19,560	)	$	(13,892	)	$	(5,668	)	41	%
Loss on commodity derivative instruments, net	(36,826		)	(108,553		)	71,727			(66	)
Other income (expense), net	(671		)	329			(1,000		)	(304	)
Total other income (expense), net	$	(57,057	)	$	(122,116	)	$	65,059		(53	)%

Interest expense, net. Interest expense, net for the nine months ended September 30, 2019 increased compared to the nine months ended September 30, 2018. The interest expense related to our revolving credit facility increased by $4.7 million during the nine months ended September 30, 2019 compared to the same period in 2018 as a result of an increase in borrowings outstanding. Also, in July 2019, we entered into interest rate swaps that extend through August 2022 on a notional amount of $150.0 million of our outstanding borrowing under our revolving credit facility. The mark-to-market on the interest rate swaps was a loss of $1.3 million for the nine months ended September 30, 2019. The increase in interest expense was partially offset by a decrease of $0.3 million in amortization of debt issuance.

Gain (loss) on commodity derivative instruments, net. Net gains and losses on our commodity derivatives are a function of fluctuations in the underlying commodity prices versus fixed hedge prices, time decay associated with options and the monthly settlement of the instruments. The total net loss for the nine months ended September 30, 2019 is comprised of net losses of $8.8 million on cash settlements and net losses of $28.0 million on mark-to-market adjustments on unsettled positions. The total net loss for the nine months ended September 30, 2018 is comprised of net losses of $17.2 million on cash settlements and net losses of $91.4 million on mark-to-market adjustments on unsettled positions.

Other expense, net. Other expense, net for the nine months ended September 30, 2019 increased compared to the nine months ended September 30, 2018 primarily due to the write-off of $1.0 million of debt issuance costs.

Capital Requirements and Sources of Liquidity

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