Item 2. Properties
Item 2.
PROPERTIES.
Our executive offices, as well as offices of Prime Operating Company, Eastern Oil Well Service Company and EOWS Midland Company are located in leased premises in Houston, Texas.
We maintain district offices in Midland, Texas and Oklahoma City, Oklahoma and have field offices in Carrizo Springs and Midland, Texas, as well as, Elmore City, Oklahoma.
Substantially all of our oil and gas properties are subject to a mortgage given to collateralize indebtedness or are subject to being mortgaged upon request by our lenders for additional collateral.
The information set forth below concerning our properties, activities, and oil and gas reserves includes our interests in affiliated entities.
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The following table sets forth the exploratory and development drilling experience with respect to wells in which we participated during the three years ended December 31, 2022.
2022
2021
2020
Gross
Net
Gross
Net
Gross
Net
Exploratory:
Oil
—
—
—
—
—
—
Gas
—
—
—
—
—
—
Dry
—
—
—
—
—
—
Development:
Oil
8
0.76
13
4.73
1
0.1
Gas
—
—
—
—
—
—
Dry
—
—
—
—
—
—
Total:
Oil
8
0.76
13
4.73
1
0.1
Gas
—
—
—
—
—
—
Dry
—
—
—
—
—
—
8
0.76
13
4.73
1
0.1
Oil and Gas Production
As of December 31, 2022, we had ownership interest in the following number of gross and net producing oil and gas wells (1) .
Gross
Net
Producing Wells (1)
1,108
498
(1)
A gross well is a well in which a working interest is owned. A net well is the sum of the fractional revenue interests owned in gross wells.
The following table shows our net production of oil, NGL and natural gas for each of the three years ended December 31, 2022. “Net” production is net after royalty interests of others are deducted and is determined by multiplying the gross production volume of properties in which we have an interest by the percentage of the leasehold, mineral or royalty interest owned by us.
2022
2021
2020
Oil (barrels)
939,000
738,000
727,000
NGL (barrels)
417,000
416,000
435,000
Gas (Mcf)
3,325,000
3,236,000
3,374,000
The following table sets forth our average sales prices together with our average production costs per unit of production for the three years ended December 31, 2022.
2022
2021
2020
Average sales price per barrel of oil
$
96.70
$
68.39
$
38.02
Average sales price per barrel of NGL
$
35.70
$
26.97
$
11.22
Average sales price per Mcf of natural gas
$
5.54
$
3.53
$
1.24
Average production costs per net equivalent barrel of oil (1)
$
16.07
$
13.76
$
12.25
(1)
Net equivalent barrels are computed at a rate of 6 Mcf per barrel and costs exclude production taxes.
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Average oil, NGL and gas prices received including the impact of derivatives were:
2022
2021
2020
Average sales price per barrel of oil
$
87.77
$
64.04
$
45.79
Average sales price per barrel of NGL
$
35.70
$
26.97
$
11.22
Average sales price per Mcf of natural gas
$
4.44
$
2.97
$
1.38
Acreage
The following table sets forth the approximate gross and net undeveloped acreage in which we have leasehold and mineral interests as of December 31, 2022. “Undeveloped acreage” is that acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves.
Developed
Undeveloped
Total
Gross
Net
Gross
Net
Gross
Net
Leasehold acreage
88,599
24,029
—
—
88,599
24,029
Mineral fee acreage
1,640
117
19,257
417
20,897
534
Total
90,239
24,146
19,257
417
109,496
24,563
Total Net Undeveloped Acreage Expiration
In the event that production is not established, or we take no action to extend or renew the terms of our leases, our net undeveloped acreage that will expire over the next three years, as of December 31, 2022, is zero acres for the year ending December 31, 2023, zero in 2024, and zero acres in 2025.
Reserves
Our interests in proved developed and undeveloped oil and gas properties have been evaluated by Ryder Scott Company, L.P. for each of the three years ended December 31, 2022. The professional qualifications of the technical persons primarily responsible for overseeing the preparation of the reserve estimates can be found in Exhibit 99.1, the Ryder Scott Company, L.P. Report on Registrant’s Reserves Estimates. In matters related to the preparation of our reserve estimates, our district managers report to the Engineering Data manager, who maintains oversight and compliance responsibility for the internal reserve estimate process and provides oversight for the annual preparation of reserve estimates of 100% of our year-end reserves by our independent third-party engineers, Ryder Scott Company, L.P. The members of our district and central groups consist of degreed engineers and geologists with between approximately twenty and thirty-five years of industry experience, and between eight and twenty-five years of experience managing our reserves. Our Engineering Data manager, the technical person primarily responsible for overseeing the preparation of reserves estimates, has over thirty years of experience, holds a Bachelor degree in Geology and an MBA in finance and is a member of the Society of Petroleum Engineers and American Association of Petroleum Geologist. See Part II, Item 8 “Financial Statements and Supplementary Data”, for additional discussions regarding proved reserves and their related cash flows. All of our reserves are located within the continental United States. The following table summarizes our oil and gas reserves at each of the respective dates:
Reserve Category
Proved Developed
Proved Undeveloped
Total
As of
December 31,
Oil
(MBbls)
NGLs
(MBbls)
Gas
(MMcf)
Total
(MBoe)
Oil
(MBbls)
NGLs
(MBbls)
Gas
(MMcf)
Total
(MBoe)
Oil
(MBbls)
NGLs
(MBbls)
Gas
(MMcf)
Total
(MBoe)
2020
2,684
2,258
13,633
7,214
1,784
787
3,897
3,221
4,468
3,045
17,530
10,435
2021
5,386
2,882
23,902
12,252
—
—
—
—
5,386
2,882
23,902
12,252
2022
4,143
2,497
22,277
10,353
3,028
1,833
9,030
6,366
7,171
4,330
31,307
16,719
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(a)
In computing total reserves on a barrels of oil equivalent (Boe) basis, gas is converted to oil based on its relative energy content at the rate of six Mcf of gas to one barrel of oil and NGLs are converted based upon volume; one barrel of natural gas liquids equals one barrel of oil.
In 2020, in West Texas we participated in the drilling of seven wells: one with Pioneer Natural Resources for 8.6% interest which was brought into production in July of 2020, and six wells with Apache on our Kashmir tract with an average 47.5% interest that were drilled but not completed at year-end and therefore classified as Proved Undeveloped in the year-end 2020 reserve report. The Company invested approximately $8.0 million in these seven wells in 2020. Also in 2020, reserves were added in West Texas through the addition of 11 horizontal wells completed in Midland County, Texas, in which we receive 0.56% to 1% over-riding royalty interest. In our Gulf Coast Region, in 2020, we successfully recompleted one operated well in the Segno field of Polk County, Texas with a 72.5% interest.
At December 31, 2020, in total, the Company had 3,221 Mboe of proved undeveloped reserves attributable to 13 wells operated by others, 10 of which were drilled but not completed by year-end 2020, and three that were not drilled until 2021. The three new horizontals along with the six uncompleted wells at year-end were brought online in late September and early October of 2021. These successful new wells are on our Kashmir tract in Upton County, Texas operated by Apache Corporation. These nine PUD wells at year-end 2020 accounted for 3,127 Mboe of the total undeveloped. The four other PUD wells, drilled but not completed at year-end 2020, are located in Grady County, Oklahoma, and accounted for 95 Mboe of the total undeveloped reserves.
In 2021, in West Texas, we participated with Apache in the drilling of three additional horizontals on the Kashmir Tract in Upton County, Texas and completed these three wells in September of 2021 along with six other wells drilled in 2020 on the same lease that were drilled but uncompleted at year-end. The Company has an average of 47.8% interest in these nine wells and invested approximately $30 million in these horizontal wells. Also in 2021, the Company participated with Ovintiv Mid-Continent for 11.25% interest in four two-mile horizontal wells in Canadian County, Oklahoma. Twelve of these thirteen horizontal wells were successfully completed and placed into production in the fourth quarter of 2021. One of the Ovintiv wells had a casing leak issue and has been temporarily abandoned. The Company invested approximately $32 million in these thirteen wells. In addition, in 2021, the Company added minor reserves through over-riding royalty interest in two wells drilling and completed in Grady County, Oklahoma.
At December 31, 2021, the Company had 159 Mboe of proved developed shut-in reserves attributable to three horizontals drilled and completed in Canadian County, Oklahoma, but not yet online at year-end. These reserves were converted to proved producing in the first quarter of 2022. At year-end 2021, we did not include proved undeveloped reserves in our reserve report because we had not yet received definitive drilling proposals from third-party operators for the more than fifteen horizontal wells that we planned to participate in located primarily in West Texas.
In 2022, the Company participated in eight horizontal wells that were drilled and completed; four located in Irion County, West Texas, operated by SEM Operating Company, in which we have 10.13% interest, and four located in Canadian County, Oklahoma, operated by Ovintiv Mid-Continent, Inc., in which we have an average 9% interest. Our investment in these eight wells was approximately $4 million and all were brought on production in August of 2022. In addition, the Company added reserves through 15 wells in which we have various minor over-riding royalty interest. Eight of these wells are located in West Texas and seven are located in Oklahoma.
In the fourth quarter of 2022, we began participation in the drilling of 20 horizontal wells located in West Texas operated by three different operators. In Martin County, we are participating with ConocoPhillips in five 2.5-mile-long horizontal wells in which the Company has 20.83% interest with a planned capital investment of $12.1 million. In Reagan County, we are participating with Hibernia Energy III in 10 two-mile horizontals with 25% interest and an expected investment of $25.6 million. Also in Reagan County, we are participating with Double Eagle (DE IV) in five two-mile-long horizontals with nearly 50% interest, carrying an expected net
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capital outlay of $23.4 million. All twenty of these West Texas wells are currently drilling or have been completed. All are expected to be online in the second quarter of 2023.
In January of 2023, the Company joined Ovintiv USA, Inc. in the spudding of three 3-mile-long horizontal wells in Canadian County, Oklahoma with 1.96% interest and an expected investment of $645,000. Production is expected to begin in May 2023. In addition, in March of 2023, Apache Corporation spud two 3-mile-long horizontals in Upton County, Texas in which the Company has 49.4% interest with an expected total capital investment of $16.1 million. We anticipate completion of these two 15,000’ long horizontals in Upton County in May and production to occur in June of 2023.
At December 31, 2022, the Company had 6,366 Mboe of proved undeveloped reserves attributable to the 25 horizontal wells described above. In total, the Company expects to invest $78 million in these 25 horizontal wells, all of which are expected to be completed and online in the second quarter of 2023.
The estimated future net revenue (using current prices and costs as of those dates) and the present value of future net revenue (at a 10% discount for estimated timing of cash flow) for our proved developed and proved undeveloped oil and gas reserves at the end of each of the three years ended December 31, 2022, are summarized as follows (in thousands of dollars):
Proved Developed
Proved Undeveloped
Total
As of December 31,
Future Net
Revenue
Present
Value 10
Of Future
Net
Revenue
Future Net
Revenue
Present
Value 10
Of Future
Net
Revenue
Future Net
Revenue
Present
Value 10
Of Future
Net
Revenue
Present
Value 10
Of Future
Income
Taxes
Standardized
Measure of
Discounted
Cash flow
2020
$
43,886
$
34,717
$
37,346
$
21,823
$
81,232
$
56,539
$
14,920
$
41,619
2021
$
275,227
$
171,906
$
—
$
—
$
275,227
$
171,906
$
36,100
$
135,806
2022
$
320,146
$
192,688
$
200,790
$
118,081
$
520,936
$
310,769
$
66,233
$
244,536
The PV10 Value represents the discounted future net cash flows attributable to our proved oil and gas reserves before income tax, discounted at 10%. Although this measure is not in accordance with U.S. generally accepted accounting principles (“GAAP”), we believe that the presentation of the PV10 Value is relevant and useful to investors because it presents the discounted future net cash flow attributable to proved reserves prior to taking into account corporate future income taxes and the current tax structure. We use this measure when assessing the potential return on investment related to oil and gas properties. The PV10 of future income taxes represents the sole reconciling item between this non-GAAP PV10 Value versus the GAAP measure presented in the standardized measure of discounted cash flow. A reconciliation of these values is presented in the last three columns of the table above. The standardized measure of discounted future net cash flows represents the present value of future cash flows attributable to proved oil and natural gas reserves after income tax, discounted at 10%.
“Proved developed” oil and gas reserves are reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. “Proved undeveloped” oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.
In accordance with U.S. generally accepted accounting principles, product prices are determined using the twelve-month average oil and gas index prices, calculated as the unweighted arithmetic average for the first day of the month price for each month, adjusted for oilfield or gas gathering hub and wellhead price differentials (e.g. grade, transportation, gravity, sulfur, and basic sediment and water) as appropriate. Also, in accordance with SEC specifications and U.S. generally accepted accounting principles, changes in market prices subsequent to December 31 are not considered.
While it may be reasonably anticipated that the prices received for the sale of our production may be higher or lower than the prices used in this evaluation, as described above, and the operating costs relating to such production may also increase or decrease from existing levels, such possible changes in prices and costs were, in
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accordance with rules adopted by the SEC, omitted from consideration in making this evaluation for the SEC case. Actual volumes produced, prices received and costs incurred may vary significantly from the SEC case.
Natural gas prices, based on the twelve-month average of the first of the month Henry Hub index price, were $6.358 per MMBtu in 2022 as compared to $3.598 per MMBtu in 2021, and $1.985 per MMBtu in 2020. Oil prices, based on the West Texas Intermediate (WTI) Light Sweet Crude first of the month average spot price, were $93.67 per barrel in 2022 as compared to $66.56 per barrel in 2021, and $39.57 per barrel in 2020. Since January 1, 2022, we have not filed any estimates of our oil and gas reserves with, nor were any such estimates included in any reports to, any federal authority or agency, other than the Securities and Exchange Commission.
District Information
The following table represents certain reserves and well information as of December 31, 2022.
Gulf
Coast
Mid-
Continent
West
Texas
Other
Total
Proved Reserves as of December 31, 2022 (MBoe)
Developed
790
2,549
7,001
13
10,353
Undeveloped
—
110
6,256
—
6,366
Total
790
2,659
13,257
13
16,719
Average Net Daily Production (Boe per day)
227
897
3,257
4
4,385
Gross Productive Wells (Working Interest and ORRI Wells)
150
508
557
151
1,373
Gross Productive Wells (Working Interest Only)
132
383
511
82
1,108
Net Productive Wells (Working Interest Only)
69
169
254
6
498
Gross Operated Productive Wells
89
176
310
—
575
Gross Operated Water Disposal, Injection and Supply wells
7
40
6
—
53
In several of our producing regions we have field service groups to service our operated wells and locations as well as third-party operators in the area. These services consist of well service support, site preparation and construction services for drilling and workover operations. Our operations are performed utilizing workover or swab rigs, water transport trucks, saltwater disposal facilities, various land excavating equipment and trucks we own and that are operated by our field employees.
Gulf Coast Region
Our development, exploitation, exploration and production activities in the Gulf Coast region are primarily concentrated in southeast Texas. This region is managed from our office in Houston, Texas. Principal producing intervals are in the Wilcox, San Miguel, Olmos, and Yegua formations at depths ranging from 3,000 to 12,500 feet. We had 150 producing wells (69 net) in the Gulf Coast region as of December 31, 2022, of which 89 wells are operated by us. Average net daily production in our Gulf Coast Region at year-end 2022 was 227 Boe. At December 31, 2022, we had 790 MBoe of proved reserves in the Gulf Coast region, which represented 4.7% of our total proved reserves. We maintain an acreage position of over 10,700 gross (3,215 net) acres in this region, primarily in Dimmit and Polk counties. We operate a field service group in this region from a field office in Carrizo Springs, Texas utilizing four workover rigs, twenty water transport trucks, two saltwater disposal wells and several trucks and excavating equipment. Services including well service support, site preparation and construction services for drilling and workover operations are provided to third-party operators as well as utilized in our own operated wells and locations. As of March 31, 2023, the Gulf Coast region has no operated wells in the process of being drilled, no waterfloods in the process of being installed and no other related activities of material importance.
Mid-Continent Region
Our Mid-Continent activities are concentrated in central Oklahoma. This region is managed from our office in Oklahoma City, Oklahoma. As of December 31, 2022, we had 508 producing wells (169 net) in the
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Mid-Continent area, of which 176 wells are operated by us. Principal producing intervals are in the Robberson, Avant, Skinner, Sycamore, Bromide, McLish, Hunton, Mississippian, Oswego, Red Fork, and Chester formations at depths ranging from 1,100 to 10,500 feet. Average net daily production in our Mid-Continent Region in 2022 was 897 Boe. At December 31, 2022, we had 2,659 MBoe of proved reserves in the Mid-Continent area, representing 16% of our total proved reserves. We maintain an acreage position of approximately 47,120 gross (10,297 net) acres in this region, primarily in Canadian, Kingfisher, Grant, Major, and Garvin counties. Our Mid-Continent region is actively participating with third-party operators in the horizontal development of lands that include Company owned interest in several counties in the Stack and Scoop plays of Oklahoma where drilling is primarily targeting reservoirs of the Mississippian, and Woodford formations.
As of March 31, 2023, in the Mid-Continent region, the Company is participating with 1.96% interest in the drilling of three 15,000’ long horizontal wells in Canadian County, Oklahoma operated by Ovintiv Mid-Continent Inc. All three wells were spud in January and completions are expected in April of this year. These proved undeveloped drilling plans and their reserves are included in the 2022 year-end reserve report as proved undeveloped.
West Texas Region
Our West Texas activities are concentrated in the Permian Basin in Texas and New Mexico. The Spraberry field was discovered in 1949, encompasses eight counties in West Texas and the Company believes it is the largest oil field in the United States. The field is approximately 150 miles long and 75 miles wide at its widest point. The oil produced is West Texas Intermediate Sweet, and the gas produced is casing-head gas with an average energy content of 1,400 Btu. The oil and gas are produced primarily from five intervals; the Upper and Lower Spraberry, the Wolfcamp, the Strawn, and the Atoka, at depths ranging from 6,700 feet to 11,300 feet. This region is managed from our office in Midland, Texas. As of December 31, 2022, we had 557 wells (254 net) in the West Texas area, of which 310 wells are operated by us. Principal producing intervals are in the Spraberry, Wolfcamp, and San Andres formations at depths ranging from 4,200 to 12,500 feet. Average net daily production in Our West Texas Region at year end 2022 was 3,257 Boe. At December 31, 2022, we had 13,256 MBoe of proved reserves in the West Texas area, or 79.3 % of our total proved reserves. We maintain an acreage position of approximately 16,939 gross (9,969 net) acres in the Permian Basin in West Texas, primarily in Reagan, Upton, Martin and Midland counties and believe this acreage has significant resource potential for horizontal drilling in the Spraberry, Jo Mill, and Wolfcamp intervals. We operate a field service group in this region utilizing nine workover rigs, three hot oiler trucks, one kill truck and two roustabout trucks. Services, including well service support, site preparation and construction services for drilling and workover operations, are provided to third-party operators as well as utilized in our own operated wells and locations.
As of March 31, 2023, the Company was participating in the drilling of 15 two-mile-long horizontal wells in Reagan County, Texas with 49.7% interest in five wells operated by Double Eagle and 25% interest in ten wells operated by Hibernia Energy. In Upton County, Texas, the Company was also participating with Apache in the drilling of two 3-mile-long horizontals with 47.52% ownership. In Martin County, Texas, the Company is participating with ConocoPhillips in the drilling of five 2.5-mile-long horizontal with 20.83% interest. Combined, we expect to spend approximately $78 million in the drilling and completion of these 22 West Texas horizontals and their associated facilities. These 22 wells and their forecast reserves are included in the 2022 year-end reserve report as proved undeveloped. Additional development of each of these project areas is anticipated in the near future.
Item 3.
LEGAL PROCEEDINGS.
None.
Item 4.
MINE SAFETY DISCLOSURES.
Not applicable.
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PART II