What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-10 · 107 added, 110 removed, 183 unchanged (54% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s condensed consolidated financial statements and related notes thereto presented in this report as well as the Company's audited consolidated financial statements and related notes included in the Company's Annual Report for the fiscal year ended September 30, 2021.

The following discussion contains “forward-looking statements” that reflect the Company’s future plans, estimates, beliefs and expected performance.

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Financial and operating results reflect the following:

• Increased total net equivalent production by 12% to 10.2 MBoe/d for the three months ended June 30, 2022, as compared to the same period in 2021 and 20% to 10.0 MBoe/d for the nine months ended June 30, 2022, as compared to the same period in 2021

• During the three and nine months ended June 30, 2022, 5 gross (5.0 net) and 12 gross (10.8 net) horizontal wells brought online to production, respectively

• Realized average combined price on production sold of $94.80 per Boe, before derivative settlements, during the three months ended June 30, 2022, including $108.41 per barrel for oil

• Generated cash flow from operations of $97.0 million for the nine months ended June 30, 2022

• Total accrued capital expenditures of $34.4 million and $80.5 million for the three and nine months ended June 30, 2022, respectively

• Paid cash dividends on common shares of $6.1 million during the three months ended June 30, 2022, and announced latest dividend of $0.31 per share with a record date of July 25, 2022, which was paid on August 8, 2022, for a total of $6.1 million

• Exited the fiscal third quarter with $16.8 million in cash and $61.0 million drawn on our revolving credit facility

• Increased total net equivalent production by 33% to 12.7 MBoe/d for the three months ended September 30, 2022, as compared to the same period in 2021 and 21% to 10.9 MBoe/d for the nine months ended September 30, 2022, as compared to the same period in 2021

• During the three and nine months ended September 30, 2022, 7 gross (4.2 net) and 14 gross (10.8 net) horizontal wells brought online to production, respectively

• Realized average combined price on production sold of $74.76 per Boe, before derivative settlements, during the three months ended September 30, 2022, including $92.40 per barrel for oil

• Generated cash flow from operations of $130.4 million for the nine months ended September 30, 2022

• Total accrued capital expenditures of $36.7 million and $96.5 million for the three and nine months ended September 30, 2022, respectively

• Paid cash dividends on common shares of $6.1 million during the three months ended September 30, 2022, and announced latest dividend of $0.34 per share with a record date of October 24, 2022, which was paid on November 7, 2022, for a total of $6.7 million

• Exited the third quarter with $17.9 million in cash and $48.0 million drawn on our revolving credit facility

Recent Developments

Market Conditions and Commodity Prices

Fiscal Year Change

On August 16, 2022, the Company's Board acting by written consent resolved to amend and restate the Company's Second Amended and Restated Bylaws to change the Company's fiscal year period from October 1st through September 30th each year to January 1st through December 31st each year commencing with the 2022 calendar year.

On August 19, 2022, the holders of approximately 75% of our outstanding Common Stock acting by written consent approved Bylaws Restatement and adopted the Third Amended and Restated Bylaws.

In accordance with Rule 14c-2 under the Exchange Act, the aforementioned actions taken by written consent became effective on September 23, 2022.

As a result, the Company's 2022 fiscal year will now be the period from January 1, 2022 to December 31, 2022.

Market Conditions, Commodity Prices and Interest Rates

and global markets are experiencing heightened volatility following impactful geopolitical events, consistent evidence of widespread inflation, as well as increased fears of an economic recession.

Though less impactful than during 2021, cases of COVID-19 continue to affect global activity and demand for commodity products.

Additionally, the full-scale military invasion of Ukraine by Russian troops has continued unabated since February 2022.

Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine has led to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions.

However, commodity prices have continued to remain high during the first nine months of 2022 due to OPEC+ and other oil and natural gas producers not rapidly increasing production levels, as well as from the recovery in demand related to the COVID-19 pandemic.

The full-scale military invasion of Ukraine by Russian troops has continued unabated since February 2022 coupled with related economic sanctions imposed on Russia further exacerbating supply shortages, leading to disruptions in the credit and capital markets, including significant uncertainty in commodity prices, during the first nine months of 2022.

In addition, global markets are experiencing significant inflation attributable to a number of factors.

Certain of our capital expenditures and expenses are affected by general inflation and we expect costs for the remainder of 2022 to continue to be a

function of supply and demand.

Specifically, costs for oilfield equipment and services continue to experience significant inflation, which we expect to continue for the foreseeable future.

Certain of our capital expenditures and expenses are affected by general inflation and we expect costs for the remainder of 2022 to continue to be a function of supply and demand.

Specifically, costs for oilfield equipment and services continue to experience impacts from significant inflation, which we expect to continue for the foreseeable future.

In response to inflation concerns, the U.S.

Federal Reserve initiated a monetary tightening policy in 2022, sharply increasing interest rates in June and July 2022 with public estimates of further increases in the future.

Federal Reserve initiated a monetary tightening policy in 2022, sharply increasing interest rates in June, July, September and November 2022 with public estimates of potential further increases in the future.

The Company's floating-rate credit facility will be impacted by such rate increases.

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Results of Operations

Comparison for the three and nine months ended June 30, 2022 and 2021

The following table sets forth selected operating data for the three and nine months ended June 30, 2022 and 2021:

Three Months Ended June 30, Nine Months Ended June 30,

Comparison for the three and nine months ended September 30, 2022 and 2021

The following table sets forth selected operating data for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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(1) The Company's calculation of the effects of derivative settlements includes losses on the settlement of its commodity derivative contracts.

These losses are included under other income and expense on the Company’s condensed consolidated statements of operations.

These losses are included under other income (expense) on the Company’s condensed consolidated statements of operations.

Oil and Natural Gas Revenues

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Our revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices.

The Company’s total oil and natural gas revenue, net increased $46.2 million and $110.5 million, or 111% and 110%, for the three and nine months ended June 30, 2022 compared to the same periods in 2021.

The Company’s realized average combined price on its production for the three and nine months ended June 30, 2022 increased by $44.62 and $33.27, or 89% and 75%, respectively, compared to the same periods in 2021.

• For the three months ended June 30, 2022, oil revenues increased by $43.0 million, or 109%, compared to the same period in 2021.

The Company’s total oil and natural gas revenue, net increased $39.5 million and $115.7 million, or 82% and 92%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

The Company’s realized average combined price on its production for the three and nine months ended September 30, 2022 increased by $20.30 and $29.87, or 37% and 58%, respectively, compared to the same periods in 2021.

• For the three months ended September 30, 2022, oil revenues increased by $36.0 million, or 82%, compared to the same period in 2021.

Of the increase, $20.3 million was attributable to an increase in our realized price and $15.7 million was attributable to an increase in volume.

Volumes increased by 36%, while realized prices increased by 34% compared to the same period in 2021.

• For the nine months ended June 30, 2022, oil revenues increased by $103.1 million, or 112%, compared to the same period in 2021.

• For the nine months ended September 30, 2022, oil revenues increased by $110.6 million, or 97%, compared to the same period in 2021.

Of the increase, $78.2 million was attributable to an increase in our realized price and $32.4 million was attributable to an increase in volume.

Volumes increased by 28%, while realized prices increased by 53% compared to the same period in 2021.

• Oil volumes increased during the three and nine months ended June 30, 2022 due to production from new wells and workovers performed on existing wells.

During the three and nine months ended June 30, 2022, we brought online 5 gross (5.0 net) and 12 gross (10.8 net) horizontal wells, respectively.

• The average WTI price increased by $42.65 and $38.12 per Bbl during the three and nine months ended June 30, 2022, respectively, compared to the same periods in 2021.

• Oil volumes increased during the three and nine months ended September 30, 2022 due to production from new wells and workovers performed on existing wells.

During the three and nine months ended September 30, 2022, we brought online 7 gross (4.2 net) and 14 gross (10.8 net) horizontal wells, respectively.

• The average WTI price increased by $22.48 and $33.91 per Bbl during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

Natural gas revenues

• For the three months ended June 30, 2022, natural gas revenues increased by $1.9 million, compared to the same period in 2021, to $2.9 million from $1.0 million.

Volumes decreased by 22%, while realized prices increased by $3.67 per Mcf compared to the same period in 2021.

• For the nine months ended June 30, 2022, natural gas revenues increased by $1.8 million, compared to the same period in 2021, to $7.3 million from $5.6 million.

• For the three months ended September 30, 2022, natural gas revenues increased by $2.3 million, compared to the same period in 2021, to $4.2 million from $1.9 million.

Volumes increased by 22%, while realized prices increased by $1.92 per Mcf compared to the same period in 2021.

• Natural gas sales volumes decreased during the three months ended June 30, 2022 compared to the same period in 2021 due to curtailed volume capacity by our midstream gas gathering and processing counterparty as a result of their capacity expansion project.

For the nine months ended June 30, 2022, natural gas sales volumes increased compared to the same period in 2021 due to increased production from new wells and workovers performed on existing wells, partially offset by curtailed volume capacity as seen in during the period.

• The average Henry Hub price increased by $4.55 and $2.65 per Mcf during the three and nine months ended June 30, 2022, respectively, compared to the same periods in 2021.

• For the nine months ended September 30, 2022, natural gas revenues increased by $1.5 million, compared to the same period in 2021, to $8.9 million from $7.4 million.

Volumes increased by 5%, while realized prices increased by $0.50 per Mcf compared to the same period in 2021.

• Natural gas sales volumes increased during the three months ended September 30, 2022 compared to the same period in 2021 due to production from new wells and workovers performed on existing wells.

• The average Henry Hub price increased by $3.67 and $3.14 per Mcf during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

Natural gas liquids revenues

• For the three months ended June 30, 2022, NGL revenues increased by $1.3 million, compared to the same period in 2021, to $2.4 million from $1.1 million.

Volumes decreased by 26%, while realized prices increased $23.14 per Bbl compared to the same period in 2021.

• For the nine months ended June 30, 2022, NGL revenues increased by $5.6 million, compared to the same period in 2021, to $8.2 million from $2.6 million.

• For the three months ended September 30, 2022, NGL revenues increased by $1.1 million, compared to the same period in 2021, to $3.2 million from $2.1 million.

Volumes increased by 29%, while realized prices increased $3.97 per Bbl compared to the same period in 2021.

• For the nine months ended September 30, 2022, NGL revenues increased by $3.6 million, compared to the same period in 2021, to $8.1 million from $4.5 million.

Volumes remained flat, while realized prices increased $12.10 per Bbl compared to the same period in 2021.

• NGL sales volumes decreased during the three months ended June 30, 2022 compared to the same period in 2021 due to curtailed volume capacity by our midstream gas gathering and processing counterparty as a result of their capacity expansion project.

Contract Services - Related Party Revenue

The following table presents the Company's revenue and costs associated with its related party transactions:

Three Months Ended June 30, Nine Months Ended June 30,

• NGL sales volumes increased during the three months ended September 30, 2022 compared to the same period in 2021 due to production from new wells and workovers performed on existing wells.

Contract Services - Related Party

The following table presents the Company's revenue and costs associated with its contract services - related party transactions:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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89 147 263 329

Gross profit - related parties $ 511 $ 509 $ 1,476 $ 1,470

Contract services revenues, net of costs $ 511 $ 453 $ 1,537 $ 1,471

_____________________

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(2) The Company's cost of contract services - related parties represents costs specifically attributable to the master service agreements the Company has in place with the respective related parties.

Costs and Expenses

The following table presents the Company's operating costs and expenses and other (income) expenses:

Three Months Ended June 30, Nine Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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Interest expense, net $ 585 $ 963 $ 1,960 $ 3,299

Loss on derivatives $ 12,363 $ 35,396 $ 67,188 $ 74,208

Income tax expense $ 10,927 $ 3,245 $ 14,682 $ 16,953

(Gain) loss on derivatives $ (17,600) $ 14,987 $ 44,395 $ 75,286

Income tax expense (benefit) $ 16,317 $ (3,937) $ 25,130 $ 13,539

Lease Operating Expenses

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Certain operating cost components, such as compression and saltwater disposal associated with completion water, are variable and increase or decrease as hydrocarbon production levels and the volume of completion water disposal increases or decreases.

The Company’s LOE increased by $2.3 million for the three months ended June 30, 2022 compared to the same period in 2021.

For the three months ended June 30, 2022, $2.1 million of the increase was due to higher workover expense as additional workovers were performed in the 2022 period and $1.6 million of the increase was attributable to costs associated with new wells and additional production volumes, partially offset by a $1.4 million decrease attributable to efficiencies on existing wells.

The Company’s LOE increased by $6.0 million for the nine months ended June 30, 2022 compared to the same period in 2021.

For the nine months ended June 30, 2022, $4.7 million of the increase was attributable to costs associated with new wells and additional production volume and $3.4 million of the increase was due to higher workover expense as additional workovers were performed in the 2022 period, partially offset by a $2.1 million decrease attributable to efficiencies on existing wells.

The Company’s LOE increased by $3.1 million for the three months ended September 30, 2022 compared to the same period in 2021.

For the three months ended September 30, 2022, $1.7 million of the increase was due to higher workover expense as additional workovers were performed in the 2022 period and $2.3 million of the increase was attributable to costs

associated with new wells and additional production volumes, partially offset by a $0.9 million decrease attributable to efficiencies on existing wells.

The Company’s LOE increased by $6.3 million for the nine months ended September 30, 2022 compared to the same period in 2021.

For the nine months ended September 30, 2022, $4.3 million of the increase was attributable to costs associated with new wells and additional production volume and $4.0 million of the increase was due to higher workover expense as additional workovers were performed in the 2022 period, partially offset by a $2.0 million decrease attributable to efficiencies on existing wells.

Production and Ad Valorem Tax Expense

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Ad valorem taxes are generally based on the valuation of our oil and natural gas properties, which also trend with oil and natural gas prices and vary across the different counties in which we operate.

Production and ad valorem taxes increased by $3.5 million and $6.0 million for the three and nine months ended June 30, 2022, respectively, compared to the same periods in 2021.

Production and ad valorem taxes increased by $3.3 million and $7.5 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

Production taxes increased primarily due to increases in our oil and natural gas sales, net, as discussed above.

Ad valorem taxes increased for the three and nine months ended June 30, 2022 based on higher estimated property values for the current taxable period.

Ad valorem taxes increased for the three and nine months ended September 30, 2022 based on higher estimated property values for the current taxable period.

Exploration Expense

Exploration expense consists of expiration of unproved leasehold and geological and geophysical costs which include seismic survey costs.

The following table presents exploration expense by area for the three and nine months ended June 30, 2022 and 2021:

Three Months Ended June 30, Nine Months Ended June 30,

The following table presents exploration expense by area for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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(1) For the nine months ended June 30, 2022, exploration expense includes $1.5 million and $0.6 million related to expiration of unproved leasehold costs in Texas and New Mexico, respectively.

(2) The Company did not renew any net acreage after expiration in New Mexico during the three and nine months ended June 30, 2022 and 2021.

(1) For the nine months ended September 30, 2022, exploration expense includes $1.3 million and $0.2 million related to expiration of unproved leasehold costs in Texas and New Mexico, respectively.

For the nine months ended September 30, 2021, exploration expense included $3.3 million and $5.6 million related to expiration of unproved leasehold costs in Texas and New Mexico, respectively.

(2) The Company did not renew any net acreage after expiration in New Mexico during the three and nine months ended September 30, 2022 and 2021.

Depletion, Depreciation, Amortization and Accretion Expense

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The liability accretes each period until it is settled or the well is sold, at which time the liability is removed.

Depletion, depreciation, amortization and accretion expense increased by $0.1 million and $1.4 million for the three and nine months ended June 30, 2022, respectively, compared to the same periods for 2021.

The increase for the three and nine months ended June 30, 2022 was primarily due to higher production, partially offset by a lower depletion rate.

Depletion, depreciation, amortization and accretion expense increased by $1.7 million and $2.1 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods for 2021.

The increase for the three and

nine months ended September 30, 2022 was primarily due to higher production, partially offset by a lower depletion rate.

The depletion rate is a function of capitalized cost and related underlying reserves.

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G&A expenses include corporate overhead such as payroll and benefits for our corporate staff, equity-based compensation expense, office rent for our headquarters, audit and other fees for professional services and legal compliance.

G&A expenses are reported net of overhead recoveries from other owners in properties operated by us.

Total G&A expense increased by $0.1 million and decreased by $0.7 million for the three and nine months ended June 30, 2022, respectively, compared to the same periods for 2021.

Administrative costs, which includes payroll, benefits and non-payroll costs, increased by $0.4 million and $2.9 million, respectively, for the three and nine months ended June 30, 2022, compared to the same periods for 2021.

G&A expenses are reported net of overhead recoveries.

Total G&A expense increased by $0.3 million and decreased by $2.1 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods for 2021.

Administrative costs, which include payroll, benefits and non-payroll costs, increased by $0.4 million and $2.1 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods for 2021.

The increase in administrative costs was primarily attributable to increased professional services, insurance, technology and investor relations costs.

Equity-based compensation expense decreased by $3.5 million for the nine months ended June 30, 2022, respectively, compared to the same periods in 2021.

The higher equity-based compensation during the nine months ended June 30, 2021 relates to restricted shares awarded to certain employees following completion of the Merger that immediately vested.

Equity-based compensation expense decreased by $4.1 million for the nine months ended September 30, 2022 compared to the same period in 2021.

The higher equity-based compensation during the nine months ended September 30, 2021 relates to restricted shares awarded to certain employees following completion of the Merger that immediately vested.

Transaction Costs

Transaction costs represent costs incurred on successful or unsuccessful business combinations or unsuccessful property acquisitions.

During the three and nine months ended June 30, 2021, the transaction costs of $0.3 million and $3.5 million, respectively, primarily relates to costs incurred on the Merger with Tengasco in February 2021.

The Company did not incur any transaction costs during the three months ended June 30, 2022.

The transaction costs of $3.9 million for the nine months ended June 30, 2022 primarily relate to a potential business combination and related financing that the Company pursued but ultimately chose not to consummate due to changing market conditions.

The transaction costs of $2.6 million for the nine months ended September 30, 2022 primarily relate to a potential business combination and related financing that the Company pursued but ultimately chose not to consummate due to changing market conditions.

During the nine months ended September 30, 2021, the transaction costs of $2.7 million primarily relate to costs incurred on the Merger with Tengasco in February 2021.

Interest Expense

Interest expense decreased by $0.5 million and $1.3 million during the three and nine months ended June 30, 2022, respectively, when compared to the same periods for 2021.

Interest expense decreased due to a lower outstanding average balance on the Company's revolving credit facility as well as the capitalized interest related to the Company's EOR project during the three and nine months ended June 30, 2022, respectively, when compared to the same periods for 2021.

Interest expense decreased by $0.4 million and $1.3 million during the three and nine months ended September 30, 2022, respectively, when compared to the same periods for 2021.

Interest expense decreased due to a lower outstanding average balance on the Company's revolving credit facility as well as the capitalized interest related to the Company's EOR project, partially offset by an increase in interest rates, during the three and nine months ended September 30, 2022 when compared to the same periods for 2021.

Gain/Loss on Derivatives

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We have oil and natural gas derivative contracts, including fixed price swaps, basis swaps and collars, that settle against various indices.

The following table presents the components of the Company's loss on derivatives for the three and nine months ended June 30, 2022 and 2021:

Three Months Ended June 30, Nine Months Ended June 30,

The following table presents the components of the Company's gain (loss) on derivatives for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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Non-cash gain (loss) on derivatives 34,640 (3,816) 16,803 (53,809)

Loss on derivatives $ (12,363) $ (35,396) $ (67,188) $ (74,208)

Gain (loss) on derivatives $ 17,600 $ (14,987) $ (44,395) $ (75,286)

Our earnings are affected by the changes in value of our derivative portfolio between periods and the related cash received or paid upon settlement of our derivatives.

To the extent the future commodity price outlook declines between periods, we will have mark-to-market gains;

while future commodity price increases between measurement periods result in mark-to-market losses.

The decrease in the loss on derivatives for the three and nine months ended June 30, 2022 compared to the same periods in 2021 is due to the change in non-cash gain (loss) on derivatives of $41.1 million and $62.1 million, partially offset by the increase in the loss on settlements of $18.1 million and $55.0 million.

The change in non-cash gain (loss) on derivatives for the three and nine months ended June 30, 2022 is due to the decrease in total contract volumes for our open derivative contracts with volumes on our fixed price oil swaps decreasing by 55% as of June 30, 2022 when compared to the same period in 2021.

Additionally, the change in the non-cash gain (loss) on derivatives was impacted by the change in the estimated forward-looking oil and natural gas prices used at the end of the period to calculate the fair value of the open derivative contracts.

The increase in the loss on settlements on derivatives was due to the increase in oil and natural gas prices for the three and nine months ended June 30, 2022 compared to the same periods in 2021.

For example, the average WTI price was $108.83 per Bbl for the three months ended June 30, 2022 compared to $66.19 per Bbl for the same period in 2021.

To the extent the future commodity price outlook declines between periods, we will have mark-to-market gains, while future commodity price increases between measurement periods result in mark-to-market losses.

The gain on derivatives for the three months ended September 30, 2022 was $17.6 million, which increased from a loss position by $32.6 million compared to the same period in 2021.

The loss on derivatives for the nine months ended September 30, 2021 was $44.4 million, which decreased by $30.9 million compared to the same period in 2021.

The change in the non-cash gain (loss) on derivatives was impacted by the decrease in total contract volumes for our open derivative contracts and the change in the estimated forward-looking oil and natural gas prices used at the end of the period to calculate the fair value of the open derivative contracts for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

The increase in the loss on settlements on derivatives was due to the increase in oil and natural gas prices for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

For example, the average WTI price was $93.06 per Bbl for the three months ended September 30, 2022 compared to $70.58 per Bbl for the same period in 2021.

Income Tax Expense

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While REP LLC was organized as a limited liability company, taxable income passed through to its unit holders.

Accordingly, a provision for federal and state corporate income taxes has been made for the operations of the Company only from February 27, 2021 through June 30, 2022 in the accompanying condensed consolidated financial statements.

Accordingly, a provision for federal and state corporate income taxes has been made for the operations of the Company beginning February 27, 2021 in the accompanying condensed consolidated financial statements.

Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates.

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See Note 11 - Income Taxes to the Company's condensed consolidated financial statements included herein for further discussion of income taxes.

Three Months Ended June 30, Nine Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

(In thousands)

Current income tax expense (benefit) $ 715 $ (1,009) $ 1,608 $ (232)

Deferred income tax expense 10,212 4,254 13,074 17,185

Total income tax expense $ 10,927 $ 3,245 $ 14,682 $ 16,953

Current income tax expense $ 433 $ 286 $ 1,928 $ 54

Deferred income tax expense (benefit) 15,884 (4,223) 23,202 13,485

Total income tax expense (benefit) $ 16,317 $ (3,937) $ 25,130 $ 13,539

Effective income tax rate 21.4 % (36.2) % 21.6 % (53.3) %

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Likewise, our ability to issue equity and obtain credit facilities on favorable terms may be impacted by a variety of market factors as well as fluctuations in our results of operations.

During the fiscal third quarter of 2022, the Company's natural gas and NGL sales were negatively impacted due to its primary midstream gas gathering and processing counterparty curtailing volume capacity as work continued on their overall capacity expansion project.

With the expansion project being fully commissioned in July, the Company expects to benefit from an increase in production capacity.

The Company is not currently aware of additional scheduled curtailments;

however, the Company may continue to experience periodic curtailments on natural

gas produced in excess of our contractual processing capacity.

For further discussion of risks related to our liquidity and capital resources, see "Item 1A.

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Working capital is an indication of liquidity and potential need for short-term funding.

The change in our working capital requirements is driven generally by changes in accounts receivable, accounts payable, commodity prices, credit extended to, and the timing of collections from customers, the level and timing of spending for expansion activity, and the timing of debt maturities.

As of June 30, 2022, we had a working capital deficit of $55.6 million compared to a deficit of $46.9 million as of September 30, 2021.

The working capital deficit at June 30, 2022 reflects $50.3 million in current derivative liabilities compared to $42.1 million in current derivative liabilities at September 30, 2021.

Additionally, we had $8.8 million payable to our counterparties for June 2022 derivative contract settlements, which is included in accounts payable at June 30, 2022.

The change in our working capital requirements is driven generally by

changes in accounts receivable, accounts payable, commodity prices, credit extended to, and the timing of collections from customers, the level and timing of spending for expansion activity, and the timing of debt maturities.

As of September 30, 2022, we had a working capital deficit of $32.7 million compared to a deficit of $32.8 million as of December 31, 2021.

The working capital deficit at September 30, 2022 reflects $22.5 million in current derivative liabilities compared to $31.0 million in current derivative liabilities at December 31, 2021.

As of September 30, 2022, we had an additional $9.3 million in accrued capital expenditures, $2.4 million in accrued ad valorem taxes due to the projected increase in property taxes in 2022, and $3.1 million in accrued G&A and LOE.

We utilize our revolving credit facility and cash on hand to manage the timing of cash flows and fund short-term working capital deficits.

Our current derivative assets and liabilities represent the mark-to-market value as of June 30, 2022 of future commodity production which will settle on a monthly basis through the end of their contractual terms.

Our current derivative assets and liabilities represent the mark-to-market value as of September 30, 2022 of future commodity production which will settle on a monthly basis through the end of their contractual terms.

This aligns with the receipt of oil and natural gas revenues on a monthly basis.

The following table summarizes the Company’s cash flows from continuing operations:

Nine Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

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Operating Activities

The Company’s net cash provided by operating activities increased by $38.1 million or 65% to $97.0 million for the nine months ended June 30, 2022 from $58.8 million for the same period in 2021.

The Company’s net cash provided by operating activities increased by $60.2 million or 86% to $130.4 million for the nine months ended September 30, 2022 from $70.2 million for the same period in 2021.

The increase was primarily driven by an increase in revenues of $115.7 million, partially offset by an increase of $39.7 million on settlements for commodity derivative contracts and an increase in operating expenses of $15.6 million, which excludes non-cash expenses such as equity-based compensation, expiration of unproved leasehold costs, and depreciation, depletion, accretion and amortization expense.

Investing Activities

The Company's cash flows used in investing activities increased by $37.8 million or 96% to $77.2 million for the nine months ended June 30, 2022 from $39.4 million for the same period in 2021.

The increase was primarily due to higher capital spending of $37.2 million related to the Company's increased drilling and completion activity and EOR project during the nine months ended June 30, 2022 compared to the same period in 2021.

The Company's cash flows used in investing activities increased by $32.0 million or 62% to $83.2 million for the nine months ended September 30, 2022 from $51.2 million for the same period in 2021.

The increase was primarily due to higher capital spending of $31.9 million related to the Company's increased drilling and completion activity and EOR project during the nine months ended September 30, 2022 compared to the same period in 2021.

Financing Activities

Net cash flow used in financing activities increased by $1.9 million or 11% to $20.1 million for the nine months ended June 30, 2022 from $18.2 million for the same period in 2021.

During the nine months ended June 30, 2022, the Company utilized $1.0 million net proceeds from its revolving credit facility to fund capital expenditures and working capital.

For the same period in 2021, the Company had a net paydown on its revolving credit facility of $3.5 million based on decreased drilling and completion activity during this period.

In addition, the Company distributed an additional $5.4 million of dividends on common stock during the nine months ended June 30, 2022 compared to the same period in 2021.

Net cash flow used in financing activities increased by $29.9 million or 390% to $37.6 million for the nine months ended September 30, 2022 from $7.7 million for the same period in 2021.

During the nine months ended September 30, 2022, the Company had a net paydown on its revolving credit facility of $17.0 million, which compares to a net paydown of $37.5 million for the same period in 2021.

In addition, the Company distributed an additional $3.7 million of dividends on common stock during the nine months ended September 30, 2022 compared to the same period in 2021.

The Company issued $46.7 million of equity, net of offering costs, during the nine months ended September 30, 2021.

These proceeds were primarily used to paydown amounts outstanding on the revolving credit facility.

There was no equity issued in 2022.

Revolving Credit Facility

The Company's borrowing base was $200 million with outstanding borrowings of $61 million on June 30, 2022, representing available borrowing capacity of $139 million.

The Company's borrowing base was $200 million with outstanding borrowings of $48 million on September 30, 2022, representing available borrowing capacity of $152 million.

See further discussion in Note 9 - Revolving Credit Facility to the Company's condensed consolidated financial statements included herein.

On April 29, 2022, the Company amended its Credit Agreement to, among other things, increase the borrowing base from $175 million to $200 million, extend the maturing date to April 2026, replace LIBOR with the SOFR and change the requirements for hedging to be based on utilization of the borrowing base and the Company's leverage ratio.

On October 25, 2022, the Company amended its Credit Agreement to, among other things, increase the borrowing base from $200 million to $225 million and change the semi-annual redeterminations to April 1 and October 1 to align with the Company's new fiscal year end of December 31st..

Distributions

For the three months ended June 30, 2022, the Company authorized and declared a quarterly dividend totaling approximately $6.2 million, with $6.1 million paid in cash and $0.1 million payable to restricted shareholders upon vesting.

For the three months ended September 30, 2022, the Company authorized and declared a quarterly dividend totaling approximately $6.2 million, with $6.1 million paid in cash and $0.1 million payable to restricted shareholders upon vesting.

Contractual Obligations

The Company has commitments with its primary midstream counterparty and has entered into purchase commitments throughout the nine months ended June 30, 2022.

The Company has commitments with its primary midstream counterparty and has entered into purchase commitments throughout the nine months ended September 30, 2022.

See Note 14 - Commitments and Contingencies in our notes to the condensed consolidated financial statements.

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The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Significant areas requiring the use of assumptions, judgments and estimates include (i) oil and natural gas reserves;

(ii) cash flow estimates used in impairment testing of oil and natural gas properties;

(iii) depreciation, depletion, amortization and accretion, or DD&A;

(v) assigning fair value and allocating purchase price in connection with business combinations;

(vi) valuation of commodity derivative instruments;

(vii) income tax provisions;

(viii) carrying value of goodwill;

and (ix) accrued amounts.

Significant items subject to such estimates and assumptions include, but are not limited to, estimates of proved oil and natural gas reserves and related present value estimates of future net cash flows therefrom, the carrying value of oil and natural gas properties, accounts receivable, accrued capital expenditures and operating expenses, ARO, the fair value determination of

acquired assets and assumed liabilities, certain tax accruals and the fair value of derivatives.

Actual results may differ from these estimates and assumptions used in preparation of the Company’s unaudited condensed consolidated financial statements included herein.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis