Item 1A. Risk Factors
Item 1A. Risk Factors
Our business involves a high degree of risk. If any of the following risks, or any risk described elsewhere in this Annual Report on Form 10-K, actually occurs, our business, financial condition, or results of operations could suffer. The risks described below are not the only ones facing us. Additional risks not presently known to us or which we currently consider to be immaterial also may adversely affect us.
Risks related to the oil and natural gas industry and our Company
A substantial or extended decline in oil and natural gas prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments.
The price we receive for our oil and natural gas significantly influences our revenue, profitability, access to capital, and future rate of growth. Oil and natural gas are commodities and their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. For example, average daily prices for WTI oil ranged from a high of $74 per barrel to a low of a negative $38 per barrel, and Henry Hub natural gas prices ranged from a high of $23.86 to a low of $1.33 per MMBTU over our last two fiscal years. Historically, the markets for oil, natural gas, and natural gas liquids have been volatile and these markets will likely continue to be volatile in the future. The prices we receive for our production depend on numerous factors beyond our control, including, but not limited to the following:
• changes in global supply and demand for oil and natural gas, which has been negatively affected by concerns about the impact of COVID-19;
• worldwide and regional economic conditions impacting the global supply and demand for oil and natural gas;
• actions of OPEC+ or other groups of oil producing nations;
• the price and quantity of imports of foreign oil and natural gas;
• political conditions in or affecting other oil-producing and natural gas-producing countries;
• governmental, scientific, and public concern over the threat of climate change arising from greenhouse emissions;
• the level of global oil and natural gas exploration and production;
• the level of global oil and natural gas inventories;
• localized supply and demand fundamentals of regional, domestic, and international transportation availability;
• weather conditions, natural disasters, and seasonal trends;
• domestic and foreign governmental regulations;
• speculation as to the future price of oil and the speculative trading of oil and natural gas futures contracts;
• price and availability of competitors' supplies of oil and natural gas;
• technological advances affecting energy consumption; and
• the price and availability of alternative fuels.
Substantially all of our production is sold to purchasers under short-term (less than 12-month) contracts at market-based prices. A decline in oil, natural gas, and NGL prices will reduce our cash flows, borrowing ability, the present value of our reserves, and our ability to develop future reserves. We may be unable to obtain needed capital or financing on satisfactory terms. Low oil, natural gas, and NGL prices may also reduce the amount of oil, natural gas, and NGL that we can produce economically, which could lead to a decline in our oil, natural gas and NGL reserves. At June 30, 2021, approximately 36% of our proved reserves are oil reserves, 35% are natural gas and 29% are NGL reserves. As such, we are heavily impacted by movements in natural gas and oil prices, the latter also influencing NGL prices. To the extent that we have not hedged our production with derivative contracts or fixed-price contracts, any significant and extended decline in oil, natural gas, and NGL prices may adversely affect our financial position.
Our revenues are concentrated in three assets and related declines in production or other events beyond our control could have a material adverse effect on our results of operations and financial results.
Our revenues come from our royalty, mineral, and working interests in the Delhi field in Louisiana, the Hamilton Dome field in Wyoming, and the Barnett Shale in Texas and thus our current revenues are concentrated from these fields. Any significant downturn in production, oil, natural gas, and NGL prices, or other events beyond our control which impact these fields could have a material adverse effect on our results of operations and financial results. We are not the operator of these fields, and our revenues and future growth are heavily dependent on the success of operations, which we do not control.
Operating results from oil and natural gas production may decline; we may be unable to acquire and develop the additional oil and natural gas reserves that are required in order to sustain our business operations.
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In general, the volumes of production from oil and natural gas properties decline as reserves are depleted, with the rate of decline depending on reservoir characteristics. Except to the extent we acquire additional properties containing proved reserves or conduct successful development activities, or both, our proved reserves will naturally decline. Our production is heavily dependent on our interests in EOR production that began during March 2010 in the Delhi field and our interests in the Hamilton Dome field in Wyoming and Barnett Shale in Texas. Environmental or operating problems or lack of extended future investment in any of these assets could cause our net production of oil, natural gas, and NGLs to decline significantly over time, which could have a material adverse effect on our financial condition. In fiscal 2021, our production was impacted by the operators of the Delhi and Hamilton Dome fields. Delhi production volumes were negatively impacted as a result of the financial strain Denbury was under and their lack of investment in projects in the field, including the delay of our Phase V, in addition to the purchased CO 2 line being shut in for repairs. In the Hamilton Dome field Merit temporarily shut in a portion of the production as it was uneconomic at the historically low prices. As of June 30, 2021, Merit has reactivated the inventory of shut-in wells capable of supporting their expenses and we continue to monitor their performance; however, there is no guarantee that prolonged periods of being shut-in or lack of investment would not negatively impact future production.
We have limited control over the activities on properties we do not operate.
Substantially all of our property interests are not operated by the Company and involve other third-party working interest owners. As a result, we have limited ability to influence or control the operation or future development of such properties, including compliance with environmental, safety, and other regulations, or the amount of capital expenditures that we will be required to fund with respect to such properties. Operators of these properties may act in ways that are not in our best interest. Moreover, we are dependent on the other working interest owners of such projects to fund their contractual share of the capital expenditures of such projects. These limitations and our dependence on the operator and other working interest owners for these projects could cause us to incur unexpected future costs, result in lower production, and materially and adversely affect our financial conditions and results of operations.
We are materially dependent upon our operators with respect to the successful operation of our principal assets, which consist of our interests in Delhi field, Hamilton Dome field, and the Barnett Shale. A materially negative change in any of our operator’s financial condition could negatively affect operations (or timing thereof) in these assets, and consequently our income (or timing thereof) from these assets as well as the value of our interests in these assets.
Any significant downturn in production or other events beyond our control which impact our assets could have a material adverse effect on our results of operations and financial results (or timing thereof).
We are not the operator of the Delhi field. It is operated by a subsidiary of Denbury Inc. (“DNR”), an independent oil and gas company specializing in tertiary recovery with CO 2 . Our revenues and future growth are thus heavily dependent on the success of operations which we do not control.
Further, our CO 2 - Enhanced Oil Recovery (“CO 2 -EOR”) project in the Delhi field requires significant amounts of CO 2 reserves and technical expertise, the sources of which have been committed by the operator. Additional capital remains to be invested to fully develop this project, further increase production, and maximize the value of this asset. The operator's failure to manage these and other technical, environmental, operating, strategic, financial, and logistical matters could cause ultimate enhanced recoveries from the planned CO 2 - EOR project to fall short of our expectations in volume and/or timing. Such occurrences could have a material adverse effect on us, and our results of operations and financial condition.
Our economic success is thus materially dependent upon the Delhi field operator's ability to: (i) deliver sufficient quantities of CO 2 from its reserves in the Jackson Dome source, (ii) secure its share of capital necessary to fund development and operating commitments with respect to the field, and (iii) successfully manage related technical, operating, environmental, strategic, and logistical risks, among other things.
In July 2020, Denbury announced that it had entered into a Restructuring Support Agreement with holders of 100% of revolving credit facility loans, approximately 67.2% of second lien notes and approximately 70.8% of convertible notes for a “pre-packaged” plan to eliminate $2.1 billion of bond debt and subsequently filed for voluntarily filed petitions for reorganization under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. Denbury subsequently announced on September 3 rd that its plan to eliminate $2.1 billion of its bond debt has been confirmed by the court which substantially reduced its debt, strengthened its balance sheet, and positioned Denbury to free up capital for investment in properties such as Delhi again.
We are not the operator of the Hamilton Dome field. It is operated by Merit, a private oil and natural gas company. Our revenues and future growth are thus heavily dependent on the success of operations which we do not control.
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We are not the operator of the Barnett Shale assets. At the time of acquisition, approximately 90% of the wells in the Barnett Shale field were operated by Blackbeard, and the remaining 10% of wells were operated by seven other operators. Our revenues and future growth are thus heavily dependent on the success of operations which we do not control.
In May 2021, Blackbeard announced an agreement to sell its interest in the Barnett Shale assets to Diversified Energy. The transaction closed in July 2021, with Diversified Energy taking over as operator . Our revenues and future growth are heavily dependent on a smooth transition of operations from Blackbeard to Diversified Energy and the success of operations under Diversified Energy, which we do not control.
The types of resources we focus on have substantial operational risks.
Our business plan focuses on the acquisition and development of known resources in partially depleted reservoirs, naturally fractured, or low permeability reservoirs. Our Delhi and Hamilton Dome assets are productive from relatively shallow reservoirs, while our Barnett Shale assets produce from deeper reservoirs. Shallower reservoirs usually have lower pressure, which generally translates into lower reserve volumes in place. Deeper reservoirs have higher pressures and usually more reserve volumes, but capturing those reserves often comes at increased drilling and completion cost and risk. Low permeability reservoirs require more wells and substantial stimulation for development of commercial production. Naturally fractured reservoirs require penetration of sufficient un-depleted fractures to establish commercial production. Depleted reservoirs require successful application of newer technology to produce incremental reserves.
Our CO 2 -EOR project in the Delhi field, operated by Denbury, requires significant amounts of CO 2 reserves, development capital, and technical expertise, the sources of which to date have been committed by the operator. Although initial CO 2 injection began at Delhi in November 2009, initial oil production response began in March 2010 and a large part of the capital budget has already been expended. Additional capital remains to be invested to fully develop the EOR project, further increase production, and maximize the value of the asset. The operator's failure to manage these and other technical, environmental, operating, strategic, financial, and logistical risks may ultimately cause enhanced recoveries from the planned CO 2 -EOR project to fall short of our expectations in volume and/or timing. Such occurrences would have a material adverse effect on the Company, its results of operations and financial condition.
Oil and natural gas development, re-completion of wells from one reservoir to another reservoir, restoring wells to production, and drilling and completing new wells are speculative activities which involve numerous risks and substantial uncertain costs.
Our growth will be partially dependent upon the success of our future development program. Drilling for oil and natural gas and extracting NGLs and re-working existing wells involve numerous risks. The risk that no commercially productive oil or natural gas reservoirs will be encountered is paramount. The cost of drilling, completing, and operating wells is substantial and uncertain; drilling operations may be curtailed, delayed, or canceled as a result of a variety of factors beyond our control, including, but not limited to:
• unexpected drilling conditions;
• pressure fluctuations or irregularities in reservoir formations;
• equipment failures or accidents;
• regulatory climate;
• inability to obtain or maintain leases on economic terms, where applicable;
• adverse weather conditions;
• compliance with governmental requirements; and
• shortages or delays in the availability of drilling rigs or crews and the delivery of equipment.
Drilling or re-working is a highly speculative activity. Even when fully and correctly utilized, modern well completion and production techniques such as horizontal drilling or CO 2 injection, do not guarantee that we will find and produce oil and/or natural gas in our wells in economic quantities. Our future drilling activities may not be successful and, if unsuccessful, such failure would have an adverse effect on our future results of operations and financial condition. We cannot guarantee that our overall drilling success rate will not decline.
We may also identify and develop prospects through a number of methods, some of which may include horizontal drilling or tertiary injectants, and some of which may be unproven. The drilling and results for these prospects may be particularly uncertain. We cannot ensure that these projects can be successfully developed or that the wells discussed will, if drilled, encounter reservoirs of commercially productive oil or natural gas.
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The loss of a large single purchaser of our oil and natural gas could reduce the competition of our production.
For the year ended June 30, 2021, one purchaser accounted for approximately 62% of our total oil revenues. We do not currently market our share of oil, natural gas, and NGLs production from the Delhi field, the Hamilton Dome field, or the Barnett Shale. Although we have the right to take our working interest production in-kind, we are currently accepting terms under the operators' agreements for the delivery and pricing of our oil, natural gas and NGLs. The loss of a large purchaser for our oil production could negatively impact the revenue we receive. We cannot guarantee that we could readily find other purchasers for our oil and natural gas production.
Our oil and natural gas reserves are only estimates and may prove to be inaccurate.
There are numerous uncertainties inherent in estimating oil and natural gas reserves and their estimated values. Our reserves are only estimates that may prove to be inaccurate because of these inherent uncertainties. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot always be measured in an exact manner. Estimates of economically recoverable oil and natural gas reserves depend upon a number of variable factors. These factors include historical production from the area compared with production from other comparable producing areas, assumptions concerning effects of regulations by governmental agencies, future oil and natural gas product prices, future operating costs, severance and excise taxes, development costs, work-over costs, and remedial costs. Some or all of these assumptions utilized in estimating reserve volumes may vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of reserves, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected from reserves may vary substantially depending on the timing and different engineers preparing reserves estimates.
Accordingly, reserve estimates may be subject to downward or upward adjustments. Actual production, revenue, and expenditures with respect to our reserves will likely vary from estimates; such variances may be material. The information regarding discounted future net cash flows included in this report should not be considered as the current market value of the estimated oil and natural gas reserves attributable to our properties. The estimated discounted future net cash flows from proved reserves are based on the 12-month average price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as the amount and timing of actual production, supply and demand for oil and natural gas, increases or decreases in consumption, and changes in governmental regulations or taxation. In addition, the 10% discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor. Interest rates in effect vary from time to time based on risks associated with us or the oil and natural gas industry in general. The Standardized Measure does not necessarily correspond to market value.
Regulatory and accounting requirements may require substantial reductions in reporting proven reserves.
On a periodic basis, we review the carrying value of our oil and natural gas properties under the applicable rules of various regulatory agencies, including the SEC. Under the full cost method of accounting that we use, the after-tax carrying value of our oil and natural gas properties may not exceed the present value of estimated future net after-tax cash flows from proved reserves, discounted at 10%. Application of this “ceiling” test requires pricing future revenues at the previous 12-month average beginning-of-month price and requires a write-down of the carrying value for accounting purposes if the ceiling is exceeded. We may in the future be required to write down the carrying value of our oil and natural gas properties when oil and natural gas prices are depressed or unusually volatile. Whether we will be required to take such a charge will depend in part on the prices of oil and natural gas during the previous period and the effect of reserve additions or revisions and capital expenditures during such period. If a write-down is required, it would result in a current charge to our earnings but would not impact our current cash flow from operating activities. A large write-down could adversely affect our compliance with the current financial covenants under our credit facility, could limit our access to future borrowings under that facility, or require repayment of any amounts that might be outstanding at the time.
Our derivative activities could result in financial losses or could reduce our income.
To achieve more predictable cash flows and to reduce our exposure to adverse fluctuations in the prices of oil and NGLs, we have, and may in the future, enter into derivative arrangements for a portion of our oil, natural gas, and NGLs production. Derivative arrangements may include costless collars and fixed-price swaps. We have not historically designated any of our derivative instruments as hedges for accounting purposes and record all derivative instruments on our balance sheet at fair value. Changes in the fair value of our derivative instruments are recognized in earnings. Accordingly, our earnings may fluctuate significantly as a result of changes in the fair value of our future derivative instruments. Derivative arrangements may also expose us to the risk of financial loss in some circumstances, including, but not limited to, if:
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• production is less than the volume covered by the derivative instruments;
• the counterparty to the derivative instrument defaults on its contract obligations; or
• there is a change in the expected differential between the underlying price in the derivative instrument and actual price received.
In addition, some of these types of derivative arrangements limit the benefit we would receive from increases in the prices for oil, natural gas and NGLs and may expose us to cash margin requirements.
We may have difficulty managing future growth and the related demands on our resources and may have difficulty in achieving future growth.
Although we plan to experience growth through acquisitions and development activity, any such growth may place a significant strain on our financial, technical, operational, and administrative resources. Our ability to grow will depend upon a number of factors, including, but not limited to the following:
• our ability to identify and acquire new development projects;
• our ability to develop new and existing properties;
• our ability to continue to retain and attract skilled personnel;
• the results of our development program and acquisition efforts;
• the success of our technologies;
• hydrocarbon prices;
• drilling, completion, and equipment prices;
• our ability to successfully integrate new properties;
• our access to capital; and
• the Delhi field operator's ability to: (i) deliver sufficient quantities of CO2 from its reserves in the Jackson Dome, (ii) secure all of the development capital necessary to fund its and our cost interests, and further develop the Delhi field, such as advancement of Phase V development in the undeveloped eastern part of the field, (iii) successfully manage technical, operating, environmental, strategic and logistical development and operating risks, and (iv) maintain its own financial stability.
We cannot ensure that we will be able to successfully grow or manage any such growth.
Our operations may require significant amounts of capital and additional financing may be necessary in order for us to continue our exploitation activities.
Our cash flow from our reserves may not be sufficient to fund our ongoing activities at all times. From time to time, we may require additional financing in order to carry out our oil and natural gas acquisitions, exploitation, and development activities. Certain portions of our undeveloped leasehold acreage may be subject to expiration unless production is established. If our revenues from our reserves decrease as a result of lower oil and natural gas prices or otherwise, it will affect our ability to expend the necessary capital to replace our reserves or to maintain our current production. If our cash flow from operations is not sufficient to satisfy our capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available to meet these requirements or available to us on favorable terms.
We will be subject to risks in connection with acquisitions, and the integration of significant acquisitions may be difficult and may involve unexpected costs or delays.
We periodically evaluate acquisitions of reserves, properties, prospects, leaseholds, and other strategic transactions that appear to fit within our overall business strategy. The successful acquisition of producing properties requires an assessment of several factors, including, but not limited to:
• recoverable reserves;
• future oil and natural gas prices and their appropriate differentials;
• development and operating costs;
• potential for future drilling and production;
• validity of the seller's title to properties, which may be less than expected at closing; and
• potential environmental issues, litigation, and other liabilities.
The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and potential recoverable reserves. Inspections may not always be performed on every well, and environmental problems are not
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necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. Moreover, in the event of such an acquisition, there is a risk that we could ultimately be liable for unknown obligations related to acquisitions, which could materially adversely affect our financial condition, results of operations, or cash flows.
Significant acquisitions and other strategic transactions may involve other risks, including, but not limited to:
• our management team's capacity could be challenged by the demands of evaluating, negotiating, integrating significant acquisitions, and strategic transactions in concert with the Company's ongoing business demands;
• the challenge and cost of integrating acquired operations, information management, other technology systems, and business cultures with those of our operations while carrying on our ongoing business;
• difficulty associated with coordinating geographically separate organizations;
• an inability to secure, on acceptable terms, sufficient financing that may be required in connection with expanded operations and unknown liabilities; and
• the challenge of attracting and retaining personnel associated with acquired operations.
The process of integrating assets could cause an interruption of, or loss of momentum in, the activities of our business. Members of our senior management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage our business. If our senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer. In addition, even if we successfully integrate the assets acquired in an acquisition, it may not be possible to realize the full benefits we may expect in estimated proved reserves, production volumes, cost savings from operating synergies, other benefits anticipated from an acquisition, or realize these benefits within the expected time frame.
Government regulation and liability for oil and natural gas operations and environmental matters may adversely affect our business and results of operations.
Oil and natural gas operations are subject to extensive federal, state, and local government regulations, which may be changed from time to time. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties, and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas from wells below actual production capacity in order to conserve supplies of oil and natural gas. There are federal, state, and local laws and regulations primarily relating to protection of human health and the environment applicable to the development, production, handling, storage, transportation, and disposal of oil and natural gas, by-products thereof, the emission of CO 2 or other greenhouse gases, and other substances and materials produced or used in connection with oil and natural gas operations. These laws and regulations may affect the costs, manner and feasibility of our operations and require us to make significant expenditures in order to comply. In addition, we may inherit liability for environmental damages, whether actual or not, caused by previous owners of property we purchase or lease or from nearby properties. As a result, failure to comply with these laws and regulations may result in substantial liabilities to third parties or governmental entities. We are also subject to changing and extensive tax laws, the effects of which cannot be predicted. The implementation of new, or the modification of existing, laws or regulations could have a material adverse effect on us, such as diminishing the demand for our products through legislative enactment of proposed new penalties, fines and/or taxes on carbon that could have the effect of raising prices to the end user.
The risks arising out of concerns regarding the threat of climate change, including regulatory, political, litigation, and financial risks may adversely affect our business and results of operations.
The Company’s operations are subject to a number of risks arising out of concerns regarding the threat of climate change, including regulatory, political, litigation, and financial risks, that could result in increased operating costs and costs of compliance, limit the areas in which oil and natural gas production may occur and reduce the demand for oil and natural gas.
The threat of climate change continues to attract considerable attention. Numerous initiatives have been proposed and more are expected to come that focus on monitoring and limiting existing sources of greenhouse gas emissions as well as to restrict or eliminate emissions from new sources. As a result, the Company is subject to numerous risks associated with the production and processing of fossil fuels and emission of greenhouse gas.
Governmental, scientific, and public concern over the threat of climate change arising from greenhouse emissions has resulted in increasing political risks in the United States. Proposals to ban hydraulic fracturing of oil and natural gas wells and ban new leases for production of minerals on federal properties, including onshore lands and offshore waters have already been made. Other actions that could be pursued may include more restrictive requirements for drilling or construction permits, the reversal of the United States’ withdrawal from the Paris Agreement in November 2020, and reinstatement of the ban on oil exports. Litigation risks are also increasing as a number of suits against oil and natural gas exploration and production companies have
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been brought in state or federal court, alleging, among other things, that such companies created public nuisances by producing fuels that contributed to global warming effects.
There are also financial risks for the energy industry as it may become more difficult to access the capital markets as the threat of climate change may impact decisions made by potential investors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending practices and some of them may elect not to provide funding for fossil fuel energy companies. Limitation of investments in and financings for the energy industry could result in the restriction, delay or cancellation of drilling programs or development or production activities.
Our business could be negatively affected by security threats. A cyber-attack or similar incident could occur and result in information theft, data corruption, operational disruption, damage to our reputation, and/or financial loss.
The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain exploration, development, production, processing, and financial activities. We depend on digital technology to estimate quantities of oil and natural gas reserves, manage operations, process and record financial and operating data, analyze seismic and drilling information, and communicate with our employees and third-party partners. Our technologies, systems, networks, seismic data, reserves information, or other proprietary information, and those of our operators, vendors, suppliers, customers, and other business partners may become the target of cyber-attacks or information security breaches. Cyber-attacks or information security breaches could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or could otherwise lead to the disruption of our business operations or other operational disruptions in our exploration or production operations. Cyber-attacks are becoming more sophisticated and certain cyber incidents, such as surveillance, may remain undetected for an extended period and could lead to disruptions in critical systems or the unauthorized release of confidential or otherwise protected information. These events could lead to financial losses from remedial actions, loss of business, disruption of operations, damage to our reputation, or potential liability. Also, computers control nearly all of the oil and natural gas distribution systems in the United States of America and abroad. Computers are necessary to transport our oil and natural gas production to market. A cyber-attack directed at oil and natural gas distribution systems could damage critical distribution and storage assets or the environment, delay or prevent delivery of production to markets and make it difficult or impossible to accurately account for production and settle transactions. Cyber incidents have increased, and the United States of America government has issued warnings indicating that energy assets may be specific targets of cybersecurity threats. Our systems and insurance coverage for protecting against cybersecurity risks may not be sufficient. Further, as cyber-attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber-attacks.
Our insurance may not protect us against all of the operating risks to which our business is exposed.
The oil and natural gas business involves numerous operating hazards such as well blowouts, mechanical failures, explosions, uncontrollable flows of oil, natural gas, or well fluids, fires, formations with abnormal pressures, hurricanes, flooding, pollution, releases of toxic gas, and other environmental hazards and risks, which can result in (i) damage to or destruction of wells and/or production facilities, (ii) damage to or destruction of formations, (iii) injury to persons, (iv) loss of life, or (v) damage to property, the environment or natural resources. While we carry general liability, control of well, and operator's extra expense coverage typical in our industry, we are not fully insured against all risks incidental to our business. Environmental events similar to that experienced in the Delhi field in June 2013 could defer revenue, increase operating costs, and/or increase maintenance and repair capital expenditures.
The loss of key personnel could adversely affect us.
We depend to a large extent on the services of certain key management personnel, including our executive officers. The loss of one or more key personnel could have a material adverse effect on our operations. In particular, our future success is dependent upon the abilities of Robert Herlin, our Chairman of the Board, Jason Brown, our President and Chief Executive Officer, and Ryan Stash, Senior Vice President, Chief Financial Officer, and Treasurer, to source, evaluate, and close deals, raise capital, and oversee our development activities and operations. Presently, the Company is not a beneficiary of any key man life insurance.
Oil field service and materials prices may increase, and the availability of such services and materials may be inadequate to meet our needs.
Our business plan to develop or redevelop oil and natural gas resources requires third-party oilfield service vendors and various material providers, which we do not control. We also rely on third-party carriers for the transportation and distribution of our oil and natural gas production. As our production increases, so does our need for such services and materials. Generally, we do not have long-term agreements with our service and materials providers. Accordingly, there is a risk that any of our service providers could discontinue servicing our oil and natural gas fields for any reason or we may not be able to source the materials
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we need. Any delay in locating, establishing relationships, and training our sources could result in production shortages and maintenance problems, resulting in loss of revenue to us. In addition, if costs for such services and materials increase, it may render certain or all of our projects uneconomic, as compared to the earlier prices we may have assumed when deciding to redevelop newly purchased or existing properties. Further adverse economic outcomes may result from the long lead times often necessary to execute and complete our redevelopment plans.
We cannot market the oil and natural gas that we produce without the assistance of third-parties.
The marketability of the oil and natural gas that we produce depends upon the proximity of our reserves to, and the capacity of, facilities and third-party services, including oil and natural gas gathering systems, pipelines, trucking or terminal facilities, and processing facilities necessary to make the products marketable for end use. The unavailability or lack of capacity of such services and facilities could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties. A shut-in, delay, or discontinuance could adversely affect our financial condition.
We face strong competition from larger oil and gas companies.
Our competitors include major integrated oil and natural gas companies, numerous larger independent oil and natural gas companies, individuals, and drilling and income programs. Many of our competitors are large, well-established companies with substantially larger operating staffs and greater capital resources. We may not be able to successfully conduct our operations, evaluate and select suitable properties, or consummate transactions in this highly competitive environment. Specifically, these larger competitors may be able to pay more for development projects and productive oil and natural gas properties and may be able to define, evaluate, bid for, and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, such companies may be able to expend greater resources on hiring contract service providers, obtaining oilfield equipment, and acquiring the existing and changing technologies that we believe are, and will be, increasingly important to attaining success in our industry.
We have been, and in the future may become, involved in legal proceedings related to our properties or operations and, as a result, may incur substantial costs in connection with those proceedings.
From time to time we may be a defendant or plaintiff in various lawsuits. The nature of our operations exposes us to further possible litigation claims in the future. There is risk that any matter in litigation could be decided unfavorably against us regardless of our belief, opinion, and position, which could have a material adverse effect on our financial condition, results of operations, and cash flow. Litigation can be very costly, and the costs associated with defending litigation could also have a material adverse effect on our financial condition. Adverse litigation decisions or rulings may damage our business reputation.
Ownership of our oil, gas, and mineral production depends on good title to our property.
Good and clear title to our oil, natural gas, and mineral properties is important to our business. Although title reviews will generally be conducted prior to the purchase of most oil, natural gas, and mineral producing properties or the commencement of drilling wells, such reviews do not assure that an unforeseen defect in the chain of title will not arise to defeat our claim. This could result in a reduction or elimination of the revenue received by us from such properties.
Events outside of our control, including a pandemic or broad outbreak of an infectious disease, such as the ongoing global outbreak of a novel strain of the coronavirus identified in late 2019 (“COVID-19”) and subsequent variants, may materially adversely affect our business.
We face risks related to pandemics, outbreaks, or other public health events that are outside of our control and could significantly disrupt our operations and adversely affect out financial condition. In December 2019, a novel strain of a coronavirus, COVID-19, was identified in Wuhan, China. This virus continues to have a material impact globally. These and other actions could, among other things, impact the ability of our employees and contractors to perform their duties, cause increased technology and security risk due to extended and company-wide telecommuting, and lead to disruptions in our permitting activities and critical business relationships. Additionally, the COVID-19 outbreak and governmental restrictions have significantly impacted economic activity and markets and have dramatically reduced current and anticipated demand for oil and natural gas, adversely impacting the prices we receive for our production. The severity and duration of the current COVID-19 outbreak and the subsequent variants in addition to the potential for future outbreaks are uncertain and difficult to predict.
The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. We are unable to predict the ultimate adverse impact of COVID-19 on our business, which will depend on numerous evolving factors and future developments, including the length of time that the
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pandemic continues, its ongoing effect on the demand for oil and natural gas and the response of the overall economy and the financial markets after governmental restrictions are eased.
Poor general economic, business, or industry conditions may have a material adverse effect on our results of operations, liquidity, and financial condition.
During the last few years, concerns over inflation, energy costs, declining oil and natural gas prices, geopolitical issues, the availability and cost of credit, the United States of America mortgage market, uncertainties with regard to European sovereign debt, the slowdown in economic growth in large emerging and developing markets, such as China, regional or worldwide increases in tariffs or other trade restrictions, and other issues have contributed to increased economic uncertainty and diminished expectations for the global economy. Concerns about global economic conditions have had a significant adverse impact on domestic and international financial markets and commodity prices. If uncertain or poor economic, business, or industry conditions in the United States of America or abroad remain prolonged, demand for petroleum products could diminish or stagnate, and production costs could increase. These situations could impact the price at which we can sell our oil, natural gas, and NGLs, affect our vendors', suppliers', and customers' ability to continue operations, and ultimately adversely impact our results of operations, liquidity, and financial condition.
Risks Associated with Our Stock
Our stock price has been and may continue to be volatile.
Our common stock has relatively low trading volume and the market price has been, and is likely to continue to be, volatile. For example, during the fiscal year ended June 30, 2021, our stock price as traded on the NYSE American ranged from $2.75 to $5.15. The variance in our stock price makes it difficult to forecast with certainty the stock price at which an investor may be able to buy or sell shares of our common stock. The market price for our common stock could be subject to fluctuations as a result of factors that are out of our control, such as:
• actual or anticipated variations in our results of operations;
• naked short selling of our common stock and stock price manipulation;
• changes or fluctuations in the commodity prices of oil and natural gas;
• general conditions and trends in the oil and natural gas industry;
• redemption demands on institutional funds that hold our stock; and
• general economic, political and market conditions.
Significant ownership of our common stock is concentrated in a small number of shareholders who may be able to affect the outcome of the election of our directors and all other matters submitted to our stockholders for approval.
As of June 30, 2021 our executive officers and directors, in the aggregate, beneficially owned approximately 2.7 million shares, or approximately 8.0% of our beneficial common stock base. Blackrock Fund Advisors, et al controlled approximately 2.0 million shares or approximately 6.1% of our outstanding common stock, Arrowmark Colorado Holdings, LLC controlled approximately 2.0 million shares or approximately 6.1% of our outstanding common stock and Renaissance Technologies, LLC controlled approximately 2.2 million shares or approximately 6.5% of our outstanding common stock. As a result, any of these holders could potentially exercise significant influence over matters submitted to our stockholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets). This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of our company, impede a merger, consolidation, takeover, or other business combination involving our company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, which in turn could have an adverse effect on the market price of our common stock.
The market for our common stock is limited and may not provide adequate liquidity.
Our common stock trades on the NYSE American stock exchange. Trading volume in our common stock is relatively low compared to larger companies. During the fiscal year ended June 30, 2021, the daily trading volume in our common stock ranged from a low of 38,100 shares to a high of 4,596,300 shares, with average daily trading volume of 169,054 shares compared to average daily volume of 155,691 in fiscal 2020. Our holders may find it more difficult to sell their shares, should they desire to do so, based on the trading volume and price of our stock at that time relative to the quantity of shares to be sold.
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If securities or industry analysts do not publish research reports about our business, or if they downgrade our stock, the price of our common stock could decline.
Small, relatively unknown companies can achieve visibility in the trading market through research and reports that industry or securities analysts publish. To our knowledge, three independent analysts cover our company. The limited number of published reports by independent securities analysts could limit the interest in our common stock and negatively affect our stock price. We do not have any control over the research and reports these analysts publish or whether they will be published at all. If any analyst who does cover us downgrades our stock, our stock price could decline. If any analyst ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price to decline.
The issuance of additional common stock and preferred stock could dilute existing stockholders.
We currently have in place an effective registration statement which allows the company to publicly issue up to $500 million of additional securities, including debt, common stock, preferred stock, and warrants. At any time we may make private offerings of our securities. The shelf registration is intended to provide greater flexibility to the company in financing growth or changing our capital structure. We are authorized to issue up to 100,000,000 shares of common stock. To the extent of such authorization, our board of directors has the ability, without seeking stockholder approval, to issue additional shares of common stock in the future for such consideration as our board may consider sufficient. The issuance of additional common stock in the future would reduce the proportionate ownership and voting power of the common stock now outstanding. We are also authorized to issue up to 5,000,000 shares of preferred stock, the rights and preferences of which may be designated in series by our Board of Directors. Such designation of any new series of preferred stock may be made without stockholder approval and could create additional securities which would have dividend and liquidation preferences over the common stock now outstanding. Preferred stockholders could adversely affect the rights of holders of common stock by:
• exercising voting, redemption, and conversion rights to the detriment of the holders of common stock;
• receiving preferences over the holders of common stock regarding our surplus funds in the event of our dissolution, liquidation, or the payment of dividends to preferred stockholders;
• delaying, deferring, or preventing a change in control of our company; and
• discouraging bids for our common stock.
Payment of dividends on our common stock has been in the past, and could be in the future, reduced or eliminated.
Our Board of Directors declared cash dividends on our common stock for the first time in December 2013 and we have declared and paid quarterly cash dividends since that time. However, there is no certainty that dividends will be declared by the Board of Directors in the future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our business plan, restrictions contained in current or future debt instruments, contractual covenants or arrangements we may enter into, our anticipated capital requirements, and other factors that our Board of Directors may think are relevant. Although it is our intent to maintain a steady dividend for our shareholders, there is no guarantee that we will be able to do so. For example, during the 3rd quarter of fiscal 2020, we reduced our quarterly dividend from $0.10 per common share to $0.025. The quarterly dividend was $0.05 for the fourth quarter of fiscal 2021 as a result of an improving financial and industry outlook. There is no guarantee that we will be able or choose to continue to pay cash dividends on our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Information regarding our properties is included in Item 1 above and in Note 6 to our consolidated financial statements in Item 8, which information is incorporated herein by reference.
Item 3. Legal Proceedings
See Note 16 to our consolidated financial statements in Item 8 for a description of any legal proceedings, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not Applicable.
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PART II